OREANDA-NEWS. June 29, 2011. The President announced at the start of the meeting with members of the Government that he has signed the 2012–2014 Budget Address.

The document sets out Russia’s budget policy for the next three years.

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PRESIDENT OF RUSSIA DMITRY MEDVEDEV: Colleagues,

I signed the Budget Address today. It sets out our country’s budget policy for the next three years.

This document summarises the different tasks on which the various state ministries and agencies are already working, and also contains a number of additional measures that I think are relevant today.

Our budget system has done quite an effective job of helping the economy in its post-crisis recovery. Growth stabilised at around 4 percent in 2010, and we expect a similar or higher growth figure this year. We have succeeded in reducing considerably the federal budget deficit, and most important of all, have carried out all of the state’s social sector commitments.

Our budget policy priorities now are to modernise our country and our economy of course, and establish the conditions for making our economy more competitive and ensuring stable long-term growth. Russia needs to put in place a completely new economic growth model over the coming years, a model based on private initiative and innovation - not fragmentary innovation developed just for show, but genuine mass-scale innovation, an effective public services system, and a high quality financial and production infrastructure.

Not all aspects of our budget and tax policies fully fit these objectives at the moment. Risks connected to our dependence – our considerable dependence – on the foreign economic situation also remain in place.

The new three-year budget must facilitate this new growth model’s development, and help us to lower the risks and ensure macroeconomic stability. With these goals in mind, we need to carry out systemic measures in a number of different areas, twelve in fact, which I will name now.

First, we should integrate budget planning into the efforts on shaping and implementing our country’s long-term developing strategy.

We are to have a long-term economic forecast approved not later than 2012, and peg our strategic social and economic development goals to the according financial and legislative support. This budget strategy, integrated with the general development strategy, must also set out the procedures for assessing the budget system’s overall stability risks.

By the end of 2012, we have to introduce the programme organising the state executive authorities’ work on a targeted basis, and approve the main state programmes, along with their programme budgets at the various levels of government.

Second, starting from 2015, we must introduce rules for using oil and gas revenues, and limiting the federal budget deficit’s size. This is all fully in keeping with our international commitments too.

Our work to draft the budget for 2012, and for the 2013–2014 planned period, must put in place the conditions for introducing these rules, and for stabilising and subsequently reducing the federal budget deficit.

There is one problem here. If we do not break the inertia in drafting budget requests that contain no means for evaluating the effectiveness with which budget money is spent, the risks to macroeconomic stability will be unacceptably high. This is something we must avoid.

Third, the maximum compulsory insurance contributions will come down from 34 percent to 30 percent in 2012–2013, and for small businesses in the production and social sectors, as well as for a broad range of non-commercial organisations, will drop from 26 percent to 20 percent. We have revenue sources to offset these losses to budget income. We can generate extra revenue by selling federal assets – privatisation, in other words. We have oil and gas revenue, reserves, and also other possible sources. The Government will need to decide what the share of each of these sources should be in budget income over the course of the budget process. This is my instruction.

Fourth, the Russian tax system must be capable of responding to the challenges of a globalising economy. It should not be an excessive burden on society, and it must contribute to Russia’s development as a federal country. We should raise the incentive and fiscal functions of the taxes levied on companies in the oil and gas sector, and in the alcohol and tobacco industries.

We must also replace the current property tax with a special tax on real estate – something we have discussed before – and also expand the patent system of taxation for small businesses.

Fifth, our budget policy must focus on improving the quality of life of our people, of each individual, on targeted solutions for social issues, and on raising the quality of state and municipal services. Pensions and benefits will increase in 2012 and the following years. Over 2012, the average pension will increase by 11 percent, and social benefits will increase by 6 percent. By the end of 2012, all Great Patriotic War veterans must be provided with housing in accordance with the commitments that we made.

We will continue implementing the programmes to modernise healthcare and education, and support culture, physical education and sport. Starting from January 1 next year, provision of public healthcare services will come under the regional authorities’ responsibility. Budget income sources will have to be redistributed between the regional and local budgets accordingly. 

I want to emphasise in this respect that work to develop the social sector should not amount to nothing more than mechanically increasing spending.

Wages in the public services sector must be more competitive compared to wages in other sectors. This goes above all for teachers and healthcare workers, whose wages will increase substantially over the next two years as part of the state programmes in these sectors.

Starting in 2012, service pay for the armed forces and people with equivalent status will undergo reform. This will take place in two stages, as was already announced. Reform will begin next year in the Armed Forces and the Interior Ministry system, and in 2013, in the other security and law enforcement agencies.

At the same time, the pensions system for military servicemen and law enforcement and security personnel will also undergo reform, which will increase pensions substantially.

Finally, our efforts to improve the quality of life in our country must pay particular attention to environmental issues, including mechanisms for financing nature conservation work. Only through combined action and joint investment by the state authorities and business can we improve the environmental situation.

Sixth, we have to ensure that our taxpayers get greater returns on their money by modernising the network of state institutions and improving the quality of the state and municipal services they provide. I remind you that the transition period for introducing new forms of federal state services provision and their financing is to be completed by January 1, 2012, and from July 1, 2012, the same should apply at the regional and local government levels.

We should approve all of the necessary rules and decisions in good time, and ensure the necessary financing and a high quality of state and municipal objectives for the budget-funded and autonomous institutions, and at the same time take steps to develop competition in social services provision by getting non-governmental organisations with a social focus broadly involved as well. The legislative framework making this possible is already in place. 

Seventh, we need to reduce significantly the state’s role in managing economic assets. The Government must draw up a timetable for privatising large stakes in companies currently under state control. The state should decrease its share in these companies to less than a controlling stake, or even withdraw altogether as necessary.

Exceptions will be made for companies in the infrastructure sectors or directly connected to our national security. This will help to attract investment, create a better environment for fair competition, and encourage companies to step up their investment and innovation activities. It will put an end to the open or hidden advantages that state- or municipal-owned companies have benefited from. There must be a level playing field for all – state companies and private businesses.

Eighth, our state procurement system requires a thorough overhaul. World practice shows that state demand for goods, works, and services is met more effectively when the state procurement system is built into a common institutional environment. Our federal contracts system must become just such a system. I gave this instruction at the end of last year, and this work is underway now, and is generating its fair share of debate too along the way. 

We need the mechanisms that guarantee proper quality of purchases, justified prices, and reliable monitoring of how contracts are performed. We also are to give full consideration to the specificities of goods, works and services related to research and development.

The effectiveness and transparency of purchases for state needs and the state sector of the economy are equally as important. In this area we should use budget policy mechanisms to initiate demand and encourage the development of science-intensive, efficient production.

We have to draw up effective procurement procedures to be used by the natural monopolies and state- or municipal-owned corporations and companies in buying goods, works, and services. Everyone is talking about this today. We must ensure that tender information is open, and that there are no unjustified limits on participants, which, as you know, is a common occurrence at the moment. In general, we need to reduce substantially the number of cases when state procurement decisions are made without holding tenders, on the basis of presidential or government decisions. This should be the exception, and not the rule, as is sometimes assumed to be the case.

Ninth, we must get the Russian direct investment fund up and running, establish its initial capital on the basis of budget money, and facilitate its subsequent employment in the priority technological development areas. We should make greater use of public-private partnerships in carrying out innovation projects, and facilitate the patenting, certifying, and commercialisation of new developments. We also need to complete work on setting up a specialised agency to insure export credits and investment.

Tenth, this year, we are to pass amendments to the Budget Code regarding state and municipal financial control issues, including concerning liability for violating budget legislation. The situation is not progressing at all on this point, and this is not good. The instruction to draft and submit to the State Duma the relevant draft law was given back in 2008, but has still not been carried out, and there is no proper responsibility set out in this area.

Eleventh, we should ensure effective decentralisation of powers between the different levels of government, with more power going to the regional and municipal authorities.

I have established special groups under the Presidential Executive Office to work on this, and they have until the end of this year to draft proposals (these groups include senior government officials, and regional governors), including on increasing the regional and local budgets’ share of income in the overall consolidated national budget structure, in order to make it more in accordance with the new distribution of powers. Proposals for changes to the tax system’s structure and budget legislation may also be required.

Twelfth, the Government must approve and begin implementing the concept for developing an integrated public finance management system – the electronic budget. Everyone is doing this these days, and we should too. This system must ensure maximum openness, transparency, and accountability of financial activity, and should provide all interested users with reliable information.

These are our budget policy goals for the next three years.