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Analysis & Opinion
20.02.11 Paying For Promises
By Tai Adelaja

For all his eagerness to reclaim the Kremlin in the first round, winning the election may turn out to be the easy part for presidential hopeful Vladimir Putin. After the March 4 elections, Putin will face an equally challenging task of tempering his campaign promises with fiscal reality on the ground. The hard part, economists say, is paying for his pre-election promises, which experts say could require an extra $200 billion which the Russian government does not have. While the prime minister has yet to explain how he would pay for his pre-election promises, Finance Minister Anton Siluanov said Friday that the government cannot afford to spend gobs of money after the elections, yet also adding that it may have to resort to a “budget maneuver” to pay for extra spending on wages and social benefits.

As Russia’s presidential campaign heats up, Putin last week played what appears to be his trump card. In yet another newspaper article, he unveiled a social policy package that doles out a record 5 trillion rubles ($166.8 billion) in post-election spending. Part of the plan is to spend billions of dollars to raise the salaries of university and college professors by September this year and double their wages by 2018. Putin also promised improvement in living conditions for 60 percent of Russian households by 2020, including lowering the price of housing by 20 to 30 percent and reducing the cost of mortgages.

Putin's “New Deal” also appears to target Russia's new generation of increasingly restive students, some of whom have been taking part in street protests after December's parliamentary elections. Student's monthly stipends are to be increased by 5,000 rubles ($170), Putin said, in order to meet the minimum subsistence level. Child care subsidies are going up, too, as the premier sets his eyes on resolving Russia’s demographic problems. Putin promised to increase monthly state subsidies to 7,000 rubles ($230) for the third and every additional child in a family to encourage families to have more children.

Nadezhda Ivanova and Mikhail Matytsin, two financial experts at Sberbank's Macroeconomic Research Centre, told Vedomosti on Friday they have been combing over the details of Putin's pre-election promises. Paying for the main part of Putin's promises - such as salary increment for teachers and doctors, raising stipends, child allowances and housing for veterans - will require a whopping 5.1 trillion rubles ($170.3 billion) over six years, the experts said. Salary hikes will form the lion’s share of such increases. Raising the wages of teachers and college professors to the average wage level in the regions this year, and up to 200 percent of the regional average by 2018, will require about 3.5 trillion rubles ($116.8 billion) over for six years. Putin’s other campaign promises, such as pegging pension to inflation or federal government support for the regions, could gobble up 5.5 percent of GDP, said Yulia Tseplyaeva, a senior economist at BNP Paribas in Moscow.

The question analysts are asking is: who will pay for this, particularly with the country's military budget already over-extended and obligatory expenses like 2014 Olympics and 2018 World Cup threatening to further stretch the budget? Siluanov, who, like his predecessor Alexei Kudrin, keeps a tight grip over the state purse strings, tried to put some of the concerns to rest on Friday. There will be some over-spending, he said, but not large enough to derail balance budget target. “We will do some ‘budget maneuvers,’” Siluanov told RIA Novosti. “In the first place, we will increase spending where needed by optimizing individual items. In other areas, we will slash expenses.”

Last month, Siluanov told the Gaidar Forum in Moscow that he opposed an increase in budget spending of 2 percent of GDP, or more than a trillion rubles ($31.7 billion) per year, through 2020. "If we examine the average price of oil over the past 10 years, it is clear that the budget should be balanced at $70 a barrel," Siluanov said. "Right now, it is not possible to do that because the volume of commitments is much higher." Meanwhile the $170.3 billion in new state commitments are not evenly distributed throughout the six-year period of their implementation, according to experts who made the estimates. Spending would increase from 300 billion rubles ($9.9 billion, 0.5 percent of GDP) in 2012 to 1.3 trillion rubles (about $43 billion, or 1.23 percent of GDP) in 2018, indicating that the government’s social spending would grow by an average of 0.85 percent of GDP annually, the economists said.

Even for Putin, who loves to credit his government for doing wonders for the budget during the recession, the new campaign promises may be hard to pull off, economists say. "To fulfill pre-election promises made by the Prime Minister, the government would need to spend an equivalent of 1.5 percent of the gross domestic product,” said Vladimir Tikhomirov, chief economist at Otkritie. “That's an unbearable burden for the federal budget." Like every campaign’s promises, Putin's pledges to raise salaries and increase pensions are infused with a certain dose of populism, Tikhomirov said. Other economists, including Tseplyaeva, said the Prime minister’s are no empty promises. “Experience shows that to remain popular in Russia one must ensure high economic growth and constant spending increases,” Tseplyaeva said.
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