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Table THE SHARE OF CLASSIFIED ALLOCATIONS IN THE 2003 2009 FEDERAL BUDGETS, % Code and Title of Section (Subsection) Containing 2003 2004 2005 2006 2007 2008 Classified Expenditures 1 2 3 4 5 6 7 Total expenditure of federal budget 9.73 9.83 11.33 11.80 10.33 11.92 11.0100 GENERAL ISSUES OF STATE n/a 1 n/a 3.67 6.28 5.52 8.66 5.IMPORTANCE 0108 International relations and international 31.88 18.04 0.01 < 0.01 3.66 cooperation 0109 State material reserve 97.73 93.33 82.86 89.23 92.18 90.17 88.0110 Fundamental research 2.13 1.22 1.12 0.97 0.0114 Other issues of national importance n/a n/a 0.05 0.72 0.28 4.42 0.0200 NATIONAL DEFENSE 37.22 38.40 42.06 42.77 45.33 46.14 46.0201 Armed Forces of Russian Federation 35.39 36.11 33.07 35.59 37.11 39.04 40.0204 Mobilization preparedness of economy 100.0 100.0 100.0 100.0 100.0 100.0 100.0205 Preparation and participation in safeguarding 100.0 100.0 100.0 collective security and peace-keeping activity 0206 Nuclear Weapons Complex 100.0 100.0 100.0 100.0 100.0 100.0 100.0207 Realization of international obligations in 100.0 41.05 45.22 46.90 50.65 100.0 100.sphere of military-technological cooperation 0208 Applied research in national defense sphere n/a n/a 98.37 93.94 93.69 93.20 92.0209 Other issues in national defense sphere n/a n/a 2.49 8.79 24.38 29.21 25.MILITARY EXPENDITURE IN THE 2009 FEDERAL BUDGET Table 1, contd 1 2 3 4 5 6 7 0300 NATIONAL SECURITY AND LAW 23.33 20.79 28.52 31.64 31.07 31.84 30.ENFORCEMENT ACTIVITY 0302 Internal security agencies 3.40 3.01 4.76 6.31 5.16 4.97 4.0303 Internal service troops 13.21 11.10 11.76 10.31 9.80 10.25 8.0306 Security agencies 100.00 98.91 97.80 95.49 97.31 99.05 99.0307 Frontier defense bodies 19.73 22.88 100.00 98.97 97.62 100.00 99.0309 Protection of population and territory from natural and man-made emergency situations, civil 43.69 41.74 59.02 62.39 50.65 51.39 51.defense 0313 Applied scientific research in sphere of national n/a n/a 73.95 66.41 64.43 75.49 78.security and law enforcement activity 0314 Other issues in sphere of national security and n/a n/a 8.26 50.71 39.95 56.32 58.law enforcement activity 0400 NATIONAL ECONOMY n/a n/a 0.05 0.02 0.44 0.64 1.0411 Applied research in sphere of national economy n/a n/a 5.23 5.84 4.0412 Other issues in sphere of national economy n/a n/a 0.12 0.06 < 0.01 0.31 1.0500 HOUSING AND COMMUNAL UTILITIES n/a n/a 3.42 0.85 6.96 18.COMPLEX 0501 Housing complex n/a n/a 4.22 5.69 15.97 20.0700 EDUCATION 2.76 2.69 2.39 2.55 3.0701 Pre school education 2.03 2.17 2.44 2.48 2.0702 General education 1.51 1.91 2.14 2.00 2.0704 Secondary vocational education 1.06 1.03 1.02 0.86 0.0705 Professional training, retraining and advanced 16.85 15.78 17.22 1.80 7.training 0706 Higher and postgraduate professional 3.15 2.93 2.53 3.08 3.education 0709 Other issues in sphere of education 0.30 0.33 0.28 0.29 0.0800 CULTURE, CINEMATOGRAPHY AND MASS 0.17 0.17 0.21 0.17 0.MEDIA 0801 Culture 0.14 0.10 0.16 0.10 0.0804 Periodical press and publishing houses 13.46 7.45 2.57 2.62 2.0806 Other issues in sphere of culture, 0.02 0.15 cinematography and means of mass communication 0900 PUBLIC HEALTH CARE, PHYSICAL 4.30 3.99 2.57 4.14 3.CULTURE AND SPORT 0901 In-patient medical care 5.61 4.66 2.94 3.24 2.0902 Out-patient medical care n/a n/a n/a n/a n/a 13.94 4.0905 Spa and rehabilitative care n/a n/a n/a n/a n/a 14.07 16.0907 Sanitary and epidemiological well-being n/a n/a n/a n/a n/a 2.09 1.0908 Physical culture and sport 0.28 0.26 0.24 0.42 0.0910 Other issues in sphere of public health care, 1.74 0.physical culture and sport 1000 SOCIAL POLICY 0.01 0.1003 Social security of population 0.02 0.1100 INTERBUDGETARY TRANSFERS 0.16 1101 Dotations to budgets of subjects of Russian 0.50 Federation and municipal formations Source: The IETs estimations based on the data from approved federal budgets for 2003 2009 (the data for 2007 are brought in conformity with the relevant sections and subsections of the budget classification introduced from January 2008). For 2009, the data taken from Federal Law No 204-FZ of 21 November 2008 and the Federal Treasurys report on the execution of the RF consolidated budget, issued in February 2009, are applied.

RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES Also, it seems plausible that the economic crisis will help Russia to overcome the RF Ministry of Finances apparent tendency to artificially enlarge and merge together the purpose-oriented military expenditure items of the federal budget, which is aimed at removing these budget items from under any control on the part of the legislative authority and society. Thus, to make the federal budget more transparent is one of the major preconditions for Russias exit from the economic crisis.


ON THE PRINCIPLES OF RESPONSIBLE BUDGETING POLICY FOR THE YEAR 2010 AND THE PLANNING PERIOD OF 2011V.Nazarov At the extended meeting of the Collegium of the RF Ministry of Finance Russia on 14 April 2009, Minister of Finance Alexey Kudrin spoke of the necessity to cut budget expenditure in the year 2010. In the nearest future, the RF Ministry of Finance is going to prepare a draft of the main directions of Russias budgeting policy for the year 2010 and the planning period extending over the years 2011 and 2012. In this connection, it appears feasible to consider the main principles of the budgeting policy of the Russian Federation for the next three years.

As the key principles of responsible budgeting policy during the period of economic crisis, it appears feasible to suggest the following ones.

1. A scenario-based approach for forming the revenue and expenditure sides of the federal budget The approach that has been applied until recently to the mapping of three-year budget could ensure stability of the budgetary system only in conditions of an unchanging foreign economic situation, and it has turned out to be practically useless during an economic crisis.

So, it appears reasonable to switch over to a scenario-based approach to forming federal budget revenue and expenditure. For this approach to be implemented, it is necessary to forecast federal budget revenue under various macroeconomic conditions:

- the conservative scenario, which will reflect a near-zero growth rate of the national economy in 2010 2012 and a low level of prices of energy carriers (oil prices of approximately 20 USD per barrel) in conditions of the global economys stagnation;

- the basic scenario, based on the assumption of stabilization of the global economy in 2012, with the preservation of the current level of prices of energy carriers;

- the optimistic scenario, based on dynamic growth of the Russian economy in conditions of renewal of economic growth in developed countries and growing prices of energy carriers.

All the spending obligations of the federal budget must be subdivided into 3 groups, depending on the priority of each expenditure item and the period of implementing a given spending obligation: A, B1, and B2:

- Group A expenditure items represent those spending obligations that cannot be subject to any cuts no matter which scenario of the Russian economys development is actually realized;

- Group B1 expenditure items are those spending obligations that can be cut beginning from the year following a current financial year;

- Group B21 expenditure items are those spending obligations that can be cut during a current financial year.

The distribution of spending obligations between groups A, B1 and B2 must be regulated by a special normative legal act of the Government of the Russian Federation.

When the State Duma will be considering the draft federal law for the federal budget for the next financial year and the planning period, the RF Government must submit to the deputies information on the distribution of spending obligations between the aforesaid categories (as a possible variant in the form of a separate annex to the law on budget).

RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES A criterion of the stability of the federal budget should be the possibility to ensure the backing of the Group A expenditure items by appropriate revenue in accordance with the pessimistic forecast of the development of Russias economy, and the backing of the implementation of Group A and B1 expenditure items by appropriate revenue in accordance with the basic scenario of the of Russian economys development. Thus, Group B1 expenditure items represent, in fact, the directions for the use of supplementary budget revenues. In order to ensure transparency of the budgeting process, it appears feasible to determine in advance the directions for the use of possible supplementary revenues.

2. A balanced budget Budget expenditure in 2010 2012 must be of an appropriate size, capable of ensuring a well-balanced budget (those expenditure items that cannot be cut in the next financial year must be covered by revenue in accordance with the conservative scenario of the national economys development, while those expenditure items that can indeed be cut over a planning period must be covered by federal budget revenue in accordance with the basic scenario).

In this connection, the emergence of technical deficit in the federal budget would be acceptable (for example, if the economy develops under the conservative scenario, but Group B1 expenditure items will anyway have to be financed during a current year) in an amount of no more than 3 % of GDP. A more substantial budget deficit would create depreciation expectations (thus, for example, individuals and companies alike, in expectation of a nearly three-trillion deficit in the 2009 federal budget (7 8 % of GDP) are very reluctant to part with their currency reserves even in conditions of a local depreciation of the ruble as a result of a stabilizing foreign economic situation) and would have a certain impact on the inflation rates acceleration.

At present, Russia is in need of modernization both of general economic and social institutions, and the national economys branch structure. Additional government expenditures cannot ensure a countrys modernization. For the improvement of institutions, what is needed is reforms, and not simply more investments in the already existing inefficient institutions. As is demonstrated by global experience, modernization of a national economy must be triggered by external demand, while budget spending can provide only for a temporary growth of domestic demand and a conservation of certain components specific of that particular countrys economic backwardness.

3. Responsibility for the next generations and unacceptability of populism in the sphere of pension provision Russia, like most of the other developed countries, represents part of the basic demographic process the populations ageing. It is the phenomenon of the populations ageing that makes difficult the prospective existence of those pension systems where the principle of generations solidarity is the prevailing one. This negative demographic trend represents a long-term strategic challenge for the pension system of Russia.

Table RATIO OF THE SIZE OF POPULATION BELONGING TO THE ABLE-BODIED AGE GROUPS AND THE SIZE OF POPULATION BELONGING TO SENIOR AGE GROUPS IN 2007 2050* Population, million persons Number of persons older than able-bodied age Year per 1000 able-bodied persons Able-bodied Senior 12 3 2007 89.8 29.4 2010 87.5 30.8 2015 81.3 32.6 2020 75.3 33.9 ON THE PRINCIPLES OF RESPONSIBLE BUDGETING POLICY...

Table 1, contd 12 3 2025 71.2 33.9 2030 67.7 33.3 2035 63.1 32.9 2040 57.1 32.9 2045 50.7 32.9 2050 45.8 31.7 * The table presents an inertia-based demographic forecast, without any changes in the main demographic indices.

Source: Rosstat of Russia; the IETs estimations.

During the next decade, the demographic situation will already be developing in such a way that the pensions expenditures will significantly increase due to the growing number of pensioners coupled with the simultaneously declining number of employed citizens who are the payers of pension contributions. Later on, as the population grows increasingly older, the situation will be deteriorating still further.

Joint responsibility of generations can effectively provide a solution to the problem of pension endowment in a situation characterized by favorable demographic conditions (growth or overall reproduction of the population), stable growth of the remuneration level, and absence of any significant and long-term changes in the actual share of employed persons in the total population. However, if the population is ageing, and economic growth largely depends on the economic situation, then there emerge problems associated with shortage of financial resources needed for ensuring the payment of pensions for next generations (or, at least, the risk of the appearance of such problem becomes higher). In this connection, the switchover to a funded pension system cannot provide any short- and medium-term solutions to the existing problems, either, because then there will arise a need not only in additional resources for funding the double payment of employed citizens during the transition period (when the working generation will have to accumulate the means to cover their own pensions, while at the same time to pay for the pensions of the previous generation), but also the necessity to create efficient instruments for investing pension savings. So, it thus becomes necessary to attract additional financial resources into the pension system, that is, incomes from investments of the National Welfare Funds resources (following the example of Norway) and incomes from privatization of government property (following the examples of Poland and some other countries where a switchover to a funded system has been implemented).

Given all the aforesaid considerations, it does not seem feasible to spend the resources accumulated in the National Welfare Fund on patching the holes in the Pension Funds budget at a time when the demographic situation still remains at a relatively comfortable level in terms of sustaining the existing pension system. Pursuing such a policy would mean eating up the resources of next generations.

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