Prime Minister Mikhail Fradkov (left) handed over the draft budget for 2006 for reworking, but pressure from Duma Speaker Boris Gryzlov put him on his guard.
Photo: Dmitry Azarov
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Government Squeezes the Surplus out of the Budget
// Mikhail Fradkov and Boris Gryzlov go against Aleksey Kudrin
Zeroth Reading
The budget for 2006 was discussed yesterday in both the State Duma and the White House. Finance Minister Aleksey Kudrin was delegated to the Duma. Prime Minister Mikhail Fradkov preferred to remain in his office, where he held talks with Duma leaders. The prime minister's non-appearance at Okhotny Ryad didn't help the government, however. The outcome of the meeting was that although the budget surplus didn't disappear altogether, in any case, it was recalculated; the sources of the stability fund thinned out, and all of this was done for the sake of increasing federal revenues, including investment revenues.
Mikhail Fradkov was expected to appear at the plenary meeting of the State Duma and report on his cabinet's work. However, as it turned out, the place of the meeting with the Duma leadership would have been postponed. Fradkov might have regarded the postponement as a personal success. He might have counted on being able to apply the experience of Minister of Economic Development and Trade German Gref, who was expected at a meeting of the United Russia presidium at the end of last week in order to reject the draft of his medium-term project. At that time, the minister was able to shift the conversation to his own territory; and as a result, the legislators actually supported the document. However, the draft program remains just that – a draft.
The prime minister was unable to repeat Gref's trick – yesterday's talks clearly ended in favor of the visitors. But the main victim was not the prime minister but the finance minister.
It all started in the Duma, where Finance Minister Kudrin appeared at a meeting of the United Russia faction and for the first time presented the basic parameters of next year's draft budget. And ran into with stiff opposition. According to Andrey Isaev, the chairman of committee for labor and social policy, the party's main complaint was that the government was gambling on a budget surplus.
According to the Ministry of Finance, the situation is as follows: the estimated federal budget surplus in 2005, without consideration of the stability fund, was 1.13 trillion rubles, while the planned surplus in 2006 is 500.2 billion rubles. However, the surplus will be much higher, which has the government worried, after it put an obviously understated receipts base into the draft budget; specifically, an average annual oil price of $33 a barrel, although they now are nearly twice as high. The government is using a Budget Code rule that allows it to use above-plan revenues for a year at its discretion. And, following the president, the Duma has every reason to demand more accurate forecasts from Gref. Gryzlov said yesterday that “ we need to consider how we should spend the surplus in 2006. The economic ministers are giving unrealistic estimates of the budget revenue base and are not providing a list of projects on which the surplus could be spent, so we'll produce it ourselves.” The result is bound to be a reduction in the government's “pockets” and a general budget review.
The deputies were impressed not only with the budget surplus, but also with the size of the stabilization fund. In essence, they are right – the simultaneous of an enormous budget surplus, a stabilization fund heading for 1 trillion rubles (and this is after debt payments to the Paris Club), and Central Bank gold and currency reserves of $151.8 billion are not a sign of healthy government finances, but rather a capital grab by the economy, which may explain not its overheating, as Kudrin has done, but the corresponding investment climate. It's a climate that could change without throwing new money into the economy, which will only lead to an explosion of inflation. Better to change it by cutting taxes, something the government has been unable to do. “If you can't draw up a budget favorable to the economy, can you simply not collect excess taxes?” Gryzlov asked Kudrin in the Duma yesterday. After getting no response, he added “an economy you've invented in which you can't use money.”
The Duma, however, was drawn to a pro-inflationary policy. Igor Igoshin, a United Russia deputy from Vladimir Region, proposed the inclusion of an article in the Budget Codes under which all budget surpluses based on the year's results, would not be entered into the stabilization fund, but would be spent on buying process equipment abroad in order to modernize companies. The White House also discovered yesterday that its idea was accepted with enthusiasm, especially the part about transferring money from the stabilization fund to the budget.
The Duma leaders and Kudrin had some success when arrived at the White House, but Gref, Deputy Prime Minister Aleksandr Zhukov, Minister of Industry and Energy Vikto Khristenko, and Health Minister Mikhail Zurabov were shielding the prime minister there. Mikhail Fradkov essentially surrendered the government's draft budget for 2006. In his statement of capitulation he said that “the government has approved the main budget parameters, but this doesn't preclude making them more accurate.” However, this was not so much a capitulation to the Duma as a blow to keeper of the budget Kudrin and government forecaster Gref. Fradkov has never been an advocate of tough financial policy; in particular, he supported an increase in the severance cost from $20 to $27 a barrel for 2006-2008 at the same time as Kudrin was trying to limit the increase in this cost, which divides state oil revenues between the budget and the budget, to $25. The prime minister expects proposals for investment projects from Gref, which will require additional budget funds. He expanded on this topic yesterday: “We need to identify internal sources of economic growth, extrapolating from high oil prices, which requires a reasonable approach to stabilization fund spending. It will keep its sterilization role, but we need to dig deeper.”
Yesterday's meeting at the White House, which is already being called the zeroth reading of the 2006 budget ended with Fradkov calling for a search for noninflationary investment project. He even knew how to search for these projects: “One head is good, but two are better! And four are even better!” Gryzlov joined in. “Right!” the prime minister agreed. “Let's recruit the governors too.” They are the third head, while the fourth is probably being held in reserve – maybe for the Federation Council, but more likely for a still-unnamed Kremlin hread.
| Investment resources of the 2006 budget |
| Name |
Cost to the 2006 budget (billion rubles) |
| Five hundred federal target programs |
287.22 |
| Major programs, including: |
| Modernization of Russia's transportation system |
106.59 |
| Russia's federal space program |
23.00 |
| Move to contract service in the armed forces |
20.22 |
| Housing |
17.36 |
| Destroying Russia's stockpiles of chemical weapons |
14.16 |
| Education development program |
*6.00 |
| RF state border |
6.09 |
| Development of Russia's export transportation services |
**5.00 |
| Global navigation system |
4.72 |
| Rural social development to 2010 |
2.57 |
| Russian children |
1.9 |
| Investment fund |
**70.00 |
*Financing begins as of 2006.
**Investment fund resources will be frozen in the budget until the Ministry of
Economic Development and Trade prepares a fund distribution mechanism. |
Andrey Bagrov
All the Article in Russian as of July 08, 2005
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