Budget and taxes: the second lever alongside the rate

The rate is discussed constantly and the budget less often, although the influence is comparable and through some channels stronger.

How it works

Rising public spending raises demand directly: money reaches contractors, wages are paid, orders are placed. Cutting taxes leaves more money with companies and households, which also supports demand.

The reverse — cutting spending and raising taxes — cools demand.

How it differs from the rate

The rate acts broadly and with a lag of quarters. Budget spending acts on specific recipients and faster — the money arrives at named addresses.

Hence a conflict observed regularly in practice: the regulator cools the economy with rates while a fiscal impulse warms it at the same time. In that configuration the rate has to stay higher for longer.

What to watch

The budget deficit and how it is financed. A deficit covered by domestic borrowing means larger government bond placements and therefore pressure on their prices.

The composition of spending: investment and current spending affect the economy differently and with different lags.

The sector effect

Companies whose customer is the state are exposed to the budget cycle directly. A change in a spending programme matters more to them than macroeconomics as a whole.

Related: The fiscal rule: why the state sets part of its revenue aside, The key rate: how a Bank of Russia decision reaches your portfolio.