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Moscow | March 19, 2004
Speech at a joint meeting of the Finance Ministry and Economic Development and Trade Ministry colleges

President Vladimir Putin:

Good afternoon, dear colleagues.

Today’s meeting is the first since the government’s major reorganisation. I hope this reorganisation will help make all of our work more effective. I would also ask you to make all the necessary amendments to laws, rules and regulations as quickly as possible, including those concerning the activities of your ministries’ territorial subdivisions.

As the Prime Minister just said, the administrative reform that we are carrying out is not an end into itself. Rather, it is a means by which we can achieve the priority economic and social goals we have set.

Let’s look more closely at these goals, for your ministries are to play a leading part in their achievement.

We had some good economic results last year. The gross domestic product increased by 72 percent. Inflation did not exceed our forecasts. The Russian stock market’s capitalisation –a very important indicator – reached what for this point and time in Russia’s development is a good level of $250 billion.

But though Russia’s share in world GDP grew somewhat, it is still very small. We cannot be satisfied with the growth rate we have, or with the structure of our economy. It is clear that we need to find ways of ensuring intensive and quality economic growth and recovery, ways that will enable us to reach such objectives as considerably increasing our GDP and rapidly reducing the scale of poverty in our country. What we need is to improve living standards and quality of life for our people.

What should we, in my opinion, focus on first?

First, we need not just to maintain the current positive macroeconomic trends but also to give them a more solid base. We need to make consistent effort to bring down inflation by maintaining a stable exchange rate and paving the way for a fully convertible rouble. I want to express my thanks for the work you have done over the last years. Together with the Central Bank, you have been up to this task.

I also want to draw your attention to the following issue. A competent macroeconomic policy remains one of the state’s most important regulatory functions. But, as we have said on many occasions in the past, the amount of direct administrative intervention in the economy must be reduced. Despite all the steps that have been taken to cut back bureaucracy in the economy, there is still too much intervention. We also need to optimise the amount of state-owned property. In any event, state-owned property should not exist simply to be a source of prosperity for the people running it in the state’s name. I want to say once again that the state should manage only the property it needs to carry out its public functions, ensure state power and guarantee the country’s security and defence capacity.

Second, it is clear that only a diversified and all-round developed economy can be viable in the long term. We need to do away with outdated and uncompetitive businesses and create an economic environment that is open to innovation and new technologies, an environment that will enable Russia to take a fitting place on the global market.

The federal budget should be one of the basic instruments of modernisation, and so it should be based itself on the country’s long-term development priorities. It is not the development objectives that should be made to fit the numbers, but the numbers that should be based on the development objectives.

Serious work needs to be done on reforming the whole public sector. The state can guarantee its commitments only if there is a balanced budget system. This is important, including for drawing up an effective social policy, a policy that, of course, will also become an effective economic growth factor.

As we have also discussed in the past, it is clear that we need a fair benefits system instead of one that is vague and does not target specific needs. Many people have seen no benefits and no support for years, after all. State support should target those who genuinely need social assistance. In this respect, we also should think of a mechanism for transforming budget mandates once announced for political motives and subsequently unfulfilled, into money payments, payments of an amount suitable for these benefits and distributed in a socially fair way.

Going further, we must take tax reform through to its conclusion. Coming to a very important area of your activities, tax conditions should be equal for all companies working in the same sector. Overall, the tax system should not be a burden for businesses. Finally, it is extremely important that once the reforms are complete, the main elements of the tax system should not be reviewed for a very long time.

Tax reform is one of the instruments we have for fighting poverty. We can use the tax system to ensure that wages rise and that people are paid their wages above board. It’s very important that we encourage people to save for their pensions. But at the same time, while developing such incentives, your proposals also must ensure that the state will provide priority assistance to people with low incomes, so that we can also help resolve the other issue I mentioned – the fight against poverty. We need to provide incentives for qualified specialists to continue working after reaching retirement age. People should have the opportunity to earn themselves a pension much higher than the survival minimum. I would remind you that just a few years ago, working pensioners were not entitled to a full pension at all. Following the beginning of pension reform, this situation has changed and pensioners who worked for a year after they reached retirement age were entitled to their full pension and what amounted to a symbolic bonus of five-seven roubles a month. After 2002, this bonus increased to 45 roubles a month. Now we can take the next step and bring it up to 90-100 roubles a month.

We also need to take steps regarding reducing the single social tax. But this has to be done in a way that will strengthen and not weaken the extra-budgetary funds’ financial base so that social guarantees to the population will be met. It might seem that reducing the single social tax and strengthening the extra-budgetary funds’ finances are mutually exclusive aims, but this is only at first glance. I hope that, as specialists, you are fully aware that this is possible, and that it is therefore something we must do. We also need to complete reform of the property taxes this year.

A separate issue is the natural resource use taxes. The current system of taxes in this area does not ensure a fair and economically justified system of payments for using the country’s natural resources. I ask you to think this issue through and propose ways to improve the system in this important area, while at the same time making sure that your proposals will not undermine the energy sector’s development. Over the course of April, these proposals should be drafted, examined by the government and sent to the State Duma.

Once we have thought over and analysed the results of all these transformations, we will need to take the next step of bringing order to another problem tax – VAT.

Finally, one serious modernisation issue in the tax system is the distribution of tax revenue sources between the different levels of state power as part of the reform of inter-budgetary relations. Each level of power should have incentives to develop its own tax base.

In connection with all that has just been said, I instruct the Prime Minister to propose a comprehensive, complete and logically interlinked package of changes to the tax system and also to the legislation concerning the approval of the basic laws on division of powers.

Incidentally, I have also asked the Prime Minister and the ministers to speak in the Duma and ensure that all these issues get widely discussed in academic circles and among the general public, and this should be done without delay.

A few words on modernisation of the financial and banking-lending sectors. We must make credit resources more freely available and increase the quality of financial services, and not only for the economy, but for private individuals too. This goes above all for mortgages and education and consumer loans. But this calls for the required legislative base, legislation that would not be a burden for players in the financial markets, and that would see the main regulatory norms translated into direct legislative norms. I talked about this with the Finance Minister just yesterday. If you think, and probably with cause, that all these regulators cannot be transformed into direct laws today, then the main ones, at least, can be, and we need to do this. We also need to ensure reliable guarantees for bank deposits. The basic law on deposit insurance has already been approved and we should now move to create an effectively working deposit insurance system. I know that specialists from your ministries are now working on this problem. I ask you not to delay with this work.

Finally, we need to be very clear about the fact that sooner or later, Russian capital will face serious competition from foreign capital on our own Russian market. We must, therefore, take serious steps to speed up the process of making our banking system stronger and increasing its capitalisation.

Dear colleagues,

These are just some of the objectives that your newly reorganised ministries have on their agendas.

In conclusion, I would just like to emphasise the main thing, which is that this country needs to make real economic progress, and so we need an economic agenda that will ensure this progress. We need a new growth dynamic. But even the most ambitious goals must be based on precise calculations, realistic forecasts and on carefully and professionally planned action. The state of the economy and the state of public finances today is such that these transformations I mentioned should not be carried out at the people’s expense. On the contrary, people should feel the positive impact of the reforms, and not in the long or the medium term, but already as our decisions are being implemented.

Only by pursuing a responsible policy will we achieve real economic success and a visible improvement to the lives of our people.

Thank you for your attention and I wish you success.

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