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. Last Updated: 07/27/2016

In a First, Federal Budget Will Shrink

Itar-TassAlexei Kudrin attending a budget meeting in the Finance Ministry on Tuesday.
Budget revenues will fall next year for the first time since President Vladimir Putin took office in 2000, Finance Minister Alexei Kudrin said Wednesday.

Budget revenues will total 6.67 trillion rubles ($256 billion) in 2008, Kudrin said during a presentation of the country's first three-year budget. The government plans to collect 6.96 trillion rubles this year.

The 4 percent decrease could indicate that the government is planning on lowering either the profit tax or value-added tax in 2008, said Peter Westin, chief economist at MDM Bank.

Budget revenues will pick up again in 2009 and 2010, amounting to 7.42 trillion rubles in 2009 and 8.04 trillion rubles in 2010, Kudrin said.

Although it would cause a short-term slump in budgetary revenues, a cut in taxes may eventually provide more incentives to pay levies and result in a growth of the tax base, Westin said. Furthermore, the government could raise the mineral extraction tax on gas to offset any shortfalls, he said.

Despite lower revenues, Kudrin said, budget spending will increase by 1 trillion rubles next year but will grow at a slower pace in the subsequent two years.

The government plans to raise state salaries, defense spending and investment from 2008 to 2010, Kudrin said.

Government expenditure will total 6.5 trillion rubles in 2008, up from 5.46 trillion rubles this year, he said.

Westin said that the budget would need to fulfill promises made during State Duma and presidential election campaigns this year and next.

"We are going to see an election budget next year," he said.

From 2009, the government's annual spending growth will be less than 1 trillion rubles. The budget will spend 7.36 trillion rubles in 2009 and 8 trillion rubles in 2010, Kudrin said. The budgetary surplus from 2008 to 2010 will range between 0.5 percent and 0.1 percent of gross domestic product, Kudrin said.

The Finance Ministry calculated its 2008 budget based on a world oil price of $53 per barrel; the 2009 budget on $52 per barrel; and the 2010 budget on $50 per barrel, Kudrin said. He conceded that prices might be too optimistic, saying world oil prices had passed their peak and would remain within $40 to $50 per barrel in the next few years.

The proposed budget also stipulates the breakup of the stabilization fund into a reserve fund and an oil and gas fund. The reserve fund -- designed to cushion the budget against declines in the oil price -- will be invested at a conservative rate of 3.5 percent to 4 percent.

It is to be set up on Feb. 1 by transferring 10 percent of the GDP in 2007 from the stabilization fund and will remain at 10 percent of the GDP every year. Money from the oil and gas fund will be invested to yield between 6.5 percent and 7 percent of profit for future generations, Kudrin said.

The ministry is considering the creation of a special agency or hiring a private management firm to handle investments from the future generations fund.

Salaries to budget-dependent workers will grow by 7 percent to 8 percent in 2008, Kudrin said. This will be in line with that year's inflation, which is forecast at between 6 and 7 percent, he said.

Defense spending will grow by 133.9 billion rubles in 2008, while expenditure of law enforcement agencies will also rise, taking in an additional 105.2 billion rubles, Kudrin said, without specifying the total amount.