Duma Approves 25% Bigger Budget

The State Duma on Friday gave preliminary approval to a 2007 budget that is expected to be 25 percent bigger than this year's, prompting worries of overspending and higher inflation as next year's elections near.

The hike comes on top of a 40 percent increase this year, as the government spends windfall revenues created by the bonanza of high world oil prices.

By a 343-94 vote with no abstentions, deputies passed the draft budget on first reading. Budget spending is to swell to 5.46 trillion rubles ($205 billion), or 17.5 percent of the country's gross domestic product. With expected revenues of 6.96 trillion rubles, the budget foresees a surplus of 1.5 trillion rubles, or 4.8 percent of GDP.

The projected surplus, however, will largely depend on the oil price, as the budget is based on an average price of $61 per barrel of Urals crude -- a far higher level than in previous years. Should the price fall significantly below this level, the budget could slip into deficit.

Finance Minister Alexei Kudrin told deputies in an address that the draft budget would help the country regain economic ground and fulfill its "industrial potential."

Analysts, however, said the budget was put together with an eye to the upcoming elections and sounded alarm bells over increased spending on bureaucrats. They also expressed concern that one-eighth of the budget would be kept secret, a proportion that has grown in recent years.

State Duma elections are scheduled for late 2007 and the presidential election is due in early 2008.

While the big-spending budget may have conjured up comparisons with the Soviet era, a slip of the tongue by Kudrin caused some merriment among his audience.

"The strategic priorities of the budget are aimed at improving the well-being of the Soviet people," Kudrin said, prompting a burst of laughter from deputies in their seats and observers in the lobby, where giant relay screens broadcast the session.

Apparently unaware of his faux pas, Kudrin continued, saying next year the country would have its highest-ever per capita income, including during the Soviet period.

State employees' salaries will increase by 50 percent in real terms, while education spending will be increased by 33 percent and health care spending by 31 percent, Kudrin said.

"This is clearly a pre-election budget. This is the only way to explain a spike in spending," said Anton Struchenevsky, an economist with Troika Dialog. "I bet that from the middle of next year we'll hear the cry: 'What are we going to do?'"

The hike in spending will add to inflationary pressures and push prices up past the government's target of 8.5 percent inflation, Struchenevsky said.

GDP next year is expected to total 31.22 trillion rubles ($1.16 trillion), 6 percent more than the forecast for this year. Consumer prices are forecast to grow next year between 6.5 percent and 8 percent.

Some lawmakers expressed doubts about Kudrin's budget predictions.

"The plan for the anticipated revenues from collecting value added tax are clearly inflated," said Yury Vasilyev, chairman of the Duma's Budget Committee, who nevertheless recommended the Duma back the bill.

Valery Draganov, head of the Duma's Economy, Entrepreneurship and Tourism Committee, said the draft budget overlooked several industries that needed state support the most, including tourism, aircraft manufacturing and shipbuilding.

"One should not be deceived that some sectors of the economy can survive without state support," Draganov said.

The government earmarked 821.3 billion rubles ($30.7 billion) for so-called general state spending, which includes salaries of state officials, and 821.2 billion rubles for defense. State security and law enforcement was allotted 664.8 billion rubles.

According to the Institute for the Economy in Transition, secret budget spending has grown to 12.2 percent in 2007 from 9.5 percent in 2003.

A total of 45.6 percent of next year's spending on state security will be kept secret, up from 36.2 percent in 2003.

The secret part of general state spending will rise to 7.6 percent from 3.9 percent in 2005, the institute said in a recent report.

In spite of the government's pledge to focus on social issues, the budget showed the government's top priorities were defense, security and administration, Troika Dialog said.

"It is becoming clear that Russia's future presidents will need to de-bureaucratize and reduce budget spending," the brokerage said in a recent research note.

On a similar note, Rodina Deputy Sergei Glazyev said Friday that the budget could not be described as socially oriented and urged deputies in his faction to vote against it.

"Comparing ourselves with any African country, our social spending is six times less and health spending is three times less their theirs. Only 12 percent of spending goes toward social needs, while 42 percent goes to finance the bureaucratic apparatus. Let's not deceive ourselves -- it's ridiculous to call such a budget socially oriented," Glazyev said.

To bring the budget in line with those of European countries, Glazyev said health and education spending should be doubled and science spending tripled.

As part of next year's budget, the government plans to pump a total of 230.9 billion rubles into the so-called national projects on education, agriculture, health and housing. Funding of 32.3 billion rubles is being earmarked for measures to improve the birthrate.

Former Prime Minister Mikhail Kasyanov said the budget increased the chances of a crisis and called its calculations "unrealistic."

"For the first time in many years, a budget is being considered that in fact has a deficit," Interfax quoted Kasyanov, a presidential hopeful, as saying. "The market price of the Urals blend is already almost 10 percent less than the estimate in the draft budget."

Analysts were divided over the decision to set next year's oil-price forecast so close to the current market price. This year's budget was based on an oil price of $40 per barrel.

"Whether $61 is too optimistic right now is very hard to say," said Peter Westin, chief economist at MDM Bank. If the oil price falls next year it would not affect the country's finances significantly, he said.

But Natalya Volchkova, an economist with the Center for Economic and Financial Research, said the government was being too bold in assuming that prices would remain high.

With such a high level of social spending, if oil prices fell, the government would have to dip into the money it now stashes away for a rainy day to make good on its promises.

"The stabilization fund could be spent in two to three years," Volchkova said.

The budget is calculated on an average of 26.7 rubles to the dollar in 2007, Interfax reported.

Deputies have until Sept. 27 to submit amendments to the budget. The budget's key second reading is scheduled for Oct. 11.