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. Last Updated: 07/27/2016

Budget Gets Communists' Support

The Communist faction in the State Duma promised Tuesday to support the government's draft 1999 budget for next year, boosting the government's economic plans.

But the head of the powerful Federation Council, parliament's upper house composed of regional leaders, said they would oppose the budget on the grounds that it cuts subsidies to local governments and limits their powers to impose taxes.

The Duma, parliament's lower house, is scheduled to vote on the draft in the first reading Thursday. After four positive votes, the budget will then go to the Federation Council for approval.

Communist Party leader Gennady Zyuganov said his faction, which dominates the Duma, would approve the basic revenue and expenditure figures, as well as inflation forecasts in the budget.

"Our choice is between bad and very bad," Zyuganov said after a faction meeting. "But this [draft] budget has to be approved in the first reading."

The government hopes that passing the budget will help it win the support of the international financial community and win loans from the International Monetary Fund.

But some economists say that even if the budget is passed swiftly, it is fundamentally unrealistic and the government will not be able to deliver on its target of low 30 percent inflation and a ruble exchange rate of 21.5 to the dollar.

Communist approval should help the government defeat mounting pressure from lobby groups that have traditionally boosted spending in past budgets. Finance Minister Mikhail Zadornov says he is committed to maintaining a tight fiscal policy where current revenues exceed expenditures by 1.64 percent of gross domestic product.

While the Communists and their allies virtually guarantee passage of the bill in the Duma, there could be some opposition. The liberal Yabloko faction, which controls 46 seats in the 450-seat Duma decided Tuesday to vote against the draft budget in the first reading.

"There are more than enough reasons to oppose this draft," said Sergei Don, a Yabloko deputy on the Duma's budget committee. "That forecast is absolutely unrealistic. It hinges on the tax changes which have not been approved yet."

The government is now trying to secure passage of a raft of tax bills which would cut rates on value-added tax and profits tax but increase sales and excise taxes.The Communist faction agreed to endorse the estimates following a meeting Monday with First Deputy Prime Minister Yury Maslyukov, himself a Communist Party member. Maslyukov supported the Communists' demand for higher military spending.

But Zyuganov concentrated on other spending articles, including support to regional budgets, which he said would lose 70 billion rubles ($3.3 billion) as a result of the tax changes planned by the government.

The current draft budget allocates a total of 40 billion rubles to support regions. Zadornov visited the Federation Council to garner support for the budget.

He had limited success. On Wednesday, the Federation Council, usually known for its loyalty to the government, slammed the draft budget. Speaker Yegor Stroyev said the document was "unacceptable" because it ignores regions' interests.

"We have a problem with the taxes, and we have a problem with spending for regions," said Alexander Surikov, a member of the Federation Council's budget committee and governor of the Altai region in Siberia. "We're all for the government's plans to cut expenditure, but why at regions' expense?"

The tax reform proposed by the Cabinet would involve cutting value-added tax to 15 percent from the current 20 percent, profits tax to 30 percent from the current 35 percent, and lowering the income tax for higher income payers.

The reduction of VAT would, indeed, be at the expense of regional budgets who currently receive one quarter of VAT revenue. But the government insists that the losses can be mitigated by the introduction of a sales tax.

Vladimir Yakovlev, governor of St. Petersburg and chairman of the Federation Council's budget committee, said sales taxes would only compensate 80 percent of the losses caused by the cancellation of the regions' share of VAT.

Surikov said governors also opposed plans to leave regional subsidies at this year's level of 40 billion rubles without giving any compensation for raging inflation.

"We are getting 39 billion rubles, so that funding will effectively be cut. It would not correspond to the necessary salary indexations and would not be enough to cover this year's wage arrears," Surikov said. "Also 12 regions have disappeared from the list of recipients for some reason and we want to know why."

Surikov said the budget committee wanted to from a working group with the Duma and government to revise the draft budget before the Duma's first reading, "so that we can avert the unpleasant procedure of sending the draft back to the Duma."

While the government predicts a surplus of 1.64 percent of GDP on current expenses, when debt servicing costs are taken into account the budget is in deficit.

The draft budget envisages 1999 federal expenditure at 575.1 billion rubles ($27.5 billion), revenues of 473.8 billion rubles and a deficit of 2.53 percent of GDP.

To fill the gap, the government will rely on a range of sources, including new foreign loans, restructuring of the existing debts and new domestic treasury bills.

While admitting it will print 32.7 billion rubles to fund the deficit, the government also plans to hold next year's inflation down to 30 percent and the ruble exchange rate to 21.5 per dollar. It predicts GDP will fall by a modest 3 percent.

The IMF this week contradicted this, predicting 56 percent inflation and an 5.7 percent fall in GDP.