President proposes budget discipline to rein in deficit

President Dmitry Medvedev has emphasized the need to halve the budget deficit over three years, proposing slashing public sector workers by 20% and privatizing more state property.

Speaking to the government about his 2010 draft budget, the President said cutting the budget deficit was Russia’s most pressing priority, was possible, and that the time to start was now.

“I propose to proceed with a 50% cut in the federal budget deficit by 2013, compared to the 2009 level. That’s the task that all of the G20 countries, all the countries with developed economies, are setting themselves. This is not just an acceptable reference point for us, but a definite need.
If we don’t cut the deficit enough, we risk losing the stability of the budget system which we have worked hard to reach.”

To give the plan some substance, economic stimulus measures introduced in the darkest days of the global financial crisis will be wound back, with the economy now on a surer economic footing and GDP growing strongly.

Vladimir Osakovsky, chief economist at UniCredit Bank, says that though cutting budget spending is an ambitious task, in Russia’s case it balancing wthe budget will not require too much slashing of expenditures, but rather reining in any thought that they may grow further.

“Well, it looks like a very hard target and a very ambitious target, but, I think, one good thing with Russia’s budget deficit is that in order to reach this Russia doesn’t really need to cut spending but rather not to raise it, which, I think, facilitates the process quite substantially.”

Other measures were no surprise to the Cabinet: moving to innovative economy, modernizing tax policy and finding a way to save budget funds.

The first step is to cut the number of civil servants at the federal level by 20%, then sell off state property and in budget planning avoid quick fixes and focus on the long-term.

The choice the government has faced with the budget proposal is one of allowing the economy to grow without further stimulus from the government – which now owns more than 50% of the economy – while winding back the governments role and freeing and encouraging the private sector. With the world third largest reserves still providing backup for the possibility of any further global volatility, the President has decided a little more stringency while the economic sun is starting to shine may reap rewards in years to come with other major economies likely to be weaning themselves off debt for a generation or more.