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. Last Updated: 07/27/2016

'Irrelevant' Budget Ripe for Rejection

All eyes are on the government's budget draft for 1997 as the State Duma sits down Friday for what is expected to be a round rejection of the bill on its first reading.


Observers say, however, that the budget is becoming increasingly irrelevant as the government decides on both revenue and spending without paying much attention to the priorities laid down in the budget law.


On Thursday, representatives of the pro-government Our Home Is Russia faction said they were likely to vote against the bill on its first reading, joining opposition from the Yabloko and Communist factions, Interfax reported.


Our Home leader Sergei Belyayev said the deputies would recommend the establishment of a government-parliament conciliation commission to hash out details of the spending plan.


Duma speaker Gennady Seleznyov on Thursday criticized the government's draft for being vague and contradictory. He was quoted by Interfax as saying that "while the government is speaking of a strong economic policy, budget lines indicate the contrary."


Seleznyov said, however, that a revised budget could be approved by the end of the year, according to the agency.


Other critics of the cabinet have singled out its record in implementing earlier budgets as a bad omen of things to come with the 1997 law.


This week, one of Russia's leading independent economists said the government is financing extra spending by massive borrowing from sources not foreseen in the budget, while the lower house's budget committee -- dominated by the market-oriented Yabloko faction -- attacked the government for ignoring parliament's spending priorities.


In the 1996 budget, "there has been the largest ever discrepancy between the spending plan outlined in the budget and the way it is enforced," said Oleg Leonov, an adviser to the Duma's budget committee.


"Once the budget is passed we have no influence on how it is carried out," he said.


Indeed, the government may have little reason to worry even if parliament gives its draft a hard time.


"The government has time on its side. If the budget is not passed before the new financial year (beginning Jan. 1), the Ministry of Finance actually gains more discretionary power, working on the basis of the main expenditure and revenue targets in the 1996 budget," Renaissance Capital wrote in a research note Thursday.


The revenue shortfall has hit all items on the 1996 budget, but to widely varying degrees, triggering accusations of government manipulation of funds.


"Some items have received 98 percent while others received less than 30 percent of the plan so far," Leonov said.


Defense procurement and state investments were sharply cut back earlier in the year as the government sought to pay back-wages in the midst of President Boris Yeltsin's re-election campaign.


But economists said the underfinancing was a natural consequence of poor revenue collection that has forced the government to cut back on "unprotected" items in the budget.


"Government spending basically reflects government priorities rather than the budget plan," said Pavel Teplukhin, chief economist with Troika-Dialog. "But the government simply cannot spend what was planned."


Revenue collection through September stood at 75 percent of what was targeted in the 1996 budget, the State Tax Service said earlier this week.


Andrei Illarionov, director of the Institute for Economic Analysis, has published articles suggesting the government is borrowing heavily from sources not foreseen in the budget to finance a deficit whose real size next year will be 12.9 percent, contradicting an estimate of 3.3 percent by the Finance Ministry.


The government has borrowed at least 126 trillion rubles ($23.2 billion) in the form of "non-market and quasi-market obligations" on top of 198 trillion rubles it has borrowed on the domestic bond market, Illarionov wrote in the weekly Moskovskie Novosti.


The Russian government "is hiding government expenditures, covering them with the help of a variety of "government guarantees," "commodity credits," "promissory notes," and similar types of quasi-money," he wrote.


But other economists said the government has cut back on its use of such schemes.


"The government has actually made the budget more transparent by eliminating its promissory notes, known as KOs, issued in earlier years and also eliminating from August this year the granting of tax exemptions, or KNOs," said Yaroslav Lissovolik, of the Russian-European Center for Economic Policy.


A Finance Ministry official said transfers from extra-budgetary funds to were unlikely to increase the deficit.


"If incomes of the funds are transferred, their expenses are reduced accordingly," said Maxim Kulikov of the ministry's economic expert group.