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Russia: Budget Concessions Head For A Downward Path

Moscow, 31 October 1997(RFE/RL) - The Russian government has signed off on a revised 1998 budget, but economists say the Kremlin has agreed to an unrealistic economic plan in a bid to placate the opposition-dominated State Duma.

Cabinet ministers had initially pledged to bring order to the government's chaotic finances next year by drawing up a budget that would curtail the chronic problem of non-payments. The government has been struggling with a drastic shortfall in revenues this year which has forced the Finance Ministry to slash spending.

Both opposition Duma deputies and government officials have described the 1997 budget as the unrealistic product of concessions to lawmakers eager to boost spending on pet projects. The government promised to stand tough and pass an austere 1998 budget that could be fully implemented.

But the revised 1998 budget, which is headed for a first reading in the Duma next month, increases revenues by 8 percent to 367 trillion rubles ($62 billion) from the original 340 trillion rubles. Spending is set at 499 trillion rubles, an increase of 27 trillion rubles.

These increases are more than the government was bargaining for. The Kremlin originally had said revenue projections could not be raised more than 4 trillion rubles. But then the Duma threatened to pass a vote of no-confidence in the government and bargaining over the budget began in earnest.

First Deputy Prime Minister Anatoly Chubais said after agreeing on the plan with lawmakers last Friday that the government had met deputies half way, but he said the compromise was, in his words, "worth the effort."

As part of the wrangling with deputies, the government agreed to a number of concessions on the draft tax code, which it had used as the basis of the 1998 budget. Chubais agreed to delay introduction of the tax code, while ministers and lawmakers worked out changes to the draft. In the meanwhile, the government is pushing ahead with separate pieces of tax legislation which it hopes to have in place by the first of the year, but it is unclear if they will result in higher revenues.

Prime Minister Viktor Chernomyrdin said yesterday he hoped the tax code would be passed by mid-1998, which would mean the code could be implemented by the start of 1999 at the earliest. But deputies have said the tax code now looks like a completely different document after they incorporated some 4,000 of their amendments. The original draft code foresaw a reduction of the overall tax burden and a simplification of the system, but it is unclear what changes have been made to the bill so far.

President Boris Yeltsin yesterday questioned the wisdom of making concessions to the Duma over the tax code, but observers have noted that he has also made a series of contradictory statements on how to handle tax reform. Earlier this month, he ordered the government to recall the tax code from the Duma as part of negotiations with lawmakers to avoid a no-confidence vote - a step that would have created further delays in overhauling the tax system.

Tax reform is considered essential if the government is to boost revenues and encourage tax evaders to re-enter the system. Chubais said yesterday that the government had, in his words, "practically failed" to meet the budget for the first nine months of the year.

Overall tax revenues (including federal and local revenues) for the first nine months of the year stand at a miserable 52 percent of targets. The government has been able to make up for part of the shortfall through lucrative auctions of state property, including $1.9 billion collected from last July's sale of a 25 percent stake in telecoms holding company Svyazinvest.

Brigitte Granville, an economist at the London-based investment bank J.P. Morgan, said the government will be forced to redouble efforts to collect revenues next year to meet the new targets. She said the government is currently collecting revenues amounting to about 11 percent of gross domestic product, but the new budget plan foresees revenues of 12.9 percent of GDP.