The Budget No One Can Keep

The State Duma may have finally passed the federal budget for 1997 -- unfortunately, all sides agree that the numbers are almost all pure fiction. Sergey Lukianov analyzes the politics behind Russia's 1997 fantasy budget and asks what the priorities should have been.


The key to understanding Russia's budget for 1997 is that no one believes it is even slightly realistic. It is fiction, a fantasy, that has now grown into an annual tradition for the Russian public and politicians.


The big question is, "Where will the money come from?"


Consider these basic numbers: The 1997 budget pledges to raise spending to 19.4 percent of gross domestic product, whereas last year, spending ran at only 15.4 percent of GDP.


The budget allows that 3.5 percent of the hole will be filled by borrowing, but the rest must come from taxes. In other words, Russia must collect taxes worth 15.9 percent of its GDP.


Everyone admits that this is impossible. Last year, according to the State Statistics Committee, Russia could only raise revenue equal to 11.5 percent of GDP from taxes.


In fact, the budget offers few clues on how revenues are to be boosted by a hefty 4.5 percent of GDP. The few concrete suggestions it did make are already looking shaky. For example, a proposed tax on currency transactions, supposedly worth 2.3 trillion rubles ($408 million), or about 1 percent of GDP, has already been killed by the Federation Council, the upper house of parliament, after being initially approved by the Duma, the lower chamber.


The point is that no one, not even those closest to the process, believe that the budget's rosy predictions of a huge boost in spending financed by massive growth in government revenues is real.


"Only 70 to 80 percent of the things in the budget will ever happen," said Mikhail Zadornov, head of the Duma's budget committee.


Sergei Dubinin, chairman of the Central Bank, said the figures are so wrong that the government will have to cut spending by 60 to 130 trillion rubles this year to compensate.


Well then, what lies behind this elaborate smoke and mirror game if the numbers are all nonsense?


The confusion is a sign that the budget's Russian style is emerging as something very different in purpose from its Western counterparts.


In other countries, the budget is a real plan for the national household for the next 12 months. In Russia, the budget has emerged as something like a statement of good intentions.


For the government, the real purpose of the budget is not so much to win detailed approval of its spending plan. Its more basic goal is to win a mandate to continue fighting inflation and containing the budget deficit. A formal budget bill helps it secure International Monetary Fund support for the continuation of its three-year $10.1 billion loan agreement.


The good news for the government is that it has more or less won. The new budget incorporates its low inflation target of 11.8 percent for 1997, backed by a relatively low deficit projection of only 3.5 percent of GDP.


The government has no intention now to start printing money to meet spending plans set up in the budget.


"Everybody is so fed up with inflation that ... the government that starts printing money would have to resign immediately. We will not bring back inflation," said Economics Minister Yevgeny Yasin.


From the government's point of view, everything else in the budget will take second place to meeting its monetary targets. In order to hold the line on the deficit and inflation, spending will have to be slashed.


That is what happened last year. The government promised to spend a lavish 18.9 percent of GDP, funded by 15.1 percent in revenue. In fact, revenue collapsed to 11.1 percent, and the government slashed spending to only 14.4 percent. All the numbers were completely skewed except for one: The government still met its target of keeping the budget deficit around 3 to 4 percent.


Having accepted that the budget is about setting low inflation and budget deficit targets, and that its spending predictions are just serendipity, the rest of the budget process becomes understandable, albeit rather comic.


The government presented an unrealistic budget, which contained the deficit and inflation projections it wanted, but with vastly inflated revenue and spending figures to please the radical, big-spending deputies from the communist and nationalist factions.


The deputies wanted still more and, during the early budget debates, they added their own pork-barreling suggestions. No matter that the promises were impossible to keep. In the short-term, it made for good populist politics and, if it turns out that the money is not spent, deputies will always be able to blame the government.


The government cooperated with the opposition's daydreaming. In the course of the budget debates, the opposition added another 34 trillion rubles in spending pledges. First Deputy Finance Minister Andrei Petrov said that these had been allowed to go through because of "strategic considerations" -- in other words, so as not to annoy the opposition.


This was also the reason why officials agreed to a nonbudgetary investment fund, worth 18 trillion rubles, proposed by the Duma's conservative industrial committee, dominated by members of the communist and agrarian factions. Petrov recently told the newspaper Segodnya that without their approval "we would have lost some 99 votes on the budget." To be approved, the draft budget had to receive support of at least 226 deputies in the Duma.


In fact, the deputies, including the most free-spending factions, are aware that their budget is unreal and have de facto voted for a special procedure written into the draft that specifies how expenditures will be slashed if the revenue collection falls below the target.


About one-third of the budget, including spending on education, wages, food and medicine for the army, and interest on government debt, has been listed as protected items that will receive priority financing.


This probably explains the frantic discussion of the draft in the final reading last month when deputies fought hard to push through last-minute amendments to shield the expenditure areas they represent by including them in the list of protected items.


Zadornov said if the quarterly revenue collection falls below 90 percent of the projected amount, the government is supposed to present parliament with a bill that outlines proportional cuts on all spending items apart from the so-called protected items. This will probably wipe out investment spending as well as other crucial items such as subsidies to the pension fund and local governments.


Ultimately, economists say, Russia's fairy tale budget allows politicians to avoid responsibility. Keith Bush, a senior associate and Russian expert at the Center for Strategic and International Studies, said the government's weakness in defending its budget showed its reluctance to risk a serious showdown with the opposition in the absence of strong leadership, caused by President Boris Yeltsin's disappearance from public life after his recent illness.


"[Prime Minister Viktor] Chernomyrdin is not a great innovator," he said. "He's a competent manager, but I don't think he would push for it by himself. Yeltsin's got a term to do that, but his only concern at the moment is staying alive, I think."


Andrei Illarionov, director of the Institute for Economic Analysis, said it was time for the government to rethink its spending pledges and make up its mind on what areas of the economy it could afford to continue supporting.


"The state should decide on what it should finance, no matter what, and what it should give up. But the answer should be openly and honestly announced to the country," Illarionov said.


Bush said that instead of looking for rubles from heaven, it was time for the government to launch a major overhaul of its taxation and legal systems that could pave the way for billions of dollars in foreign investments.


"What they must do is change the tax code, and this needs a great big push from the top. They must change conditions for Western investors, including the production sharing agreement," Bush said. "All this has been put on the back-burner. The Duma, of course, will resist, but if the executive were to give it a shot, if Chernomyrdin paid priority to this, if Yeltsin paid the priority, [it would have happened, but] they haven't done very much," he said.


In recent weeks, signs are emerging that the government has a completely different approach. Some are saying that increased tax collection is not only impossible but also not even a good idea.


Yasin gave a chilling warning to the World Economic Forum in Davos last week. The most respected economist in the government said that Russia was faced with disaster unless it cut spending by about a third in the next three years. "If we fail, we will be faced with the prospect of an extended depression," he said.


Yasin's words were directed at cuts in the official budget and at the much larger quasi-budget sector that includes the huge pension fund, the road fund and local governments.


This bloated sector is draining the blood out of the rest of the economy. Yasin said in an interview last month that Russia's government spending, when this wider definition is taken into account, rises from 14 to 38 percent of GDP.


"Russia has probably more social dependents than any other countries with the possible exception of Sweden. We want to build a capitalist market economy with a socialist system of social security," he said.