Premier Boosts Expenditures While Medvedev Fights Inflation

Medvedev had demanded in his budget address definite steps to cut inflation down to 6 per cent by 2011. It is believed in the Finance Ministry that this will not be an easy job, the newspaper Gazeta notes. The monetary-crediting policy will have to be toughened to achieve this end and no budget expenditures should be allowed to grow, it adds.

According to the selfsame ministry, the budget expenditures can be expected to grow by 50 per cent within the next three years. Economists stress that squandering of the budget's surplus petroleum and gas revenues will merely escalate the "inflation spiral".

During his meeting with United Russia Party members, Putin backed Duma Speaker Boris Gryzlov's statement that economic development should not be suppressed to prevent inflation. The speaker "has correctly stated that we deem it wrong to fight inflation to the detriment of economic development. This view has every right to exist", Putin stated in this connection.

At the same time, the premier cited the view of the European Central Bank, for which measures to combat inflation are more important than economic growth. "It is worth noting, however, that measures of the Russian Central Bank (reserve claims to banks) and of the Finance Ministry (sterilisation of petroleum and gas revenues, except transfers to the budget) to limit money supply, were overtly approved in Medvedev's budget address," the newspaper Kommersant stresses. "Nevertheless, Prime Minister Putin has implied that the option is still ahead," it adds.

"When we make these or other decisions with you, we shall have to bear in mind the set of instruments, needed to combat inflation, and the differing points of view on this score," the premier stated. "They are being employed differently in different countries and in different economies. We have to choose an optimal way for our economy".

The Russian government is not planning to freeze salaries as a measure to combat inflation, Putin stated. "As distinct from Western economies, our citizens have no financial accumulations, no safeguards and, therefore, we cannot freeze offhand the salaries in all the sectors of our economy and shall not do it," he stressed.

Announcing the 30 per cent boost of the labour remuneration fund for institutions financed from the Federal Budget as of December 1st, 2008, Putin specified: "We have had consultations with our Central Bank, which believes that boosting of the labour remuneration fund will not produce any serious impact on the inflation process".

"If we were to examine today the inflation growth pattern, we would nevertheless observe primarily monetary factors there," he added.

"It appears that the leader of the United Russia Party had indeed believed with an easy heart that it was possible to fling into the market ever new lots of money and, at the same time, not to increase inflation, if not to lower it," the newspaper stresses. Putin remains dedicated to his line, namely to fight not the reasons of inflation, but its consequences, the Gazeta asserts.

The premier has announced, in particular, the establishment of a special fund. "We shall use it to add money to the cash allowances of certain groups of officers". On the average, the cash allowances should be increased up to 65,000 roubles, and even up to 100-150 thousand roubles for some categories. I have in view the top officers. We believe this measure is grounded," Putin stated.

A comment, which the newspaper Gazeta got from the Finance Ministry, notes that means from the petroleum and gas transfers will most likely have to be used for these purposes and, possibly, they will even have to be increased. In any case, the expenditures are being boosted to such an extent that a pro-inflationary effect is unavoidable.

As to the pensioning system, the premier said the real growth of pensions would this year amount to 16-19 per cent with due account of inflation. If we fail to keep the inflation within the planned limits, it will be necessary to index them once more, Putin stated.

While President Dmitry Medvedev is declaring the efforts against inflation as the nation's economic priority, Prime Minister Vladimir Putin, who is leader of the ruling party, announces a substantial boost of salaries and allowances. In the opinion of some publications, this means that the premier is thereby amending the president's economic policy. President Medvedev had indicated the fight against inflation as the country's priority task in his budget address. In spite of this, meeting with fellow party men at a boarding house near Moscow on Sunday, United Russia Leader Vladimir Putin announced, among other things, a 30 per cent increase of salaries to employees paid from the state budget as of December 1, 2008.

According to Rosstat figures, inflation in Russia equalled to 8.1 per cent by June 1, 2008. It remains stably high both against the background of the slackening rates of money supply and against the background of the net outflow of foreign capital, which amounted to 2.4 billion U.S. dollars early in June. Economists confidently predict that inflation in 2008 will equal to no less than 14 per cent, but only if the government resorts to more significant measures to limit the growing rate of money supply.

In spite of this, Russia has not heeded the advice of the International Monetary Fund (IMF) to reduce budget expenditures in order to combat inflation. The State Duma approved on June 11 the first reading of an amendment to the law on the budget, increasing state expenditures by 228 billion roubles. Finance Minister Alexei Kudrin had tabled the amendment.

A day before that he got the IMF recommendations not to increase by any means the current level of expenditures in order not to whip up inflation. The IMF noted that Russian economy was overheated and the inflation was caused by the government's erroneous policy. It simply recommended not to fully execute the 2008 budget, not to further increase the expenditures.

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