Kudrin Calls for Cuts in Spending

Finance Minister Alexei Kudrin pitched himself against other leading policymakers Tuesday, calling for a cut in federal spending as the economy displays signs of overheating.

Kudrin, noted for his prudent fiscal policy during his eight years in charge of Russia's finances, told a conference that the country's 8.1 percent growth rate last year was a warning that the economy was expanding too fast.

He also called for federal budget spending to be cut by 1 to 1.5 percent of GDP over the next four years, in light of an expected fall in oil revenues and as the government battles with rising inflation.

His assessment was contradicted by Economic Development and Trade Minister Elvira Nabiullina, who spoke after Kudrin at the conference. She dismissed "this 'overheating' talk," and urged that the government continue to pursue high growth targets.

"We cannot afford low growth rates. The price of a slowdown for us is too high," said Nabiullina, an economist who took over as economic development and trade minister last fall from German Gref, an ally of Kudrin's. "When we face macroeconomic challenges, we cannot give up growth."

It was the clearest sign this year of a strategy divide within the government on the country's fast-paced economic growth, and one that could pose difficulties in picking a new Cabinet when President-elect Dmitry Medvedev takes over from President Vladimir Putin next month.

The economy grew at its fastest pace last year since Putin set his administration the famous challenge to double GDP in a decade. To achieve that, the economy would need to maintain at least its current rate of growth.

Some analysts estimate that the economy grew by more than 8.5 percent in the final quarter of last year.

Officials have pointed to the data as evidence that the Russian economy is prospering despite the international financial crisis, which looks likely to hit global economic growth in 2008. The World Bank has predicted that global GDP growth will slow this year.

Kudrin said Russia should learn the lessons of the crisis, which was sparked by a collapse in subprime lending to homeowners in the United States. He noted that the U.S. government flooded the market with cheap credit in 2000, when it cut interest rates to 1 percent, prompting a doubling in home construction over the following five years.

"By stimulating and trying to heat up an individual economic sector, it created a bubble, and it has burst," Kudrin said. "I hope our policy will overcome the temptation to use money to create a temporary paradise."

Alexei Ulyukayev, a deputy chairman of the Central Bank, backed Kudrin's view of the economy, saying overheating was a "real problem faced by many economies." He called on the government to "concentrate on maintaining economic stability and a more conservative fiscal and monetary policy."

Clemens Grafe, chief economist for UBS in Moscow, backed the calls for fiscal discipline.

"The economy is growing too fast," he said. "If [the government] doesn't raise interest rates or tighten fiscal [policy], they risk overheating."

Overheating, when an economy grows beyond its potential growth rate, can be sustained for a short period of time, Grafe said, but will translate into lower growth in the long run.

Kudrin's warning was in stark contrast with recent comments by Putin, whose administration has spearheaded an aggressive investment phase, targeted at the development of the country's ailing infrastructure, in partnership with private investors. Medvedev has pledged to continue Putin's course, and has asked Putin to be his prime minister.

Kudrin, who has emerged as a strident defender of the funds accumulated from windfall oil profits, also reiterated his opposition to a drastic cut in the value-added tax, saying it could have serious implications at a later date.

"It frightens me when people tell me that we need to lower the value-added tax urgently while we have the money, because in three years it may become clear that there aren't such resources, and we shouldn't have lowered it," Kudrin said.

Both Putin and Medvedev have supported the business community's calls for lower taxes. The Finance Ministry has been given until August to evaluate the costs of a cut in the VAT rate.