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The political stability obtained in thesecond half-year turned out even better than expected: this is confirmedby both the post-elections tactics of the CPRF and the activities of the tradeunions. The opposition went the way of its organizational formation at thesimultaneous gradual integration in the power structures. For G.Ziuganov, animportant result of the Presidential elections was the understanding of thefact that even the combined left-nationalist electorate was insufficient to winthe elections; hence the change of his tactics. For the one hand, the leadersof the CPRF began vigorously looking for popularity among the non-socialistgroups (intellectuals, business people), for which the democratic decency needsto be demonstrated.

As for the administration of the Government,it demonstrated the readiness to cooperate with the left opposition. For theone hand, it was pushed to this by the distribution of forces in the State Dumawhere the support from the CPRF fraction is vital, especially in the situationwhen the Yabloko fraction, though of democratic image, rejects vigorously anycooperation with the executive power. For the other hand, it is the expectedreinforcement of the left fractions in the Council of Federation after theautumn regional elections. The introduction of A.Tuleyev in the Cabinet ofMinisters, though not ensuring for the Government the support of the Parliamentmajority (due to the special constitutional conditions of Russia), improved theinteraction between the Prime Minister and the leaders of the leftmajority.

After the elections, the readiness of thetrade unions leaders (FNPR) to cooperate with the Government and Presidentoutlined itself quite clearly. This was distinctly seen during the autumn(November) rallies and strikes, led by the FNPR and held within the peaceful,legal limits. The FNPR had a success (though not complete) in neutralizing theactions of the left extremists among workers.

Thus, the political evolution after theelections showed the stability and relative reliability of theconstitutional-legal regime of the post-communist Russia as a prerequisite forthe beginning of the investment activity. The issue of the institutionalreforms, whose gist is to ensure the immutability of the property rights, ismore complicated.

Of course, B.Yeltsin’s victory at the electionseliminated the main threat to the economic stability, conditioned by thenegative attitude of most candidates to the privatization and the intention ofthe CPRF to review its results and follow the way of nationalization on largescale. However, the laws regulating the property rights are today poorlydeveloped, and neither the Duma, nor the Government do not show readiness tothe quick promulgation of the relevant acts30.

There are serious problems with the set ofmacroeconomics parameters influencing directly the outlooks of economic growth.First of all, the beginning of the growth depends upon the situation of theFederal Budget. The remaining level of the Budget deficit requires hugeinterior borrowings which affects negatively the perspectives of the investmentactivities of economic agents. However, this thesis cannot be perceivedunequivocally, reducing all the tasks to the reduction of the Budget deficit bymeasure of victory over the inflation and passage to the growth phase. Theexperience of the post-communist countries shows that, ceteris paribu, thesolution of the stabilization problems is accompanied by the a certain growthof the budget deficit31, at least during the firsttwo or three years following the stabilization. In the other words, thequestion is just the time gap separating the reduction of the annual inflationto the level below 50% from the beginning of the economic growthitself32. The governments usually utilize the growth of the budget deficitin such situation as an additional tool for the structural reforms.

In Russia, the situation is different. Forthe one hand, after the elections, the crisis of the State incomes was notovercome. As shown above, the tax inflows, somehow grown in summer, wend downagain in autumn, despite a certain resurgence of the production activity andgrowth of inflation. For the other hand, the crisis of the expenditure side ofthe Budget continued aggravating. The problem of the constant reduction of theexpenditures in real terms following the evolution of the taxation crisisdeserves a more detailed discussion in connection with the approbation of theRussian federal Budget for 1977.

Budgetary policy of 1997 and economicgrowth

The analysis of the dynamic of the Stateexpenditures (including out-budget funds) in shares of the GDP for 1992-96shows their almost 2‑fold reduction (se Table1.14). The greatest reductions wereobserved in the expenditures on defense, national economy33, science,loans minus repayments. The share of the expenditures of the consolidatedBudget on the State administration, law enforcement, and social purposes stayedpractically the same. At the first sight, such conclusion contradicts theconcepts that, under the non-fulfillment of the budget plans for incomes, thesequestering of the expenditures performed under pressure of various lobbiesleads, as a rule, to the greatest reduction of the social expenditures, notsupported by clearly defined pressure groups.

However, it is important to take intoconsideration the different degrees of rigidity of individual groups ofexpenditures. Thus, the volume of the price subsidies is determined by theirsums per unit of goods and the production or sale volumes of such goods. Thegrant of subsidies for the exchange rate to the importers, whose volume dependsalso upon the real exchange rate is similar. The agriculture subsidies and thesubsidies to the unprofitable enterprises depend upon the production volumes.When the economy is shrinking, such expenditures can be reduced relativelyeasily (though the process itself of the GDP reduction may lead to additionalexpenditures relative to the growth of unemployment, etc.). The Stateinvestments can be reduced relatively easily to a certain level (the problemsbegin when the amount of the relevant expenditures stops ensuring the normalfunctioning of the infrastructure and the requirements of the environmental andnuclear safety, etc.). Similarly, the defense expenditures can be reduced byreducing the production and purchase of arms, reduction of the armed forces,etc. The expenditures on the State administration, especially in what concernsthe sectors management depend significantly upon the size of theeconomy.

On the contrary, the social expenditures areless dependent on the scale of the economic activity or such State activitiesas support of tenability, law enforcement, or national security. Even more,when the economic activity and the above activities reduce, the State has toexpand the social expenditures (unemployment allowances, construction of livingfacilities for dismissed servicemen, expenditures on retraining of thedismissed employed people, etc.).

The dimensions of different kinds of socialexpenditures depends on the particularities of the economic policy of theState. Thus, the subsidies to the municipal facilities, being of the socialcharacter, but entered in the section of the national economy expenditures, maybe replaced by the direct transfers to the needy layers of the population. Thesame is true for the subsidizing of certain kinds of food, medicaments,etc.

Thus, the share of the social expendituresin the GDP is the index sufficient to compare situations in different countriesor in a same country in different periods of time at a stable dynamic of theGDP. The latter is not true for Russia: in 1996, the GDP reduced by 38%,compared with 1991. Similar processes were observed in practically all thepost-socialist countries. Based on such significant reduction of the per capitaGDP, the analysis of the budget expenditures is necessary to get the idea onthe real situation in the field of State finance. Table1.14 shows that, duringthe period from 1991 to 1996, the real State expenditures reduced2.7‑fold. At the sametime, the social expenditures reduced 1.6‑fold. The per capita expendituresreduction was similar.

When estimating the real social expendituresof the consolidated Budget, the continuing process of transfer of the socialinfrastructure of enterprises to the municipal balances and the necessityto increase the budget expenditures should be taken into account34. The absenceof the relevant growth means that the drop of the real social expenditures hasbeen greater than Table1.14 shows, which does not include the quasi-statesocial expenditures of enterprises.

Such reduction, necessary from the viewpointof the financial stabilization, and support of the short-term budgetequilibrium, apparently exceeds the limits supporting a stable long-termequilibrium. The reduction of the government intervention in the economy is thenecessary and inevitable process for all the post-socialist countries. Thereduction of the State expenditures, and, hence, the relieved tax pressure onthe economy, allows to ensure the conditions for the growth of the privatesavings and investments which are of high efficiency. In Russia, beginning fromthe second half of 1993, this process of deetatization went on the backgroundof the growing crisis trends in the fiscal sphere, uncontrolled reduction ofthe tax incomes to the budgetary sphere. The Taxation crisis conditioned thefact that such violent cutback of the State expenditures was required to ensurethe financial stabilization. The same cause, the crisis of the tax incomes,expressed in the badly predictable reduction of the State incomes, led to theformation of the irrational structure of expenditures. In the situation ofnon-fulfillment of the budgetary plans for incomes, typical for the post-reformperiod, the expenditures are sequestered under the pressure of differentlobbying groups (agro-industrial complex, armament industry complex, banking,mining and feedstock sectors, etc.). Hence, this process in uncontrollable andleads inevitably to the greatest reduction of the social expenditures, notsupported by clearly defined pressure groups.

As a result, the structure of the Stateexpenditures, formed to today, is definitely irrational, and unable to supporteither the conditions for growth or the sufficient social and politicalstability. At the today’s level of incomes, the social expenditures could have been muchhigher, as the Budget has reserves for reduction in practically all other itemsof expenditures. Much more than necessary to support the economic and socialstability is being spent on the defense, national economy, Stateadministration, etc. However, the short term, these expenditures cannot becompressed, and the Budget has no sufficient reserves for their reduction andcorrection of their structure. The medium-term rationalization of the budgetexpenditures requires their interim growth.

Thus, the necessity of a significantreduction of the defense expenditures in medium term is quite apparent. Yet,this process is possible only under condition of a defense reform and asignificant reduction of the armed forces which, in their turn, require thetemporary growth of the State expenditures.

Table 1.14.

Expenditures of Russian consolidated Budget in 1991-96

Expenditures of consolidated Budget (% of GDP)

Real expenditures of consolidated Budget (Rbl.bn)













Stateexpenditures and loans minus repayments













1.Expenditures on State power and administration


























3. Lawenforcement



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