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Section 2

Monetary and Budget Spheres

2.1 Public finances

Up to the Fall 1994, the Government, headed byChernomyrdin, adhered to the so-called moderate-limiting financial policy.This policy was targeted at gradual stabilization of the national economy. Thequestion was to ensure for 1995 a lowering of the rates of inflation to get to3% - 5% monthly to the end of the year.

But, in practice, in 1994, thismoderate-limiting financial policy was expressed in the support of the Budgetdeficit of 7% to 10% of GDP, of the about 9% monthly growth rates of theCentral Bank credits, of M2 growth rates of about 10% monthly, and, at last the about 8%monthly prices growth. The highest rates of growth for the money stock wererecorded in May to July 1994 (17.1% in May, 13.4% in June, and 12.9% in July),which, with the six months lag, led to the growth of the inflation rates growthup to 15% to 16% in October to December 1994. At the same time, about 75% ofthe increase of the Central Bank credits were the credits to theGovernment.

At the beginning of the Fall 1994, theGovernment changed sharply its concept of the macroeconomic policy. Instead ofthe moderately strict monetary policy, a radically new scheme began beingdeveloped. The purpose of it was to make the monetary and budgetary policiesstricter in such a way, that it would ensure, by the end of 1995, the realfinancial stabilization with the monthly inflation rates of about1%.

Budget Planning for 1995

In November 1994, the Government submitted thedraft 1995 Budget, developed within the framework of the new concept of themacroeconomic policy, to the State Duma. After its rejection in the firstreading, and after the work of the Reconciliation Commission, at the beginningof 1995, the Ministry of Finance submitted to the Duma the amendments to thedraft Budget and to the macroeconomic program. The work of the ReconciliationCommission with the Finance Ministry for amending the Budget was formal enough.In order to avoid the repeated situation of the previous year with the approvalof the high nominal Budget indexes, the Government made, in 1995, a deliberatetechnical fault: the calculations to the Budget did not correct the parameterscharacterizing the evolution of the inflation processes. At the same time,already in the Fall 1994, taking into account the dynemics of the money supply,one could forecast the high rates of the prices growth in 1995, which broughtto significant corrections in the macro-economic calculations.

The draft Budget based on such corrections wasapproved by the State Duma in the last, fourth, reading on 14March1995.There, the confrontation between the fractions of the State Duma hindered theapproval of practically all the amendments submitted by individual deputies ortheir groups. As a result, if we omit small things, the Government-proposedvariant of the Budget was approved. The main parameters of the Budget are shownin Table2.1.

The situation with the Budget planning for1995, described above, though badly reflecting the reality, turned out,nevertheless, much more preferable than that of 1994. The underrated pricesgrowth and GDP volume, taken into account in the calculations by the Ministryof Finance, allowed to avoid, last year, the situation with the approval forthe Budget of the unrealistic nominal volumes of incomes andexpenditures.

With the inflation rates 1.5‑fold higher than accounted for inthe Budget calculations (2.31 actual and 1.6 in accordance with thecalculations of the RF Ministry for Economy used when drafting the Budget), thenominal volumes of the Budget incomes, much more lower both in the nominalexpression and as percentages of GDP allowed to finance the nominalexpenditures volumes approved for the Budget without increasing thedeficit.

Table 2.1

RF Federal Budget for 1995

Percentage ofGDP accounted for when developing the Budget (Rb925trln)

Percentage offorecast GDP (Rb1,500trln)

Percentage of actualGDP (Rb1,659.2 trln)

Execution for 1995, 5 of the actual GDP

Parameters

draft law, October1994

Law of 14March1995

Law of 14March1995

Law of 12August1995

Law of 6December1995


INCOMES

Incomes from taxation,incl.:

12.7

13.8

8.5

8.5

10.6

10.27

Profit tax

2.6

2.6

1.6

1.6

2.7

2.47

Personal incometax

0.4

0.3

0.2

0.2

0.2

0.2

VAT

4.9

5.4

3.3

3.3

4.5

4.27

Excisetaxes

1.0

1.0

0.6

0.6

0.9

1.07

Specialtax

0.6

0.4

0.4

0.5

0.44

Royalties for the useof natural resources

0.2

0.2

0.1

0.1

0.1

0.18

License duty forproduction and sale of alcohol

0.2

0.2

0.1

0.1

0.0

0.0

Land tax

0.0

0

0

0

0.1

0.01

Taxes on foreigntrade

2.1

3.5

2.1

2.1

1.5

1.46

Other taxes, duties,and levies

1.3

0.1

0.1

0.1

0.1

0.2

Non-tax incomes andassets of the Budgetary targeted funds

2.9

5.1

3.1

3.1

3.0

3.48

Total incomes of theFederal Budget

15.6

18.9

11.7

11.7

13.5

13.67

EXPENDITURES

Stateadministration

0.5

0.4

0.3

0.3

0.3

0.27

Internationalactivities

1.9

2.3

1.4

1.4

1.3

1.3

Nationaldefense

4.9

5.3

3.2

3.4

3.6

2.87

Law enforcementactivities

1.7

1.6

1

1.1

1.2

1.16

incl. Federal Courtssystem

0.1

0.1

0.1

0.1

0.1

Fundamentalresearch

0.6

0.7

0.4

0.4

0.4

0.29

Nationaleconomy

3.9

4.6

2.8

2.9

2.7

2.18

Education

0.9

1

0.6

0.6

0.7

0.52

Culture, art, andmass media

0.3

0.4

0.2

0.2

0.2

0.17

Public health andphysical culture

0.5

0.5

0.3

0.3

0.3

0.21

Socialpolicy

0.3

0.5

0.3

0.3

0.7

0.23

Repayment and serviceof the inner debt

1.2

0.9

0.6

0.6

0.5

0.56

Service of theexternal debt

1.1

1.6

1

1

0.9

0.94

Other

4.6

5.9

3.6

3.2

3.5

3.7

incl. financial aidto other levels of power

3.1

3.1

1.9

1.9

2.3

1.76

Expenditures ofextra-budgetary targeted funds

1.1

1.3

0.8

0.8

0.8

0.85

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