The budget was plain sailing and did not run into any snags. It contained nothing new. Last year, in his debates with other ministers and in his articles in professional journals, he explained his stand on the budget, its revenues and spending, and the weak points of the Russian economy that had prompted his decisions.
The few remaining details to be disclosed concerned only the Stabilization Fund, its future, topping-up sources and spending targets. But after President Vladimir Putin delivered his budget message, nearly all questions were put to rest. In 2008, the Stabilization Fund will be split into a Reserve Fund and a Fund for Future Generations (FFG). The Finance Ministry suggested the Reserve Fund should be defined in the Budget Code in real terms, but all agreed that a better option would be to express it as a percentage of GDP.
It was therefore decided that as of February 1, 2008, an amount equivalent to 10% of the previous year's GDP would be diverted from the Stabilization Fund to form a Reserve Fund, while remaining extra revenue would make up the FFG. The Reserve Fund is expected to total 3.067 trillion rubles ($117.87 billion), while the FFG will add up to 623 billion rubles ($23.94 billion). Kudrin believes the Reserve Fund's money will be invested in gilt-edged securities, and the FFG's in a wider range of securities, particularly corporate securities and, later, real estate. The FFG is supposed to have an annual yield of 6.5% to 7%, while the Reserve Fund's return will be 3.5% to 4%, or the projected level of inflation. To manage the funds, a special agency will be set up or private management companies invited.
The system of making contributions to the funds will also be changed. Currently the Stabilization Fund is made up of oil windfalls. But Kudrin plans to direct all receipts from the oil and gas sector to the new fund, including the mineral resource extraction tax and export customs duties on crude oil, refined petroleum products and gas. Earlier, the Finance Ministry had also wanted the profits and dividends of state-owned oil and gas companies to be added, but its recommendation was turned down. The final version looks like a trade-off. All receipts from the oil and gas sector will be deposited in one account, to be later divided into three parts: a transfer to finance current budget spending, to top up the Reserve Fund, and to top up the FFG.
Kudrin's argument took into account not only the open resistance of companies, but also the fact that "these earnings have been unpredictable in recent years and will continue to be so in the near future." The budget's oil and gas revenues are expected to drop from 8.2% of GDP in 2007 to 5.3% of GDP in 2010. Also, Kudrin thinks the oil prices penciled into the budget will reach or even go through the floor. This prompted him to say that the federal budget's oil and gas revenues in 2009-2010 may fall short of the 10% of GDP that will go to fill up the Reserve Fund, and there might not be any left over to replenish the FFG.
As he had many times before, the minister reminded his fellow ministers that budget revenues should come not only and not so much from oil and gas windfalls resulting from the world's favorable business climate, but also from other sources. Kudrin meant to say that everyone should pull their weight. But his colleagues refused to accept his stand, and believed that a drop in the oil price down to $50 per barrel did not pose a serious threat to the Russian economy. Moreover, they are sure that if anything goes wrong they can draw on the Reserve Fund. Meanwhile, arrangements have been made to transfer a portion of the fund to the budget every year. In 2008, the sum will be equivalent to 6.1% of GDP; in 2009, 5.3%; in 2010, 4.5%; and in 2011, as low as 3.7%.
Kudrin's principled stand, though, is backed by everyone. Deputy Prime Minister Alexander Zhukov, for example, said that the draft federal budget prioritized the development of the non-oil and gas sector. Kudrin himself called the new budget one of long-term stability, predictability and diversification. In addition, he insisted on postponing for at least a year the decision to reduce VAT in 2008, although a decision on whether to alter VAT and extraction-tax rates on gas would be made before the draft budget was submitted to the State Duma, the lower house of the Russian parliament. Also, the three-year draft budget capped government spending, as is evident from a proposed annual cut in oil and gas transfers to the budget.
In general, the draft budget looks more than hopeful. Its revenues in 2008 will total 6.67 trillion rubles, or $256.46 billion (19.1% of GDP), and spending will add up to 6.5 trillion rubles, or $249.81 billion (18.6% of GDP). In 2009, revenues will rise to 7.42 trillion rubles, or $285.21 billion (18.8% of GDP), and spending will increase to 7.36 trillion rubles, or $282.93 billion (18.6% of GDP, the same as 2008). At the end of the planning period, in 2010, revenues will grow to 8.04 trillion rubles, or $308.81 billion (18.1% of GDP), and spending to 8 trillion rubles (18% of GDP). So, despite the reduction in oil and gas transfers, the budget will remain deficit-free, although it will not have a surplus of two trillion rubles, or $76.86 billion (7.5% of GDP), like it did last year.
As Kudrin noted, effective management of allocated budgetary funds, rather than runaway spending, will come to the fore. He emphasized that his tight-fisted policy would not affect either health care or other social services. In fact, the government will significantly increase funds for pensions. While this year pensions will total 1.06 trillion rubles ($40.74 billion), in 2010 the figure will almost double to 1.85 trillion rubles ($70.95 billion). The national minimum wage will be increased to equal the living wage in 2011. Already on September 1 of this year, the minimum wage will rise to 2,300 rubles ($88.39) a month. As a result, public sector wages will climb by 13%. Further increases are scheduled, including one of 7% on September 1, 2008, 6.8% on September 1, 2009, and another 6.5% on January 1, 2010, although the program will require additional allocations. Overall, public sector wages will grow by 50% in the next three years. Military pay will also increase.
The opinions expressed in this article are the author's and do not necessarily represent those of RIA Novosti.
