Russian officials clash on economy’s temperature

Russia’s powerful Finance Minister Alexei Kudrin and the central bank’s First Deputy Chairman Alexei Ulyukayev both suggested last year’s rapid 8.1% economic growth rate was a sign of overheating. Economy Minister Elvira Nabiullina, a soft-spoken former scientist who replaced her flamboyant predecessor German Gref last year, dismissed the overheating argument and insisted Russia needed more growth. “We cannot afford low growth rates. The price of a slowdown for us is too high. When we face macroeconomic challenges, we cannot give up growth,” Nabiullina said at a conference. “It is important not to cool growth down by this ‘overheating’ talk. It is important not to resort to an argument over what was there first -- an egg or a chicken, growth or stability,” she added. Ulyukayev, one of the few close allies of Russia’s market reform architect Yegor Gaidar who remain in power, said the country’s natural economic growth rate was around 6%. “The overheating is not a sheer curiosity issue but a real problem faced by many economies," Ulyukayev told the conference. He suggested overheating undermined Russia’s immunity to external shocks.

TAX CUTS

Ulyukayev said Russia’s 20% investment growth was mainly funded through foreign loans, while gaps between domestic demand and production, as well as between income and labor productivity growth, were getting larger. “The government should concentrate on maintaining economic stability, more conservative fiscal and monetary policy,” Ulyukayev said. The temperature issue lies at the heart of the recent debate over whether Russia should cut taxes to boost growth. Opponents see the tax cut as a pro-cyclical move which will cost the state budget an equivalent of one year’s defense spending. “It frightens me when people say to me we need urgently to lower value added tax while we have the money, because in three years it may become clear that there aren’t such resources and we shouldn’t have lowered it,” Kudrin told the conference. The outcome of the discussion may determine the line-up of the new government to be headed by outgoing President Vladimir Putin after the inauguration of president-elect Dmitry Medvedev. Both Putin and Medvedev backed the tax cuts.

Kudrin, who strongly opposed the cuts, won time by arguing his ministry needed until August to calculate the consequences of the value added tax cut. Advocates of the cut say Russia needs growth rates of 7-8% in the next few years to achieve Putin’s goal of doubling Russia’s real gross domestic product within a decade. “I do not agree with the overheating argument. I think that economic growth needs support and cannot happen by itself. Taxes are the most powerful tool for supporting growth,” Putin’s economic adviser, Arkady Dvorkovich, told Reuters last month. “The question is: what will be the reaction of firms and individuals to the tax cuts? Will they invest more or save? Will they dodge taxes as they do now, or not?” he added. “But I believe in our people.” (Reuters)