Sachs Warns That Draft Budget Lacks Legal Teeth

A top Western economist warned Monday that the Russian government lacks the legal disciplines necessary to ensure implementation of its austere budget for 1995, even if the unpopular document manages to find its way through parliament.


"It is not enough to have a piece of paper that balances numbers," said Geoffrey Sachs, professor of economics at Harvard University. "The problem is for the government to obey what is on the paper and what is passed by the Duma."


Sachs, who quit his position as advisor to the Russian leadership after the departure of radical finance minister Boris Fyodorov in January, said the government's position was now closer to his own than it had been for a long time.


He endorsed the draft budget's aims to vigorously attack inflation, end reliance on credits from the Central Bank and create a stable ruble with the help of a proposed $6 billion International Monetary Fund stabilization fund.


The hardline monetarist also had some kind words for the IMF, which in the past he subjected to fierce criticism for what he saw as its failure to provide adequate aid to Russia. Apart from the stabilization fund, Russia is currently negotiating a $6 billion standby loan from the IMF that would be used to partially finance a projected budget deficit of around 75 trillion rubles ($23.5 billion), or 7.8 percent of gross domestic product.


The government is planning to fill the remainder of the budget gap by issuing internal securities and has pledged not to use cheap credits from the Central Bank.


Whether the IMF will provide assistance on the scale that Russia is requesting, however, will largely depend on how feasible it believes the budget targets to be.


"The government has many times announced it will do one thing and has then done something quite different," said Sachs, who argued that Russia requires three legal disciplines to ensure tough budgetary legislation is implemented. These were:


?a law preventing the Central Bank from giving money to the budget that is not in the budget law;


?a law that the government can spend only that money which has been approved by parliament;


?a law that everybody should pay the same taxes without special exemptions other than those approved by the Duma, the lower house of parliament.


"Without such laws, I'm unfortunately skeptical that what's on paper will not turn out to be what is done later," he said.


Sachs said the public's lack of faith in the government was undermining its attempts to achieve economic stabilization, pointing to persisting inflationary expectations during the summer, despite low levels of inflation, which resulted in interest rates staying high and interenterprise debt continuing to mount. Monthly inflation has since jumped to 15.1 percent in October, cooling only to 14.1 percent in November.


"The costs of a low level of credibility are very high in terms of achieving stability," Sachs said.


Lack of faith in the government could also undermine plans to raise over $12 billion in internal loans next year.


"To borrow from the Russian people, the government must be believable, trusted," he said. "Governments that follow the law are trusted more than governments that constantly make tricks."


While he said the budget came close to what was needed to achieve stabilization, Sachs said the deficit it envisaged was still too large and called for further spending cuts or measures to improve revenues.


"There are many areas where spending could be cut without hurting people, which would just cut out thieving," he said.


Sachs was in Moscow to launch his first Russian-language book on economics, published by the BBC.