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President of Russia Vladimir Putin: Good afternoon, colleagues,

The 2013–2015 Budget Address was signed today, and I will outline its key priorities during this meeting. 

Due to our responsible fiscal policies of the past several years, we have been able not only to recover from the crisis, but also to establish a solid macroeconomic environment, a macroeconomic foundation for growth. That includes such factors as a safe level of sovereign debt, stable national currency and the lowest inflation in 20 years. It is vital that we consolidate these fundamental achievements.

However, it is necessary to increase the effectiveness of our fiscal policy, to strengthen its focus on economic and social development, as well as other national priorities.

The budget resources, financial and tax regulation mechanisms should focus on the implementation of our strategic modernisation programme, which was supported by the vast majority of Russians. We are well aware that we will have to implement it at a difficult time. The global economy is experiencing a period of turbulence, and we need to be prepared for any possible manifestations of the economic crisis.

The fundamental task for us is to preserve macroeconomic stability and fiscal sustainability. It is obvious that the main risk factors are still rooted in our high dependence on global energy and raw materials markets. The oil and gas deficit is too big. Our main challenge is that we need to stimulate economic growth and implement large-scale social programmes, and at the same time safeguard the budget against sudden fluctuations in energy prices.

The previous Government has begun a detailed analysis of these issues and proposed various solutions. We have all agreed that we should return to the so-called fiscal rule in drawing up the 2013 budget, and legally establish the procedure for using oil and gas revenues. This policy will allow us to accumulate reserves and still have the necessary means to a stable, unconditional fulfilment of budget obligations for the long-term government programmes.

What do we propose? When planning the federal budget, it is expedient not to base the calculations on current or even projected price quotations, which are constantly changing, but on more fundamental indicators. Therefore, the budget will be based on the average oil price for the past five years, and every year the accounting period will be increased by one year. Thus, in five years the Russian budget will be calculated based on an average oil price for the ten-year period. If the actual price of oil is above the average, then the additional revenues should go to the Reserve Fund, and if the oil price falls below the average, the budget will use the Reserve Fund money to make up for the shortfall of oil and gas revenues.

It is also necessary to legally establish the maximum size of the Reserve Fund, and any funds in excess of this amount should be forwarded to the National Welfare Fund. In addition, as I have said, we should consider a mechanism for using part of the National Welfare Fund to finance infrastructure and other priority projects. However, project financing using the NWF funds is possible only in excess of the amounts needed for transfers to the Pension Fund. It was for that purpose, to support the Pension Fund, that we established the National Welfare Fund some time ago.

At the same time we need a more flexible and diversified strategy for managing sovereign funds. This is especially true in view of the increased volatility of world markets. Simply put, you cannot put all your eggs in one basket. We must seek the best solutions that will improve the profitability of investing our reserves while minimising the risks. I think that investing in infrastructure projects should achieve that objective. Therefore, I ask you to consider all aspects of establishing a Russian financial agency that will implement the state policy in the management of funds and sovereign debt.

I would like to emphasise that the new fiscal rules, strict regulations for spending the interest income is also a powerful anti-inflationary measure. I consider reducing the inflation level to be a vitally important task for the economy as well as the social sphere. Moreover, low inflation boosts our resistance to negative external factors, and we must be prepared for any scenarios in the global and domestic economy, and have the mechanisms and capabilities for rapid response. Therefore, please include a sufficient reserve for anti-crisis measures in next year’s budget, in case such a need arises. In the long term we need to establish an effective system of risk monitoring, forecasting and management.

Colleagues, the achievement of the stated priorities, which are set out in my pre-election articles and Presidential executive orders, should be the main criterion for assessing the effectiveness of our fiscal policy. We are talking about creating a new economic structure, favourable conditions for attracting investment, improvements in education and healthcare, and the entire social sphere.

The funding should be spent on reforms; each ruble from the federal budget must stimulate development, change the quality of our economy and the daily lives of our citizens. The public has every right to be informed not only regarding the objectives on which the budget funds are spent, but also on the results achieved. The current practice is to assess the budget execution and the achievements in the socio-economic sphere separately. We hold one meeting to look at how the money is spent, and another to discuss agencies’ performance and accomplishments. This approach provides an incomplete picture and does not encourage results-oriented work. I think that it is necessary to combine the budget review with the discussion of socio-economic policy implementation. If more money was spent than had been planned, and the goals are not achieved, we must draw appropriate conclusions and make personnel decisions.

I believe that we must assess the personal responsibility of heads of ministries and departments based on the annual analysis of budget spending. I would like to ask you to develop such a system and implement it.

We must also increase the effectiveness of budget expenditures by switching to budget planning and execution on the basis of state programmes. We have been talking about this for a long time but have postponed the decision due to the lack of long-term reference points for financing these programmes. I ask you to include them in Russia’s budget strategy until 2030. Let me remind you that the work on these documents must be completed by the end of this year.

In addition, we must approve all key state programmes by the end of this year, so that the three-year budget plan for 2014–2016 is completely made up on a programme basis. I realise that this will not be easy, but this work must be completed. The individual elements of the programme approach must be implemented in drawing up the budget for next year.

There are several points I would like to draw your attention to. Budget investments are primarily designed to promote the creation of modern transport, engineering and public infrastructure, and to improve the quality of social services. At the same time state investment must not replace or push out private investments. On the contrary, the state funding should serve as a catalyst for private initiative, to promote the growth of business activity and enhance the competitive capabilities of domestic business. This carries special importance with the increasing integration in Eurasia, as well as Russia's accession to the World Trade Organisation. We must take advantage of the new markets for the promotion of domestic producers and at the same time minimise the risks to our business associated with our accession to the WTO. We have been working on this for a long time, our experts negotiated this issue for 16 years, almost 17. They have succeeded in getting everything that could have been squeezed out, to put it simply. Nevertheless, the fears expressed by the business community and real economy, are justified, and we need to think about it.

Therefore, I believe the federal budget for the coming three years must stipulate measures to facilitate the adaptation of our economy to the new conditions following Russia’s accession to the WTO.

Once again, the globalisation of world economy and an increasing competition for investment demand that we are competitive in everything. This is especially true of the investment climate. Its quality depends on our economic policy, our actions in the budget sector, and the stability and fairness of the tax system. We must have a clear understanding that the tax system not only performs fiscal functions, but also helps to diversify the economy and stimulate business activity.

Given our goal to reduce dependence on natural resources, I think we must preserve the existing tax level for the non-resource sector. It would be short-sighted, irrational and dangerous to impose any further burdens on it.

We must also free business from overlapping and often meaningless work in preparing financial reports and tax returns. Fiscal accounting must be simplified and the use of accounting documents in tax reporting must be allowed. We have talked about it on many occasions, especially recently, and the business community has often raised this issue. We discussed it in meetings with the Federal Taxation Service and other federal government agencies.

In general, we have found a number of common approaches. I stress that today our tax rates are comparable to those of the countries with which Russia is competing for attracting capital. But the administration procedures must also conform to international best practices. At the same time, it is essential to exclude the conditions for tax evasion. Companies that do not pay their taxes destroy fair competition and undermine honest business practices.

Improving the quality of management will not only increase fiscal revenues, but also create reserves to reduce the existing tax burden on honest businesses. I believe that the fundamental approaches to the development of our tax system must be reflected in the budget strategy.

There is another very important, high-priority issue. It is imperative that we decide on the development strategy for our pension system, with long-term sources for financing it – this is an issue that concerns and interests nearly all of Russia’s citizens. It is certainly important for us to secure the interests of our current and future retirees, to guarantee the reliability and stability of the pension system for years ahead, taking into account long-term demographic trends. I request the Cabinet to submit suggestions on the development parameters for our pension system. They must be taken into account when preparing the budget for the next three years.

Now, as far as the intergovernmental budgetary relations system is concerned, the basic approach here should involve designing efficient, real incentives for regions and municipalities to broaden their own revenue base for developing the regional economy.

We must complete work on delineating powers between different levels of government authority soon as the work has been quite drawn out. I fully understand that it is a complicated issue – I worked on it for many years myself – but it also needs to be completed. The agreed powers must be ensured by stable income sources, including by eliminating tax breaks that were established at the federal level. Please note that if maintaining a particular tax break is recognised to be practical, then we should devise a mechanism for compensating the resulting lost income in the regional and local budgets.

For their part, the federal constituent entities and local governments must adhere to strict financial discipline, including by shifting to programme principles in forming their budgets, eliminating ineffective expenditures, and clearly determining priorities, the most important of which should become increasing salaries for specialists working in the public sector, similarly to how it is done at the federal level.

Today, in spite of measures that have already been passed, public sector salaries are still lower than in the business sector, and sometimes, they are barely above the minimum living wage, which is absolutely unacceptable. In addition, the quality of public services does not satisfy the people despite the fact that allocations for public programmes are increasing every year.

Thus, an important goal is to radically increase efficiency in the use of funding allocated by the government toward education, healthcare, social services and culture. We are moving away from the principle of estimation for financing state-funded institutions, thereby strengthening their commitment to the final results of their work. The entire necessary legal framework for this has already essentially been prepared. The Cabinet should constantly monitor the practical implementation of new mechanisms for financing state-funded institutions at the federal and local levels.

Our next task is to change over to an effective labour contract which must clearly specify the conditions of employees’ labour compensation and social benefits, depending on the quality and scope of their performance. Implementing an effective contract will help to increase salaries for doctors, scientists, educators, cultural workers and social service employees. Naturally, such a mechanism will permit the government to be competitive as an employer on regional labour markets.

Certainly, the transfer to an effective labour contract must be harmonised with structural changes in the social services. By the end of 2012, the Government must approve concrete roadmaps for these changes over the next six years. You and I fully understand that this is one of the most sensitive and complicated issues. It is up to the Cabinet to navigate this path.

Let me stress that the principle of equal opportunities for private, public, and municipal institutions must lie at the foundation of our steps. We need real competition in the public sector, including for budgetary funds. If a private institution is ready and able to provide a public service for the same amount of money but at a higher level of quality than public institutions, then that is where we must contract that service. It is the state’s obligation to allocate funds and pay for guaranteed services, but it is an individual’s right to select the institution where he or she can receive those free, guaranteed, high-quality state services.

I repeat again, the new principles for public sector financing do not in any way abolish people’s right to free education, healthcare, and social assistance. I demand all of the political forces not to speculate on this subject.

In conclusion, I will note a few key issues. We should ensure greater transparency and openness in the budget and the budgetary process to the public. In order to increase the efficacy of public monitoring, it is imperative to implement the Electronic Budget data system, which will make the budget and the budgetary process at the federal level more transparent. In the future, I suggest that we set up a common portal for all of Russia’s budget system and, with its help, grant constant public access to information on the execution of budgets at all levels.

We believe that society must receive full and objective information on the efficacy and quantity of government resources being used.

Now I suggest that we have a substantive discussion on the specific steps to implement our budget policy for the upcoming three years. I know the Government plans to examine the budget parameters for the next year at one of its upcoming meetings, so I request you keep me updated on how preparations are going, how smoothly you are able to cooperate with the Russian parliament, the State Duma. Thank you.

Please, go ahead.

Finance Minister Anton Siluanov: Mr President, colleagues,

It is true that the Cabinet held a Budget Commission meeting this week, where we looked into the main parameters within the draft budget for 2013–2015.

The budget and its parameters were put together taking into account budgetary rules. The parameters are quite strict, but we think that it simply cannot be otherwise given the conditions of instability and turbulence. Thus, the most important goal today is to design adequate mechanisms to be employed in case an unforeseen situation occurs. And, Mr President, as you noted in your Budget Address, in our work on the draft budget for the next year, we are to set up back up mechanisms. I think that they can be the same as this year; in other words, we can reserve some of the funds, without allocating them to the corresponding ministries and agencies, and if required, have the opportunity to use them to implement social support measures for citizens, measures for providing assistance to core businesses, financial institutions and so on.

Today, in our view, we are facing the challenge of drafting the necessary regulatory and legal acts to resolve a range of key issues on budget optimisation, on consolidation, and on implementing the reforms that are outlined by the Government of the Russian Federation. This includes intensifying the principles of providing targeted social assistance, delaying some decisions in the event that the Government finds them ineffective, and implementing different principles for increasing the efficacy of budget expenditures.

Indeed, as stated in the Budget Address, money must be provided for reforms. We think that we simply cannot act otherwise, therefore one of the main priorities for ministries and agencies will be to prepare these reforms quickly, making the necessary decisions within the Government to implement those reforms, including within the framework of preparing the draft budget for 2013–2015.

Thank you.

Vladimir Putin: Thank you.

Mr Belousov, please go ahead.

Economic Development Minister Andrei Belousov: Mr President,

The goals set out in the Budget Address will certainly require a sharp increase in the efficacy of our efforts, and not just in preparing and executing the budget, but also in management. After all, we are basically talking about simultaneously ensuring the implementation of four very important systemic priorities.

The first is to resolve social challenges, including modernising and reforming public sectors (healthcare, education, the pension system), while increasing salaries for people employed in public institutions to meet the parameters set in the executive orders of the President of the Russian Federation.

The second is to solve problems in accelerating economic growth. I would like to note that during this half of the year, we have grown ahead of the projections approved by the Government of the Russian Federation. In the first quarter, GDP grew by 4.9 percent, and this quarter, growth is at about 4 percent. But this is absolutely not enough to increase labour productivity 1.5-fold by 2018 and accumulate financial resources for accomplishing our tasks, including public sector reforms.

To do this, we have to have at least 5 percent growth, or better yet, something closer to 6 percent. In particular, this challenge entails the elimination of infrastructure limitations. I should note that in many areas, including transport, our infrastructural limitations are not eased. On the contrary, they are becoming tighter, due in part to the funding shortfalls that were result of objective circumstances of the crisis situation in 2008, 2009, and 2010.

The third is to resolve national defence matters, including those pertaining to implementing the state armament programme and increasing monetary compensation for military service members and military pensions.

The fourth priority is to support budgetary balance and reduce the possible deficit which may be caused by teh oil and gas prices drop. No doubt, such potential deficit of over 10 percent of GDP as of today, poses inadmissible risks for the Russian economy. Our goal is to reduce it to 7–8 percent in the next few years while in the future to reach a level of about 5 percent, which we and international organisations see as a relatively safe level.

Resolving all four of these priorities concurrently would be an unprecedented challenge in scale never accomplished in other nations, and moreover, it will certainly require making a rather radical budget manoeuvre and seriously restructuring budget expenditures, while simultaneously increasing the efficacy of those expenditures. In this regard, I would like to draw attention to the fact that state programmes should become the main instrument for accomplishing this manoeuvre.

As you know, we are preparing 41 state programmes. This year, the Government of the Russian Federation will approve 18 such programmes, including programmes with a major impact on the budget, such as developing the transport system, aviation, and many others. It is precisely these programmes that should become the main, most efficient instrument for strategic management and guarantee that the use of budgetary funds is concentrated on the most important, high-priority goals of thr national socioeconomic development.

I should say that for the state programmes to be successful, in our view, there should be drafted and approved detailed three-year plans of action on the implementation of each such programme. Today, unfortunately, most state programmes do not contain concrete actions while they include fairly large sets of challenges. This is justified, because our programmes are long-term, through 2020, but we believe that for the three year period, it is imperative to have a detailed plan, a roadmap if you will, for implementing those programmes, which would identify specific provisional targets while at the same time fit within the specified budgetary allocations. Indeed, this is to become the main instrument for strategic management.

I would like to stress that these plans must be strictly tied to financial resources, the allocated budgetary funds and funds obtained via extra-budgetary sources. In order for us to be able to comply with the budget process, I believe such action plans must be developed no later than the first quarter of 2013.

Thank you.

Vladimir Putin: Thank you very much.

Mr Medvedev and I were just discussing the possibility of launching back-up mechanisms for the second half of the year, similarly to how it was done at the beginning of this year. I will not object to this approach, assuming that the fundamental issues of employing this mechanism are an exclusive competence of the Prime Minister. And the volumes must be the same as at the beginning of this year, 2012. But I suggest that we discuss this in more detail either all together or in a more restricted format.

Thank you.