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. Last Updated: 07/27/2016

Numbers Rubbery, Cuts Will Follow

Russia at last has a budget for 1998, but it is a far cry from the realistic fiscal plan that the government and legislators had promised in order to clean up the country's messy public finances, economists said Wednesday.

Instead, the government has been given a knife to cut spending as it sees fit to prevent the budget deficit from ballooning, in a move that was welcomed by investors worried about Russia's fiscal problems in light of world market turmoil.

The budget passed by the State Duma, or lower house of parliament, is largely the same fiscal plan drawn up before Asia's financial crisis hit Russia last October. But circumstances have changed dramatically since then. The government's cost of borrowing has skyrocketed at a time when it is struggling to collect taxes and wipe away the massive budget arrears that are strangling the economy.

President Boris Yeltsin called on the Duma to pass additional spending cuts of 27 billion rubles ($4.6 billion) to take into account market troubles, but deputies balked. Instead of signing off to specific cuts, deputies gave the government carte blanche to slash spending if corresponding revenues are not found.

Most economists say the rosy revenue forecasts in the budget will force the government to immediately impose deep spending cuts.

"Everyone knows it won't be possible to collect as much revenue as they planned," said Alexander Morozov, an economist with the World Bank in Moscow. "There is a need to cut spending this year more than actual expenditures in 1997."

The situation is reminiscent of last year, when the Duma padded the budget with extra spending that proved impossible to carry through. The government was forced to seek the Duma's approval to sequester, or cut, spending by about 20 percent to make up for a dramatic shortfall in tax collection. Deputies rejected the plan, but the government went ahead with the cuts anyway.

This time, the government will not be required to ask the Duma to approve spending cuts, which allows both sides to claim victory.

"This allows the Duma to accuse the government of failing to meet spending targets," said Al Breach, an analyst with the Russian European Center for Economic Policy. "But it also means that the Duma has absolutely no oversight of budget spending."

There are no limits on spending cuts, but the government is required to reduce expenditures proportionally and notify the legislature and budget organizations before the axe falls.

"Formally, they can cut the budget as much as they need to," Morozov said. "Now they will adjust the budget with only one target to follow -- the budget deficit."

The budget targets a deficit of 4.7 percent of gross domestic product, well below last year's deficit of 6.8 percent. It calls for spending of 500 billion rubles and revenues of 368 billion rubles.

The market rallied after the budget was passed Wednesday as investors welcomed the government's pledge to cut spending and stick to its budget deficit. The Moscow Times Index of 50 leading shares surged 4.28 percent and government bond prices rose on the news.

First Deputy Prime Minister Boris Nemtsov, in Germany to promote foreign investment in Russia, hailed the budget's passage and said it would provide the economic foundation to keep the ruble stable.

"The budget deficit will be kept within limits and will secure the stability of the ruble," Nemtsov said, according to a Reuters report. "The deficit is also within the framework of macroeconomic parameters that one should not exceed."

But economists said the government is likely to have a difficult time meeting its revenue targets this year because it has vowed to accept tax payments in cash only, abolishing the practice of monetary offsets, which the International Monetary Fund has criticized.

Noncash payments, such as barter arrangements, had allowed the government to boost spending on paper but contributed to the vicious circle of nonpayments in the economy.

Morozov said many companies had been holding back on paying taxes, betting that the Duma would include a clause in the budget requiring the government to accept noncash payments. But deputies stopped short of forcing the government to continue monetary offset schemes, passing a diluted amendment that allowed noncash payments to continue in a limited form.

Morozov said the move to abolish offsets, plus other measures to control budget spending, would bring more order to the government's finances this year, but he warned that the government must continue to boost tax collection and control spending.