Medvedev targets inflation, pensions in Russia budget

MOSCOW (Reuters) - Russia must cut inflation and reform pensions, healthcare and education without excessive budget spending in order to extend a decade of economic boom for its emerging middle class, President Dmitry Medvedev said.

Medvedev, outlining Russia’s 2009-2011 budget, said state corporations should also be held to account for their spending and gave only a small mention of defense spending in a departure from the more hawkish language of predecessor Vladimir Putin.

“Despite the high tempo of economic growth in the last 10 years, the current structure of the Russian economy does not yet meet the modern demands of a dynamically developing country,” Medvedev said in an annual budget address.

“It’s imperative that we slow down price growth. It’s simultaneously a macroeconomic and a social problem,” he said in a transcript posted on the Kremlin’s Web site, www.kremlin.ru, late on Monday.

Russia moved to a three-year budget system last year as part of a drive by Finance Minister Alexei Kudrin to limit spending amid record-high prices for oil, the country’s main export commodity and a huge contributor to its $1.3 trillion economy.

A spending spree on public sector wages and pensions ahead of parliamentary and presidential elections is a factor behind inflation that is running at over 15 percent on an annualized basis, well above the government’s 10.5 percent target for 2008.

Medvedev said the government and the central bank must take “exhaustive measures” to reduce inflation. The government wants to cut consumer price growth to 6 percent by 2011.

“Reducing inflation to 6 percent is quite an ambitious target and is only achievable if the government puts a cap on any further increase in budget expenditures,” Deutsche Bank analyst Yaroslav Lissovolik said in a note.

STATE CORPORATIONS, PENSIONS

Medvedev called for budget spending to remain in line with economic growth. Analysts said caution on public expenditure suggested the president was following Kudrin’s recommendations.

“The (finance) ministry’s more prudent budgetary policy may receive support from the president,” UniCredit Aton analyst Vladimir Osakovsky said in a note.

“We view the development as a positive indication of a more responsible economic policy in the future,” he said.

In managing budget spending, Russia should better monitor the outgoings of its powerful state corporations, Medvedev said.

“We must create a federal system to monitor the efficiency of budget spending, and also to evaluate the efficiency of the use of financial resources distributed by state corporations,” Medvedev said.

He did not name any state corporations. Such companies include Russian Technologies, the industrial giant that has grown out of the state arms exporter, as well as nuclear group Rosatom and aerospace holding United Aircraft Corp.

Medvedev said pension provision would be vital to economic growth, particularly as Russia’s working-age population drops, and should not be the responsibility of the state alone. Private pension schemes should play a greater role, he said.

Defense spending warranted only a small mention toward the end of Medvedev’s speech. He said Russia would next year launch its 2009-2015 program to streamline the military and would increase spending on a program to eliminate chemical weapon stocks.

The budget will be submitted to parliament in the coming months.