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Pre-election Budget Maneuver: The Russian Government Is Finding It Hard to Trim Deficit Spending in its Pre-election Budget

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With Russian parliamentary elections on the horizon, the Russian government is opening up its treasury and plans to spend trillions of rubles on pumping up salaries, raising pensions and easing the social tax burdens on businesses. The cabinet on Thursday considered the country's largely predetermined budget parameters that provide for 3.8 trillion rubles ($135.66 billion) in social spending, by far the largest item in the three-year federal budget. The preliminary budget further puts baseline defense spending at 1.85 trillion rubles ($66 billion) and another 1.69 trillion rubles ($60.2 billion) has been earmarked for security and law enforcement.

Over the next three years, the Russian government plans to spend 293.3 billion rubles ($10.47 billion) to raise public workers' salaries using indexation mechanisms. Another 1.2 trillion rubles ($42.84 billion) will go toward building new roads and upgrading the country's dilapidated transport infrastructure. State pension funds will continue to get a boost after a surge in commodities prices helped bolster state finances. The government plans to transfer 2.3 trillion rubles to the funds this year and up to 3.1 trillion by 2014. Easing the social tax burden for companies will cost the budget 236.4 billion rubles in 2012 and another 275.6 billion rubles in 2013, according to the budget parameters considered on Thursday.

Despite rising global oil prices, the new spending spree is expected to punch a hole in the budget. The federal budget deficit is expected to make up 2.7 percent of gross domestic product in 2012-2013, which is twice the 1.3 percent calculated for 2011, but should drop to 2.3 percent in 2014, according to the preliminary budget drawn up by the Finance Ministry. Prime Minister Vladimir Putin told the cabinet on Thursday that Russia's federal budget deficit this year may in fact be lower than 2.7 percent of GDP. "The projected budget deficit in 2012 is 1.6 trillion rubles ($57 billion), or 2.7 percent of GDP ... We hope that next year the real deficit will be lower than projected," RIA Novosti quoted Putin as saying. Putin added that the government should continue to look for ways to achieve a deficit-free budget.

The Cabinet may have to forgo its plans to cut government spending and return to a deficit-free budget in 2015, Vedomosti business daily said Thursday, citing unnamed sources at the Ministry of Finance. The country's 2012 budget is based on an average oil price of $93 per barrel, but Finance Ministry officials have said that the government can only achieve a deficit-free budget if Urals crude, the country's chief oil export blend, is trading at $124 per barrel. The government is hoping to pay for the budget deficit mainly by borrowing about 1.6 trillion rubles ($57 billion) over three years, and tapping into incomes from its privatization program which could yield up to 300 billion rubles ($10.7 billion), Vedomosti reported. That will still leave the country with a national debt equal to 11.2 percent of gross national product in 2012 and 17 percent of GDP in 2014. Putin said Thursday that the budget could receive 10.6 trillion rubles ($378.42 billion) in revenues in 2012, while government spending is expected to reach 12.2 billion rubles ($435 million).

Total public debt is expected to grow to about 10 trillion rubles ($356 billion) from 6.6 trillion rubles ($235 billion) over three years, Vedomosti reported. The country recorded its lowest debt level in 2008 when it barely hit 6.5 percent of GDP. Despite expanding pre-election spending, the Finance Ministry appeared determined to protect Russia's two sovereign wealth funds, the Reserve Fund and the National Welfare Fund. The Reserve Fund is expected to grow from 1.4 trillion rubles ($50 billion) in 2012 to 1.6 trillion ($57 billion) in 2014. However, further transfer to the fund is expected to stop in 2014 as the government expects revenues from oil and gas to dip to 7.7 percent of GDP in 2014 from a high of 8.2 percent in 2013, the Finance Ministry said. That means that Russia's "safety cushion," the country's sovereign wealth funds, will flatten out over three years, going down slightly from 2.56 trillion rubles ($91 billion) in 2012 to 2.53 trillion rubles ($90 billion) in 2014.

The government hopes to use a combination of tax increases and spending cuts to spread the burden of bringing down the country's budget deficits over the next three years. An increase in the tax burden on the gas sector is expected to boost budget revenues by 504.2 billion rubles ($18 billion) while keeping the present level of contract soldiers could save the budget an additional 371.1 billion rubles ($13.2 billion). The government also hopes to save 179.7 billion rubles ($6.4 billion) by withholding its contribution to the country's mortgage fund and an additional 54.3 billion rubles ($1.9 billion) is expected from reducing the number of army servicemen.

However, the budget also reflects government determination to keep its controversial procurement system intact while it considers proposals to cut back on its budget by 300 billion rubles ($10.7 billion) over the next three years. The government is also planning to go ahead with all its investment and other federally targeted programs. As a way of patching the budget hole, regional and municipal authorities will be required, starting next year, to channel into the federal budget about two-thirds of all revenues from excise taxes on alcohol and hydrolysis spirits as well as a stamp duty on motor vehicle registration and penalties for traffic violations.

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