Government split over spending
Prime Minister Vladimir Putin warned ministers against cutting social spending and urged that "linear solutions" were not the answer a day after President Dmitry Medvedev ordered radical liberalisation measures for the government and the economy.
"We cannot take the burden off business and place it on the population," a concerned Putin told ministers at a meeting of the government presidium on Thursday. "We know how sensitive the topic [of social benefits] is. They were raised in order to finance increased pensions... and modernisation of the health system."
Counterweight
The statements appeared to be a counterweight aimed at balancing some of Medvedev's liberalisation measures to improve Russia's investment climate.
Speaking in Magnitogorsk Wednesday, Medvedev offered up ten points on making investors more welcome in Russia and his top suggestion was slashing social taxes for business, Vedomosti reported.
Social spending was just as relevant to other problems, including raising salaries for police officers as part of Medvedev's efforts to reform the Interior Ministry, Putin said.
Tax or spend
The dispute reveals a dilemma for the government over how to boost growth both in the longterm, but also before the 2012 presidential election.
Russia's economy needs liberalisation to attract investment to the country, but decreasing social spending to balance the budget would be politically unpopular and economically harmful.
"Social spending is a source of growth in domestic demand [and] domestic demand is one of the key drivers of the economy," said Alexei Devyatov, chief economist at Uralsib.
Medvedev, meanwhile, has already moved to cut taxes reversing a decision to increase the unified social tax from 26 per cent to 34 per cent.
Putin said the government could lose from 400 billion roubles to 800 billion roubles ($28.3 billion) as a result of the cut.
"It is important to reduce the tax burden. We can see that the economy has painfully reacted to the increase in the social security tax rate," said Devyatov, adding that there had been a decrease in construction and investment.
Sin taxes
The Finance Ministry is keen to balance the budget and leading for calls to raise taxes, particularly on alcohol and cigarettes.
The premier ruled out a Finance Ministry proposal for sharp rises in sin taxes, which could have seen a half-litre of vodka rise to 400 roubles, RIA Novosti reported.
"A sharp increase will not make people drink less, but will lead to consuming substitutes and increased moonshine production," Putin told a government meeting.
Experts say the government could lose money from the proposal if heavy drinkers turn to illegal subsitutes.
Central bank intervention
The Central Bank has also weighed in on the dispute, criticising a call to run budget deficits from a panel of experts appointed by Putin, Reuters reports.
"Some think that the state will have more resources [as a result of running deficits]," Central Bank chairman Sergei Ignatyev said on March 29. "In fact it will result in diminished resources."
But much will depend on the high oil price, with every extra dollar on the cost of a barrel adding $2 billion to the deficit.
Devyatov, of Uralsib, said the government could keep its social spending high while reducing the tax burden on business until the election.
The World Bank, meanwhile, has said that Russia could eliminate its deficit in the next two years, Dow Jones newswires reports.
The government currently predicts a 3.6 per cent deficit for the year, but ran a budget surplus in January and February.
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