Putin starts 2014-2016 budget procedure, allows using National Welfare Fund to cover pension deficit

By bne IntelliNews June 14, 2013

Russia's President Vladimir Putin started the budget procedure for 2014-2016 by addressing the members of the government and the State Duma. The process of drafting the federal budget for the next three years should be finalised in the fall. Putin reiterated the previous pro-social stance, noting that social obligations are the main priority. At the same time he acknowledged that economic growth was the only way to ensure growth of social spending.

However, the address did not deliver any concrete measures of facilitating economic growth which this year is forecast at 2%-2.5% vs. 5%-6% mid-term target set in 2012. The government is struggling to live up to a set of social policy promises made by Putin in his May 2012 comeback to Kremlin (so-called “May’s orders”). The finance ministry has already increased the projected budget deficit to 0.6% of GDP for 2014 and 0.7% of GDP for 2015 (0.2% and balanced budget previously, respectively). In the address Putin again urged the government to prioritise and to find ways to finance previously outlined social obligations.

Putin also set the goal for finalising the Pension Reform by the end of 2013. The reform which aims to find funds to cover RUB 1tn (USD 32bn) Pension Fund deficit is being unsuccessfully drafted for almost two years. Putin said that the National Welfare Fund (about USD 88bn) could be used to cover the deficit. At the same time both the Welfare Fund and the Pension Fund could be used for financing large infrastructure projects as means for growth facilitation, Putin suggested.    

The president also maintained his stance on the “de-offshorisation” of the economy which was set as a priority at the end of 2012. The possibilities of optimising taxes and legally transferring incomes to offshores should be limited. Also luxury spending should be discouraged, with real estate tax and luxury levy to be introduced.

In the follow-up to Putin’s address, finance minister Anton Siluanov said that the government is going to raise additional resources by curbing tax evasion, facilitating privatisation and increasing the dividends of state-controlled companies, and revising tax breaks and discounts. At the same time he noted that the previous goal for balancing the budget by 2015 is not seen as feasible anymore. Siluanov warned that 2016 is going to be the tough on the budget. Spending on large projects such as the Far East development programme, railroad infrastructure, and holding FIFA World Cup 2018 are  going to peak in 2016, he explained.

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