On fundamentals of a sound budgetary policy for 2010 and the planned period of 2011-2012

At the extended meeting of the Collegium of the RF Ministry of finance on April 14, 2009, Mr. A. Kudrin, the RF Minister of Finance, enunciated the need for cutting back budgetary expenditures in 2010. The MinFin should shortly complete a draft of the Budgetary Policy Avenues for 2010 and the planned period of 2011–2012. In light of this it appears a timely move to examine fundamentals of Russia’s budgetary policy for the upcoming three years.



In the period of an economic crisis a sound budgetary policy should rest upon the following pillars:


1) a scenario-based approach to formation of the revenue and expenditure parts of the federal budget, which necessitates a projection of the federal budgetary revenues in different economic conditions (the conservative, basic and optimistic scenarios); all expenditure obligations of the federal budget should be split into three groups depending on the priority nature of the expenditures and timelines of the obligations; the above should be considered in association with different scenarios of collection of budgetary revenues;


2) a balanced budget – in 2010-2012, the expenditure part of the budget should be such so that the budget would be balanced (the expenditures that may not be cut down in a given financial year should be co0vered with revenues as per the conservative variant of development of the economy, while the expenditures that can be curtailed in the planned period should be covered by the federal budget revenues as per the basic scenario). That said, a “technical” deficit of the federal budget is permissible (for example, due to the situation when the development followed the conservative scenario, but some groups of expenditures have to be financed over the current year anyway) at a rate not greater than 3%. A more significant budget deficit sparks depreciation expectations and give a boost to inflation acceleration;


3) responsibility towards next generations and impermissibility of populism in the area of pension provision- the negative demographic trend poses a strategic long-term challenge to Russia’s pension system. In the circumstances, the governmental obligations in the pension sphere alone would result in a nearly 2% RISE of deficit of the 2010 federal budget. Whereas the government’s capability to finance the pension system over the upcoming years are going to be seriously constrained, it would be appropriate to concentrate resources on the focal point, that is, eradication of poverty among pensioners, i.e. limiting oneself with raising pensions to the subsistence minimum level;


4) priority should be given to support to the population rather than businesses – it seems that the federal budget expenditures should focus on support of the population for the sake of precluding from a drastic fall in their living standards, decline in the quality and accessibility of budgetary services; with that in place, it would be appropriate to reduce to minimum volumes and avenues of support of businesses;


5) more drastic cuts in financing non-priority budgetary expenditure items (or those whose financing was being artificially increased in the prior years) instead of a proportional reduction of all the expenditures obligations – while comparing some expenditure items of Russia’s budget with those of the OECD countries’ 2008 budgets, one can find out certain amounts to save under “The National Security and Law Enforcement” and “The National Economy” items. At the same time, it appears possible to increase financing by ‘The National Defense” item to transition to the 100% manning of the national armed forces with professional soldiers. The military reform will have an anti-crisis nature, as it should exert a positive influence on the employment structure, with the jobless being employed by the armed forces, while the professionals in demand continuing their education or holding civil jobs;


6) organization of the performance oriented budgeting – it is necessary to ensure the budgeting is comprehensive and comprises an array of avenues of which major are a separate planning of the effective and future obligations, employment of instruments of evaluation of effectiveness of budgetary expenditures and ensuring such evaluation is considered in the budgetary planning.


If implemented, these fundamentals would enable one to transform Russia’s budget into a mechanism of the country’s institutional modernization, rather than an object of sectoral lobbyists’ bargaining. 

V. Nazarov, Head, Department of Budgetary Federalism