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. Last Updated: 07/27/2016

Duma to Call State 'Bluff' on Budget

The State Duma's top budget official on Friday accused the government of underestimating next year's budget surplus in order to spend up to $6 billion without parliamentary oversight.

Alexander Zhukov, chairman of the Duma's budget and tax committee, vowed to fight what he called intentional deception on the part of Prime Minister Mikhail Kasyanov's government, which submitted its 2002 draft budget Aug. 26. Zhukov's comments also appeared to challenge President Vladimir Putin, who called every line item in the draft "justified."

Zhukov said the 2002 budget is a mixed bag: Unlike the initial 2001 budget, it figures in debt payments and sets clearer priorities for social spending. But it takes tax revenues from the regions' coffers, and its biggest flaw is that it underestimates inflation and gross domestic product and, thus, revenues.

"I believe the government does it on purpose, leaving itself total freedom" to spend excess revenues as it sees fit before showing the Duma the tab at the end of the year, Zhukov said at a news conference Friday to greet a new political season.

The government forecasts 2002 revenues to be 1.998 trillion rubles ($63.4 billion) and spending to be 1.872 trillion rubles. Although the Unity party has supported the budget, the government is in for a fight when the budget comes up for first reading Sept. 28 unless changes are made, Zhukov said.

"We will try to find all funds the government is trying to hide," Duma Speaker Gennady Seleznyov said Friday, Itar-Tass reported.

The government plays down the amount of likely excess revenues, and Putin threw his support behind the budget plan last week. "It should be clear to everyone that all budget figures are justified," Putin said in a televised Cabinet meeting.

Analysts expect Putin will be able to ram through the budget as he did last year, and even Zhukov predicted it would be passed in four readings by Jan. 1, but he said much of the bargaining could be avoided if revenues were revised.

"We need to leave behind the traditional budget horse trading, which everyone is sick of ? and which in the past several years has concerned the fight for so-called 'additional' budget revenues. ? Transferring additional revenues in full to a financial reserve or a stabilization fund is correct, but only when revenues and expenditures are realistic," Zhukov said.

Since 1999, actual revenues have exceeded budget revenues by up to almost $11 billion. In the first half of 2001, excess revenues reached 225 billion rubles ($7.7 billion). At a meeting Thursday, the government estimated excess revenues will be about 300 billion rubles for the year. Zhukov said 350 billion rubles is more likely.

"Unfortunately, a tendency we've seen for the past three years continues: Government revenues are significantly underestimated. And it is undoubtedly a negative characteristic of the 2002 budget," Zhukov said.

Even under the most conservative scenario, excess revenues in 2002 could reach 150 billion to 200 billion rubles, Zhukov said. Estimated VAT revenue itself is 70 billion to 100 billion rubles too low, he said.

Tax revenues have been underestimated mainly because GDP and inflation are underestimated, analysts say. If inflation exceeds the budget estimates of 10 percent to 13 percent, tax and other revenues will increase accordingly, while expenditures remain stable. Inflation will be hard to control because of tariff hikes and budgeted salary increases, Zhukov said. Analysts foresee inflation of 15 percent to 18 percent.

The budget assumes nominal GDP of 10.6 trillion rubles, but 11 trillion is more realistic, said Zhukov.

Some analysts say oil prices are likely to be lower than the government's estimate of $22 per barrel, and this could narrow the gap between the budget estimates and the Duma's expectations.

The government has committed to setting up a financial reserve using 57.9 billion rubles of the budgeted 126.5 billion-ruble surplus as well as any excess revenues, privatization proceeds and foreign borrowing. The reserve is intended to provide a cushion if oil prices, and the economy, take a nosedive.

"Forming a financial reserve is an important and positive endeavor on the part of the government," Zhukov said. The country faces a debt hump in 2003 of up to $19.5 billion. The reserve has already been seeded with undistributed 2001 budget funds, he said.

A well-planned reserve is an effective debt management technique, and as such, it could also lower Russia's cost of borrowing as early as 2002, said Niclas Sundstrom, a senior analyst at Salomon Smith Barney. Deputy Finance Minister Sergei Kolotukhin said earlier this month that Russia may borrow up to $2 billion in 2002. The government should be able to pay off its 2003 debt without issuing Eurobonds, by using surplus and excess revenues, said Zhukov.

However, Zhukov said, no laws regulate how the government spends excess revenues.

"We need to define in law exactly how the reserve is formed and where the money is directed. If external debt payments are the issue, we need to state it. Otherwise, we are creating a parallel budget that is formed and distributed at the executive's discretion rather than by law," he said.

The government may have been using existing excess revenues over the past 12 to 18 months to quietly buy back debt before it matures in 2003. State officials have proposed open auctions for buybacks next year, which would improve transparency, say analysts. "I think they are already doing it but don't want it broadcast," Zhukov said.

The country does not have a clear mechanism for buying back debt ahead of maturity, so is most likely buying through local banks, said Al Breach of Goldman Sachs.

The budget has a clearer set of priorities this year than in previous years, said Zhukov, praising salary increases for state employees such as judges and teachers and for the military. Another positive change is a drastic cut in the number of social programs and an increase in the amount of funds allocated. However, the budget allocates less money to the real sector, including industry, agriculture, road-building and investment, he said.

"The most painful issue" is the federal government's increased control over the regions by shifting the division of tax revenues to 60:40 in its favor, Zhukov said. The budget code gives the regions the right to 50 percent. "The government has increased expenditures to other levels of power. That is, there is a concentration of funds at the federal level, in order to redistribute them from the center."

Deputies from the regions are expected to put up the fiercest resistance to the draft, but this is unlikely to lead to a rejection of the budget, Zhukov said.