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Vladimir Putin:

Good afternoon,

The state of finances is the most accurate reflection of the state of the economy and the social sphere in Russia. The budget is in fact the essence and substance of the main elements of the government policy.

The Finance Ministry of course has the key role to play: it is responsible for a coherent financial, budget, tax and currency policy and ultimately for the results of that policy. The performance of your ministry has a direct impact on the entire economy and goes a long way to determining the effective work of the Government.

That is why I would agree with the Minister and suggest that we have a totally frank discussion of the problems that worry your agency and the country as a whole.

Work is under way to draft the federal budget for the following year. It should be a no-deficit budget. Why it has to be that you know better than anyone. Besides this, in forming the budget financing priorities should be adhered to, and not forgetting what we were saying last year, I would like to name the social sphere, national security, and support for education and science in Russia as the priorities.

This year special attention needs to be paid to the reform of the judiciary and reform of the civil service. We should not allow “windfall” profits to be used to plug all sorts of financial holes. We should at last put an end to the situation when every year we are hostages to world energy prices.

Ensuring maximum protection of the federal budget and the entire economy against the impact of external factors is a fundamental issue. The President’s Address to the Federal Assembly envisaged a budget consisting of two parts. The first part would proceed from a worst-case assessment of the price of our export commodities, especially traditional commodities. The second part would be formed from additional revenue, also mainly export revenue.

I would like to dwell on other tasks and problems. One that is becoming increasingly apparent is the rate of inflation. In the first quarter it was twice the rate envisaged in the budget. Inflation is beginning to eat into our revenues and is emerging as a major threat to economic growth. We have to make active use of budget instruments and put a stop to the increase of ineffective spending.

To be sure, not everything depends on the Finance Ministry, much depends on the entire economic unit of the Government, but much is in your hands. I would like to stress that the effectiveness of budgetary policy is measured not only in terms of formal compliance with individual federal budget items, but in terms of concrete achievements in the social sphere and in the economy as a whole. Figures must be backed by results.

Tax reform is another challenge. Our aim is the same: well considered and consistent reduction of the tax burden. But we should be aware that tax reduction is not an end in itself, it should help above all those who honestly pay taxes and who seek to develop production.

What has been done in the course of tax reform so far shows that for the first time in many years the Government is pursuing not just fiscal goals but seeks to encourage business activity in the country. At long last we have moved from words to deeds. Conditions are being created for increased federal budget revenue from the development of entrepreneurship and not simply from collecting more taxes, although that too is a priority.

Income tax collection, and you know that a flat 13% rate has been fixed, has increased by nearly 70% on the first quarter of last year. I don’t think any one among those present had expected such a result, including the Government. On the whole, tax collection in real terms has increased by 30–40%.

Liberalisation of customs was a substantial factor in increasing tax collection. The Chairman of the State Customs Committee may have more accurate figures, but on the whole we collected 30% more in the first quarter than in the same period of last year. That is a tangible result.

I would like you to pay attention to the need to upgrade the quality of the documents, especially the laws, which are being prepared in this sphere. Poor, inferior legislation is the root of many problems. We should seek to make laws self-implementing, with a well-thought-out and very clear mechanism of implementation. We cannot tolerate norms that lend themselves to different interpretations or refer you to other norms.

Next, I would like to stress the need to improve inter-budgetary relations and ensure and sustain a balance between the budgets of all levels. The current system of delimitation of tax and budgetary powers has met with criticism from regional and local authorities. This year we rank the delimitation of powers between the regions of the Federation, between the municipal and federal levels of government as an internal policy priority.

We know that the substance of all these processes lies in the budgetary sphere. Many still believe that the federal budget collects the high revenue taxes while leaving it to the regions to collect the taxes that are difficult to collect. The ratio of tax revenues between different levels of the budgetary system has also come under critical fire. We must complete the formation of a coherent system of financial support for the regions in short order, and it is important to separate the powers of expenditure and tax raising and to ensure that this principle is strictly observed.

For example, in 1999 arrears of the regional budgets on payments to the federal budget of taxes such as VAT, excise, land tax and land rent and rent for subsoil resources amounted to 10.4 billion roubles. The measures taken by the Federal Treasury last year have gone some way to rectifying the situation. Today the distribution of taxes between budgets is by and large in compliance with the norms. The regions are satisfied that the Federal Government is consistently committed to upholding federal law, and we have partly solved that task.

But on the other hand, we should see how to increase the revenue base of regional and local budgets. All these matters should be taken into account in preparing the programmes for development of the federal budget in the period till 2005. Hyper-centralisation, including in the financial sphere, is not our goal: municipal and regional revenues must be sufficient to fulfill the tasks and functions that these authorities have.

And the last and very important area is the management of the national debt. That strategy remains a key element of our budgetary policy. We should seek to reduce our debt, to improve its structure and reduce the cost of servicing it. To this end it is necessary to put in place a single system for managing the national debt, while being very careful about incurring new debts and new obligations.

Many different approaches and ideas have been proposed but a buildup of debts cannot be the main policy in this sphere. So, substantial changes will need to be introduced in the regulatory documents, and we must take advantage of the changes in international practice and market mechanisms.

In conclusion I would like to say a few words about the principles of the work of the Finance Ministry. The Finance Ministry is inherently a fairly conservative agency, which is not bad for the stability of the country. But I nonetheless call on ministry officials to look at the innovations and reform projects proposed by other agencies not only in terms of today and in terms of the departmental agenda, but from a broader, national, point of view. Sometimes what looks like a loss today may later translate itself into significant gains for the country. I am sure that the ministry staff are capable of making such calculations.

Colleagues, the tasks that have been set are not strictly professional. Of course the Finance Ministry is called upon to tackle them jointly with other agencies, especially those which form the Government’s economic unit. But we should understand that the state of the federal budget and the state of finances is the underpinning not only of social and economic, but also of political life in the country. It is an indicator, a diagnosis and a forecast of the development of society and the state and ultimately, it is the basis of our national progress.

I would like to congratulate you on the completion of repairs to your building, to thank you for your performance last year and to wish you success in the current year.

Thank you.