Economic Transformation for Grow th
Modest cash deficits masked the procyclical weakening of the fiscal position. While the headline budget was approximately in balance, already in 2008, Belarus had an estimated structural deficit of 3.4 percent of GDP (figure 1.17).6 The average annual growth of consolidated general government expenditures per capita stood at 11 percent in real terms between 2005 and 2008, exceeding the pace of growth of output per capita for the period (9 percent). The rapid expansion of expenditures was driven by subsidies and transfers, followed by capital expenditures and expansionary income policies in public sector wages and social transfers. Despite a fiscal tightening in 2008–09 in response to the global financial crisis, spending exceeded revenues, and, in both 2009 and 2010, the general government budget was in deficit.
Figure 1.17. Cyclicality of Government Spending in percent of GDP
Figure 1.18. State Support in percent of GDP
5
2010
3
0.1
2009
0.3
1
2008
0.2
-1
2007
-3
2006
-7
2003
2004
2005
2006
2007
Cyclically adjusted balance
2008
2009
Actual balance
Sources: Ministry of Finance, Social Protection Fund, and World Bank estimates.
2010
0.1
1
2
Tax benefits Called guarantees
2.4 3.8
0.1
0.1 0.6 0.2
3.6 3.6
0.1
3
0
3.7
0.2
3.6
1.9
1.3 0.2
3.7
0.2
4
0.1
2004 Output gap
3.3
0.6
2005
-5
3.1
0.6
3.8
0.2
2.2
3
3
0.1 0.4
4
5
Interest rate subsidies Bank recapitalization
1
1.1
1
6
7
8
Budget subsidies Other programs
9
10
Source: World Bank (2011_b).
Domestic demand was propped up by significant state support. The overall cost of state support increased from 7.6 percent of GDP in 2004 to 10.4 percent of GDP in 2008, largely driven by subsidies, which grew from 3.0 to 3.7 percent of GDP (figure 1.18). The total cost of state support, including tax privileges, declined to less than 8 percent of GDP in 2009, but sprung back up in 2010. The rise in the annual cost of state bank recapitalization is particularly worrisome because it, de facto, served as compensation to the banks for their losses incurred through the excessive credit growth, including through GDL programs. After being reduced from 2.4 percent of GDP in 2008 to less than 0.04 percent of GDP in 2009, bank recapitalization expenditures grew again to 1.3 percent of GDP in 2010 and to 5.3 percent of GDP in 2011 (see also figure 2.30).7 On the monetary side, a massive expansion of credit to the economy, including through GDL, has fueled domestic demand in the past five years. On average, domestic credit grew by 40 percent (in nominal terms) annually between 2005 and 2010 (figure 1.19). GDL played a large role in this credit 6 The cyclically adjusted balance is the budget balance adjusted for cyclical factors, e.g. it shows what the government's budget balance would be if the
economy was at a normal level of activity (full potential). Changes in the cyclically adjusted balance therefore reflect structural (policy) changes in either revenue or expenditure policy. For Belarus we statistically estimated the permanent trend and cyclical component of GDP by applying the Hodrick-Prescott (HP) filter to annual GDP data for 1995-2010, extending it with projections to 2015 (to mitigate end of series bias). Cyclically-adjusted revenue is calculated from actual tax revenues adjusted according to the ratio of potential output to actual output and the estimated revenue elasticity (equal, to 1.7). We assume expenditures are inelastic, taking into account labor market rigidities and the absence of comprehensive unemployment benefits and other automatic stabilizers on the expenditure side in Belarus. 7 A large increase in bank recapitalization expenditures in 2011 was necessitated by the large devaluation of Belarusian Rubel and the need to bring the
prudential ratios of the state-owned banks in conformity with the international standards.
Chapter 1. A Grow th Model in Peril
9