OREANDA-NEWS. July 30, 2010. PM Putin and Finance Minister Kudrin disclosed the basic parameters of 2011 Federal budget: revenue will reach RUB8.6 trillion, or 17.4% of GDP; expenditures – RUB10.4 trillion, (20.9% of GDP), with the deficit expected at 3.6% of GDP, reported the press-centre of OTKRITIE Financial Corporation.

View: The 3.6% GDP deficit seems a compromise between the need for conservative budget planning and the desire to stimulate the still tenuous economic recovery. The potential deficit range was pre-set between the 3.4% of GDP figure in the initial Finance Ministry version of the budget and the 4% cap the government has set for itself and the planned 3.6% GDP deficit reflects conservatism to the budget planned under a relatively optimistic Urals assumption of USD75/bbl.

However, compared to the initial MinFin version proposed revenue has increased by RUB850bn and expenditures are up RUB920bn. We believe that the higher level of redistribution through the budget is a negative development given the inefficiency of Russian fiscal spending. However, increase in fiscal spending seemed inevitable in a pre-election year and is confirmed by news of a 9% rise in pensions in 2011.

In YoY terms, 2011 fiscal spending is increasing just marginally – from RUB10.2tr to RUB10.4tr, but these figures mask the ~2% GDP  increase in payroll taxation which will reduce the transfer from the federal budget to the Pension Fund. We believe there will be an increase in defense and social spending instead of needed higher levels of government investment.