Kudrin Says Spending Spree at an End

MTFinance Minister Alexei Kudrin studying his notes as he addresses a Renaissance Capital conference on Tuesday.
Finance Minister Alexei Kudrin said Tuesday that the country would not increase budget spending as it tackles high inflation amid signs of economic overheating and that it needed to dampen demand growth.

Annualized inflation has risen to more than 15 percent in May, partly because of a spending spree ahead of the parliamentary election in December and the presidential vote in March.

Earlier this month, the parliament approved a rise in 2008 budget revenues by 10 percent to 21 percent of gross domestic product and expenditure by 2 percent to 16.6 percent of GDP. It also raised figures for 2009-2010.

"We will not increase budget spending and will stay within 17.6 to 18 percent of the GDP [in 2008-2010], which is enough to achieve our key tasks," Kudrin told the Renaissance Capital investment conference.

Kudrin, the government's leading fiscal hawk, is fighting an uphill struggle to limit spending amid record prices for oil, the country's main source of revenues. His opponents say Russia should boost infrastructure spending and cut taxes.

Public expenditure soared by 37 percent in 2007 from the initial plan to almost 6 trillion rubles ($252 billion) after the government raised wages and pensions, as well as handing out cash to infrastructure development corporations.

"We cannot allow such an increase in budget spending again," Kudrin said, adding that fiscal policy would from now focus on "stabilizing state finances and curbing inflation." He said the government was united on the need to cut spending.

Kudrin said the government's anti-inflation commission, which he chairs, would this month unveil a plan to curb price growth and praised the Central Bank for a set of actions that had cut money supply growth to 33 percent.

The Central Bank widened the currency's trading corridor against the dollar/euro basket it uses to guide its exchange rate policy last month, a measure which, in an environment of large petrodollar inflows, amounts to revaluation.

Kudrin said the Central Bank could still achieve the annual inflation target of 10.5 percent, dismissed by many analysts as highly unlikely, through monetary policy and exchange rate measures, but that such a move would slow economic growth.

The economy grew by 8.5 percent in the first quarter, playing into Kudrin's argument that the economy is overheated.

"Speaking about the overheating, we see that we need to cut the pace of [aggregate] demand growth, to balance it out," Kudrin said. The Kremlin's top economic aide, Arkady Dvorkovich, later said he did not share this view.

Kudrin lost some of his clout in the latest government reshuffle in May, with First Deputy Prime Minister Igor Shuvalov briefly taking over as the lead reformer.

During the government meeting last week, Prime Minister Vladimir Putin publicly criticized Shuvalov for not paying enough attention to rising food prices, and he has been keeping out of the public eye since then.

//BLOB// The country may fail to reach its latest revised inflation target of 10.5 percent in 2008 as prices could rise by 12 percent, Gennady Melikyan, first deputy chairman of the Central Bank, said Tuesday.

"Unfortunately, inflation won't fit within single digits and could reach 12 percent, same as last year," he told reporters.