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Russia fiscal tightening will hit growth - EconMin
November 9, 2012 / 3:41 PM / 5 years ago

Russia fiscal tightening will hit growth - EconMin

* Urges loosening of fiscal rule

* Economy Ministry at loggerheads with hawkish FinMin

By Darya Korsunskaya

MOSCOW, Nov 9 (Reuters) - The Russian Economy Ministry criticised proposed changes to budgetary policy on Friday, saying that without a looser fiscal policy the economy faces long-term stagnation.

New fiscal guidelines backed by the Finance Ministry, now before parliament, would constrain Russia’s ability to spend its hoard of petrodollars - a critical issue as the government relies on energy taxes for half of its revenues.

Russia, the world’s largest oil and gas producing nation, will need crude oil prices to average more than $100 per barrel to make its fiscal arithmetic add up in a three-year plan being reviewed by lawmakers.

“We agree with those who say that it’s necessary to correct the budget rule,” said Deputy Economy Minister Andrei Klepach, presenting the ministry’s long-term forecasts of Russia’s economic development until 2030.

“It’s impossible to achieve (high-growth) scenarios without a budget deficit and a softening of the budget rule,” he said, referring to a new oil-price rule for the budget that would limit Russia’s ability to spend oil revenues.

The ministry’s projections show that disagreements over economic strategy continue to cause deep divisions within the government, notwithstanding Prime Minister Dmitry Medvedev’s strong backing for the new fiscal policy.

Klepach said that to achieve the ministry’s base case scenario - which envisages average annual economic growth of 4.1 percent between 2013 and 2030 - Russia would need to boost combined investments in health, education, science and transport to 20 percent of gross domestic product (GDP) by 2030, from around 12.7 percent at present.

But he said that there was no chance of achieving these levels without a rethink of the tight fiscal guidelines backed by the Finance Ministry.

The rules would link government spending to the long-term average oil price in preceding years, cap annual government borrowing at 1 percent of GDP, and rebuild the country’s fiscal Reserve Fund to 7 percent of GDP from around 3 percent at now.

But Klepach warned that, were the fiscal rules to be adopted in their present form, Russia would be unable to carry out cardinal reforms to its economy - which would as a result remain dependent on commodity exports and lacking in innovation.

“The tough variant of the budget rule brings about the conservative (scenario), when the present structure of the economy will be preserved (and) growth will be around 3 percent a year,” Klepach said.

“In essence it’s a matter of stagnation after 2020.”

The Economy Ministry, which typically advocates an active role for the government in stimulating investment, is often critical of the Finance Ministry’s fiscal conservatism.

Klepach has also recently criticised the central bank, blaming its decision to raise interest rates in September for causing an economic slowdown.

President Vladimir Putin has broadly backed the tough fiscal rules drawn up by the Finance Ministry, but he has also called for more state investments in health and education, raising questions about Russia’s ability to meet the conflicting goals of fiscal stability and higher spending. (Reporting by Darya Korsunskaya; writing by Jason Bush; editing by Douglas Busvine and Keiron Henderson)

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