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Russia: Government And Duma To Work On Compromise Budget

Moscow, 16 October 1996 (RFE/RL) -- The Russian parliament -- the State Duma -- voted today in favor of a compromise formula for negotiations on the government's 1997 budget and sent the proposed budget back to the government to come up with a new version.

Analysts say there will likely be a tough battle over the budget, as the government tries to defend anti-inflationary policies and Duma deputies push for more spending to ward off social unrest. Last week the Duma overwhelmingly rejected the government's draft. Now, a reconciliation commission composed of representatives of both sides is to be formed to work out an acceptable solution.

Finance Minister Aleksandr Livshits called today's vote a modest victory for the government. The creation of a reconciliation commission is widely regarded as a positive step, one that is likely to prevent a standoff.

It appears that the government might have submitted a draft projecting overly optimistic targets for prospective revenue. The draft predicts that tax revenue will increase in comparison with what was expected this year. But the government has been unable to meet even these targets. According to the government's figures, only 75 percent of projected tax revenues have been collected this year. And the situation is getting worse.

The head of the Duma's budget committee, Mikhail Zadornov, told the Interfax news agency last week that tax collection was actually down 30 percent in September as compared to August.

Some observers say the government had little choice but to assume higher tax revenues if it wanted to produce a budget with a low deficit target required under International Monetary Fund (IMF) criteria. The government's draft projected that inflation would be brought down to about 10 percent and the budget deficit would be reduced to just over 3 percent of Gross Domestic Product (GDP).

The IMF has praised these figures, but it has also criticized the government for allowing tax revenues to fall. Problems with tax collection will undoubtedly be discussed during talks in Moscow this week between an IMF delegation and the government on disbursement of the next installment of a $10.3 million loan.

Duma deputies seem to fear that the government is promising more than it can pay for. This year, for example, the government has actually spent less than it planned because it has failed to collect expected tax revenues. With the decrease in funds, the government has opted to hold back on pensions and wages. The result was growing social unrest as miners and teachers went on strike to demand payment of back wages.

As one analyst put it: "The government simply ignored the budget."

Legislators fear the government will continue to adhere to its anti-inflationary agenda next year, holding back on wages and pensions because tax revenue is not coming in. One deputy was quoted as summing it up this way: "Another year with such a tax policy and we arrive at war communism."

Roland Nash, an economist with the brokerage firm Renaissance Capital in Moscow, told RFE/RL that legislators and government representatives may not reach a consensus on the budget before the end of the year.

Nash says the Ministry of Finance "holds all the cards" in budget negotiations. It can afford to wait for a deal on its own terms because it has discretionary spending powers. If the budget is not passed by January 1, the start of the fiscal year, the government can continue to spend based on targets set out in the 1996 budget. Moreover, if the Duma rejects the budget twice, the president can dissolve parliament.

The Duma recommended in its resolution today that the government completely rethink the conception of the budget by incorporating changes to economic and social policy. But this is considered unlikely.

Nash says budget negotiators will probably agree to lower revenue and spending targets, but only slightly, and raise the deficit level a bit. But he says that ultimately the government will be forced to take stern measures to improve tax collection.

Some steps have already been taken. President Boris Yeltsin on Friday announced the formation of a special emergency commission, headed by Prime Minister Viktor Chernomyrdin, to crack down on tax evaders. Presidential chief of staff Anatoly Chubais has been named as Chernomyrdin's deputy. Some commentators have noted that Chubais is gaining an important new role in economic policy, and point to his new responsibilities for overseeing the State Tax Service.

But Yeltsin's initiative was greeted with skepticism in the Duma. Many observers believe a new structure will do little to solve the problem. What is needed, they say, is a resolve to crack down on some 20 large companies which account for 80 percent of tax arrears. These include the natural gas giant Gazprom and the automaker AvtoVAZ, both of which have good connections to top government officials.

In the meantime, the government has taken its campaign against tax evaders to the airwaves. A series of slick new TV commercials sponsored by the state tax authorities shows garbage piling up on the streets, an elderly woman looking worried about her pension, crime on the rise, and asks: "Why isn't everyone paying their taxes?"