Fiscal Hawks Find Friend in Medvedev

President Dmitry Medvedev broadly sided with the country's fiscal hawks Tuesday as he unveiled proposals for state spending in the next three years, providing a boost to Finance Minister Alexei Kudrin's efforts to rein in the federal budget deficit.

But the long-awaited address, delivered to top lawmakers and the full Cabinet, also had a populist flair, promising some salary hikes, and it avoided discussion of raising taxes on the country's gas industry, which analysts say could be a quick way to mend the state's finances.

Medvedev said last year that he would personally submit his budget address in 2010, rather than just submitting the list of spending priorities and guidelines.

Anti-crisis measures should be "gradually wrapped up," since "state support cannot continue for a long time on the same subsidized terms," he said. Instead, budget policy should focus on co-financing public-private partnership projects that stimulate modernization.

The deficit — which reached 5.9 percent of gross domestic product in 2009 — must be halved by 2013, Medvedev said.

While approving many proposals by Kudrin, the government's chief austerity proponent, to raise federal revenues and reduce the budget deficit, Medvedev notably skipped the idea of applying a heavier tax on the gas industry, including behemoth export monopoly Gazprom.

“I would have enjoyed seeing such a line about the gas industry,” said Alexandra Suslina, an analyst at the Economic Experts Group, a think tank. “If we are really looking for additional revenues, the gas industry should be the first to look at.”

The government probably has not yet reached a consensus on the issue, she added.

Alexandra Yevtifyeva, senior economist at VTB Capital, said the government might still attempt to raise revenues by increasing the mineral extraction tax on gas companies. Kudrin indicated Tuesday that the proposal was under discussion, with a final decision expected by August.

In another sign of support for the Finance Ministry, Medvedev did not say there was any immediate need to replace the high oil export duties with a tax on excess profits, as oil producers want.

Kudrin said at a Renaissance Capital investment conference Tuesday that the move was possible only in the “medium term,” and only for new fields.

Medvedev also ordered a 6.5 percent salary increase for hundreds of thousands of federal employees and military officers next year, after a pause this year.

Prime Minister Vladimir Putin has also regularly announced raises to salaries and pensions, which political analysts say is a key issue for many voters. Both Putin and Medvedev have left open the possibility of running for the presidency in 2012.

Employees of federal institutions, as well as military officers and college students, will see their salaries and stipends grow next year, Medvedev said.

Pay for officers will swell as of April 1, while for federal employees — including an army of federal officials such as judges and prosecutors, as well as college teachers — the raise will kick in June 1.

Students will get an increase in their stipends at the start of the next academic year.

Regional governors may take the growth of federal payments as a “signal” and raise salaries for local teachers and doctors, Yevtifyeva said, warning that it was not a good time to be boosting people's earnings.

The burden of social spending on the budget is already heavy, she said, especially after Putin boosted retirement pensions this year, creating an additional drain on federal coffers. The timing suggests that the announced raises may be a "small present" for voters before they go to polling stations to elect the president in March 2012, she said.

Medvedev's pledge to boost salaries in 2011 does not preclude possible gains later this year, a possibility Putin recently suggested, Suslina said.

“Such decisions can be of populist character,” she said. “Announcements of pay raises appear whenever there's a threat of the approval rating going down. It's unpredictable.”

In a poll released last week by the independent Levada Center, 74 percent of respondents said they supported Medvedev's politics, down from 77 percent in May. In the same survey, 78 percent said they supported Putin's work, down from 80 percent a month earlier.

Both movements were within the poll's 3.4-point margin of error.

The government should present its proposal on cutting the number of federal employees by "about 20 percent" in the next three years, Medvedev said in another show of support for Kudrin.

Medvedev also struck a fresh blow for more privatizations and voiced support for a single property tax to replace two current separate taxes on land and real estate.

The president backed many of Kudrin's proposals, as finance ministers have come to the forefront in the time of austerity, said Yelena Matrosova, director of the macroeconomic research center at the BDO Yunikon consultancy.

Medvedev, who attended G8 and G20 summits on state finances this weekend, again underlined Russia's resource curse and followed the lines of Kudrin's rhetoric about the necessity to make the budget less reliant on high oil prices.

The goal of budget policy should be an "all-around economic modernization," and all budget expenditures should be evaluated for their efficiency. "Strategic goals will have to be sensibly evaluated against realistic abilities," Medvedev said, cautioning against overspending.

Clear rules should be established for evaluating existing and new budget expenditures, and the "practice of financially undervaluing new initiatives with subsequent increases in spending" is "unacceptable," he said. "Responsibility should be raised" for providing accurate financial evaluations on programs.

Medvedev avoided speaking of imminent increases of taxes or the retirement age, both unpopular measures that have been mentioned by Kudrin. He conceded, however, that the "pension system is facing serious long-term problems."

In an echo of Putin's promise in March, Medvedev ordered the Cabinet to exempt health and education institutions from profit tax until 2020.

A lot of Medvedev's statements “sum up what have been said before” and don't set any new goals, Suslina said.

See also:

IMF Report: Russia Could Consolidate Up to 12% of GDP in 3 Years

Russia's Reserve Fund to Run Empty in 2017

Russian Oil Companies Warn Government Against Currency Control