Evaluation of compliance with the balanced budget rule in 2019

The government’s medium-term budgetary objective was to achieve a balanced budget in the form of a structural deficit not exceeding 0.5 % of GDP by 2019. According to the CBR, as well as the Ministry of Finance, the objective was not achieved in 2019 as the government had significantly deviated from the adjustment path. Despite the decrease required under the balanced budget rule, the structural deficit increased in 2018 and 2019, amounting to 2.1 % of GDP in 2019, according to the CBR. Between 2016 and 2019, the government missed the opportunity to use the windfall revenues and the reduction in interest payments to considerably move towards the balanced budget. Expenditures for the period grew 10.8 p.p. above the level permitted by the expenditure benchmark, contributing to a rise in deficit by 3.8 % of GDP. The CBR had already identified a significant deviation from the balanced budget rule in its evaluation based on the 2018 results and the non-compliance with the rule became even more prominent in 2019.

According to the CBR, in order to increase the effectiveness of the rule, the manner of its evaluation should particularly be reviewed.
The evaluation is within competence of the Ministry of Finance, while the activation of the correction mechanism is subject to a government’s decision. Although the CBR had identified a significant deviation already when evaluating the results of fiscal performance for 2015 and, subsequently, in its first evaluation of the 2018 performance, the government, based on the Ministry of Finance’s opinion, did not activate the correction mechanism. If it had been triggered sooner, after accepting the CBR’s opinion, the public finances would have been better prepared for the current situation affected by the pandemic. Therefore, the compliance with the balanced budget rule should be assessed by an independent institution, with the option to automatically activate corrections in the event of a significant deviation.