For the formation of the 2006 budget, the forecast of the Ministry of Economic Development can be considered adequate, believes the head of the President's expert department Arkady Dvorkovich. But the experts are not very happy with the choice of areas for cutting expenses. According to the chairman of the budget committee of the Federation Council, Yevgeny Bushmin, officials should have been bolder and taken $37 per barrel as the average annual price of oil - then the deficit would have amounted to 100-150 billion rubles, and "social promises to the population [could] be touched last." It is necessary to optimize first of all the expenses on defense and law enforcement - this is a third of the budget obligations, believes Natalya Orlova from Alfa-Bank . Only if it is not possible to overcome the resistance of the security lobby, it will be possible to take a closer look at social items, says Orlova. For example, it is possible to refuse to link pension indexation with inflation: currently payments are increased if prices grow by more than 6% per year.

Last Friday, the budget commission headed by Prime Minister Mikhail Fradkov approved the scenario conditions and forecast for economic development for the next three years. The Ministry of Economic Development proposed three options. The “inertial” forecast (with an average oil price of $28 per barrel) does not provide for tax innovations, the implementation of large investment projects and industry strategies, which ensures GDP growth of 4-4.4%. The opposite option, which assumes all these reforms, brings it to 5.7-6.4% of GDP, but requires the withdrawal of all income from oil exports to the stabilization fund at a price above $32-33 per barrel (currently $20). In addition, if oil costs less than $30-31, the treasury will not have enough money to cover all expenses, which threatens macroeconomic stability, Finance Ministry officials explained.

After a month of discussions, the government chose an intermediate, “innovation-oriented” approach. It is based on an oil price of $39 in 2005, $34 in 2006, and $33 in the following two years. The cutoff point for revenues to the stabilization fund is raised to $27 per barrel. The GDP growth rate falls from 6.5% this year (see article on the same page) to 5.9% in 2006 and 6.1–6.2% in 2007–2008. Inflation also slows: from 7–8% in 2006 to 6–7% in 2007 and 4–5.5% in 2008. The ruble exchange rate slowly strengthens: from 27.2 rubles to 27.65 rubles in three years. At the same time, the 2006 budget will be drawn up with a surplus of 1.5% of GDP.

"We have, in a sense, sacrificed the rate of GDP growth," admits a government official. To double the economy - this is the task set for officials by President Vladimir Putin in 2002 - the approved forecast of 5.9% for 2006 is not enough: GDP must grow by at least 7.2% annually. But the economy will reach the required growth rate after 2008, notes Andrei Klepach, head of the macroeconomic department of the Ministry of Economic Development. Minister German Gref insisted on this plan in the draft medium-term program for economic development. According to his proposal, the country doubled GDP in the decade 2006-2015.

But even in the not-so-ambitious version of the 2006 budget, expenditures will exceed revenues by 364 billion rubles. The Ministry of Economic Development proposes to reduce state investments and defense orders. The Ministry of Finance, according to a source in the ministry, is also thinking about other budget items, including social ones. “We are not talking about reducing the absolute amounts [of social payments],” the official notes. “It is enough to index expenditures [only] by the amount of inflation.”

But Kirill Tremasov from Bank of Moscow likes the option chosen by officials. “The conservative forecast in the formation of the budget is justified, I am not sure that even $34 per barrel is a conservative price,” notes Tremasov, recalling that by the end of the year the US Federal Reserve may raise interest rates to 4% and the trends in the financial and raw materials markets will change. The government has found a compromise between the expenses it would like to finance and the requirements of macroeconomic stability, summarizes the head of the Economic Expert Group Evsey Gurvich.

Now the Finance Ministry has begun to "shrink" future treasury expenditures, says a government official. At the next meeting of the budget commission, Deputy Finance Minister Tatyana Golikova will talk about her ministry's proposals. The Finance Ministry's calculations will also be set out in the financial plan for 2006-2008.

Stability is more important than growth