Russian Government Predicts Budget Surplus For 2002

by Tatiana Smolenska, Tax-News.com, Moscow

23 August 2001

On Monday and Tuesday the Russian Government discussed the Finance Ministry's proposed 2002 budget document, which some (with rather short memories) have called the first budget of a liberal economy in the history of Russia.

The budget is based on the assumption of an annual rate of inflation in 2002 of 10% -13% per cent and a surplus of revenue over expenditure of R126bn, which will be targeted chiefly at a reduction in foreign debt. Defence and social services will also be major beneficiaries, with grossly underpaid public servants receiving pay increases of up to 100%.

Russian finances are closely linked to the price of oil, and the budget is based on the fairly conservative assumption of an average price of $17 per barrel. Each dollar that the price falls below that level costs the budget $1bn of revenue.

Finance Minister Aleksey Kudrin said that Russia could resort to some kind of borrowing, but in principle the budget is drawn up on the assumption that Russia will not borrow again from any 'serious international organizations'. On Tuesday he confirmed that financing plans included a return to the bond markets to the tune of $2bn, confirming what most of us already knew, that the Euromarkets are anything but serious in their attitude towards emerging markets.

Prime Minister Kasyanov said: 'At the beginning of the year, when we were formulating the paramount objectives for this year, we decided that tax reform, continuation of the tax reform, provides the key to the further maintenance of economic growth. The laws passed by parliament, the laws which we worked out here, which we then submitted to parliament and argued for, enable us to lower the tax burden by nearly 2 per cent of GDP - 1.8 per cent of GDP. This is the first important priority stimulating entrepreneurial activity, stimulating economic growth.'

He continued by explaining that if funds which are coming into the budget from the growth of the economy are used exclusively for social programmes and for meeting the primary needs of the people, then this could lead to a repetition of the crisis of 1998 and to another crash. He said this was inadmissible.

The budget's main expenditure provisions centre on dealing with social needs, and a nearly twofold increase in expenditure on defence. Ministers said that practically all the key reforms which have been planned by the government for the immediate period would come into effect next year, including reform of the judicial system, reform of the army and other reforms, including pension reform.

Echoing George Bush's attempts to rein in the US Congress's usual budget-busting behaviour, Prime Minister Kasyanov constantly referred to the presidential message to the Federal Assembly and to the president's budget message, saying that it was essential to draw up a document which meets the president's demands and which does not lead to "bargaining" in parliament.

He said: 'The president has stressed on several occasions that the budget has to be realistic, and it was with these instructions in mind that we embarked on the process of drawing up the budget. And how professionally we are able to underpin our projections, our expectations of the coming year, will determine whether or not we are able to avoid what the president called "budget bargaining" in parliament.'

The planned R126bn surplus, equivalent to about $4bn, falls far short of the $14bn of foreign debt service falling due next year, but it is supposed that the government will return to privatisation as a major source of additional revenues.

 

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