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. Last Updated: 07/27/2016

Without Discipline, Budget Just a Dream

The few economically literate deputies who actually addressed the details of the government's proposed 1995 budget pointed out what is obvious on even a superficial reading. Someone is going to have to pull a very large rabbit out of a hat if it is to work.


On the one hand, the budget deficit -- the gap between what the government earns and what it spends -- will fall only slightly, from 8.8 percent of GDP to 7.6 percent next year. In money terms, the government is still going to need about an extra 75 trillion rubles that it does not have.


One the other hand, the government says it will not borrow even one kopek from the Central Bank to finance this gap. The government says it will instead cover the budget deficit by an unprecedented borrowing campaign. It will borrow about 45 trillion rubles from Russian capital markets, and then borrow another $12 billion from international financial institutions.


This will, by any reckoning, be a magic act.


The government has had some success borrowing money on capital markets through its program of selling interest-bearing treasury bills. But this year it will raise a total of only 4 trillion rubles. Will the market lend it 10 times that amount next year? The government is already having trouble selling six-month treasury bills, and it was forced to offer unbearable interest rates, over 400-percent, at its first auction of one-year bonds this week.


The predictions that world financial institutions will blithely offer $12 billion to Russia next year are also hopeful. The International Monetary Fund, which is the main source of this money, has so far, in three years of reform, only lent Russia $4 billion.


Does this mean that the whole budget is just a fantasy of painless economic reform that is being peddled as a diversionary tactic to throw deputies off the scent? Sergei Glazyev, the leftist chairman of the economics committee, has basically said this.


If this year's budget is anything to go by, this cynical view is probably the accurate one. The government delivered a hopelessly optimistic budget, and it knew it all along.


But there is also evidence that the government has changed its strategy for 1995. It has certainly changed both its rhetoric and its policy targets.


It is no longer talking about a "moderately tight" fiscal policy, as it was earlier this year. It is now talking about a "radical breakthrough" to low inflation under 1 percent a month.


It has also switched from a policy based on maintaining a certain budget- deficit target to a new target: avoiding borrowing from the Central Bank.


This year the government was ultimately answerable to nobody. It had its own budget targets, but if it overspent it could easily borrow from the Central Bank, which faced only very vague limitations on its loan levels.


Next year, if the government tries to overspend, it will face external discipline. The independent Central Bank would have a strong legislative basis for resisting requests for further cash, since the budget will forbid it from issuing credits.Moreover, the government will face real scrutiny over the way it spends money from its other sources of deficit funding. It will have to win over private capital markets and foreign lending agencies, which will only cough up the cash to finance a deficit if they can see it is being well spent, according to a plan they can understand.


By pinning its colors to the goal of ending Central Bank borrowing, the government may be giving itself a little dose of political courage. It will have an austerity program that is enforced by an independent Central Bank, and monitored by international agencies and local financial markets.


The government may fail, of course, and start spending freely. The test will be whether the government will be forced to borrow from the Central Bank. Or, perhaps, when.





Geoff Winestock is a Moscow-based correspondent for the Journal of Commerce.