MOSCOW. (RIA Novosti political commentator Yana Yurova) - Budget reforms have forced the Russian government to increase social spending significantly, and as a result there is an obvious shortfall of funding to push economic development during the year.

So where will the government find requisite funds?

The budget reforms were initially designed for three years. The first stage was intended to make changes to inter-budget relations and re-distribute some federal and regional spending. After that, there were plans to start replacing benefits in-kind (for example, free public transport) with cash payments and to switch from estimate-based budgeting to budget projections based on results.

All these measures were expected to free up the state budget from ineffective expenses, including financing of the social sphere. Later, the funds were to have been re-distributed in favor of projects expected to give an impulse to dynamic economic development.

However, when the government tried to cut the budget's social expenditures by "monetizing" social benefits, spending actually rose significantly. For example, 240,000 social-security claimants were able to visit sanatoria in the first three months of this year alone, comparable with the total number in 2004, Deputy Prime Minister Alexander Zhukov said. In addition, in the first three months of the year, three times as many free and discounted prescriptions were issued, and three times as much medicine given out than in the whole of 2004. As a result, when the government started to draw up the budget for 2006, it turned out that there was an acute shortage of money required for all spending items.

This time, the government faces a much more impressive task: As the Russian proverb goes, The wolves must eat well and the sheep not be touched. Once underway, budget reforms must be concluded and government spending cut. At the same time, the government will have to fulfill its increased social obligations, which it has assumed amid in a worsening social situation.

In his state of the nation address, Vladimir Putin set the task of increasing wages in the public sector by 50% by 2008, to make them equal to the national average salary. Interestingly, the government had previously discussed the possibility of doubling wages, but the authorities seem to have realized that the budget would not be able to cope with such an increase in spending, as there are plans to double pensions by that time as well. The government also has to fulfill its much-talked-about task of doubling GDP by 2010. As a result, today the budget commission, which is drawing up a budget for 2006 and also working over the financial plan for the next three years, has reached deadlock. The government has endorsed various scenarios of economic development for 2006-2008 that envisage sectoral reforms. In this connection, government investments are projected to rise from $14.3 billion in 2005 to $23 billion in 2006 and to $32 billion in 2008. According to Ministry of Economic Development and Trade forecasts, in this case, GDP will rise by 5.9% in 2006 and by 6.1-6.2% in the following two years. However, there is not currently enough money for these projects.

The 2006 budget is based on new principles: It is divided into obligations that the government has already assumed and new obligations. Naturally, priority goes to the former. However, according to the Finance Ministry, government investment under obligations already assumed can total only $12 billion, and new projects will get government investment of just $2.4 billion. This is a tiny amount compared with new plans estimated at $13.5 billion. These plans include the establishment of an investment fund for infrastructure projects ($2.2 billion), plans for special economic zones ($500 million), federal target programs worth $2.3 billion (including the "administrative reform" target program worth $530 million) approved personally by Vladimir Putin, and other projects. Moreover, doubling pensions by 2008 has not yet been included in the budget. This increase will require another $2.3 billion.

The economy will develop sluggishly without large-scale projects and sectoral strategies, and in this case it will hardly be possible to expect GDP growth by more than 4.5% per annum. Obviously, this is not acceptable to the authorities, who will have to look for new development potential.

In theory, the necessary money could be taken from the Stabilization Fund, which is expected to accumulate over $36 billion by the end of 2005. The Stabilization Fund receives revenues from oil sales of over $20 per barrel at current prices. Under current legislation, surplus Stabilization Fund money, i.e., anything over $18 billion, can be spent. However, it can be spent only on servicing foreign debt and financing the Pension Fund budget deficit. However, even legitimate spending will clearly push up the level of inflation, which is high already. It seems that the government is pinning its hopes on private investors. In the economic part of his address, Putin spoke exclusively about the need to improve the investment environment in the country. He promised much to entrepreneurs: To cut the privatization review period from ten to three years and to bring tax collection into line with the law. Putin also announced capital amnesty, which, according to State Duma deputy Mikhail Zadornov, could give the country $5-10 billion. Foreign investors are also expected to get clear-cut rules of the game. Therefore, the main task today is to draw more private money into the Russian economy in conditions when government money is obviously not enough.

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