On the 2025 Budget Deficit and Weak Growth

We have all watched the tenge weaken against the dollar to 480 in just a couple of months, against the backdrop of reduced transfers from the National Fund. That much is obvious, but it is not the most important issue in the current situation. What should worry us more is how the 2025 budget deficit will be resolved. Our non-oil revenues are clearly not enough to cover it, and the new Tax Code, in the version now presented to the public, will evidently not solve the problem. Expenditures also grow every year, and most of them are indexed, one way or another, to inflation, either directly or through the MCI (monthly calculation index). This means that even without any new social commitments, budget spending will keep rising. Even if the new Code is adopted quickly, and given that most of the planned revenue increase is to come from better tax administration, administration itself requires, beyond the Code, a great many by-laws and rules that cannot be drafted so fast. So at best we will see the effect of improved administration in 2026. Meanwhile, the tax initiatives in the new Code are so far aimed more at creating new exemptions and arbitrage opportunities.

Moreover, we should understand that this year we will not see strong economic growth, which means the tax base cannot be expanded much, and there are many reasons for this. However much we try to create conditions for growth by manual control, the current model by its nature does not allow growth of 6% a year. Here are some of the reasons:

Excessive transfers from the National Fund in 2024 strengthened the tenge sharply against the US dollar. As a result, many of our producers could not compete with cheap imports. In other words, under the current exchange rate policy we ourselves are creating conditions in which our non-resource enterprises suffer and cannot compete. For now, we can sustain growth in labor productivity only through the erosion of real wages by inflation.

The high base rate and the current banking regulation do not encourage lending to the real sector, and so we are limiting economic growth through leverage. The problems here are known to everyone, but the proposed solutions are not yet obvious. Raising tax rates on the banking sector can hardly be called a stimulus. The issue lies rather in the imbalances that have been created and that discourage banks from lending. For example: free balances on accounts, regulated rates on foreign currency deposits, CIT exemptions on securities, excessive regulation of debt recovery, the absence of a collateral market, and so on.

Most lending to the real sector relies on interest rate subsidies, yet the volume of subsidies is woefully inadequate because there is no money in the budget. This policy has led to a trap in which new businesses without subsidies are by definition at a disadvantage against those that have received them. As a result, companies do not launch new projects while waiting for subsidies, and those that have received subsidies monopolize the market and hold back the development of whole industries. It is easy to see that all subsidies are usually exhausted by the end of the first quarter. This neither encourages investment inflows nor creates a mechanism for economic growth. The economy works in such a way that only competition and equal opportunities create growth potential. When some receive subsidies and guarantees and others receive nothing, growth on average will be lower than if nobody received anything and the money went into infrastructure available to all. This deserves a longer explanation, and I will write about it in more detail next time.

Oil production this year will fall short of plans, and it was the main driver of economic growth. The current Subsoil Code has not become the breakthrough it was meant to be, while existing conflicts in environmental legislation prevent the mining industry from developing further. Even the Agency for Protection and Development of Competition noted the unequal conditions between large oil corporations and local companies.

In this situation one cannot envy the country's economic team, but without the generally recognized economic reforms, it will unfortunately be quite difficult to achieve acceptable growth. Everyone broadly understands which reforms are needed, but there is as yet no mechanism for launching them.

In short, we need to cut subsidies to the real sector more radically, reform the regulation of the banking sector, and adopt global best practice in tax policy by abolishing most exemptions and introducing simple, clear taxes without arbitrage. We also need to liberalize prices for regulated goods and services and keep building the country's institutional environment in order to attract investment. We must increase investment in infrastructure and create equal opportunities for all economic agents.

If we do not take care of the economy, the accumulated imbalances will make themselves felt much more painfully later on.