Cash in place of benefits

The abolition of benefits in kind and their replacement with cash compensation is currently the most discussed socio-economic issue in Russia. The offensive against the social benefit system, which was established in Soviet times and expanded during perestroika and the early 1990s, is not anything new; the Russian government launched it a few years ago. But at that time the campaign was only half-hearted and did not go beyond statements that benefits needed to be cut and, in the longer term, ended altogether. A decision was evidently taken to prepare the population for the unpopular reform in advance and over some years.

However, the government recently tabled a raft of bills in the lower house of parliament. Ministers intend to abolish most benefits in kind from 2005 and pay cash compensation instead, while 2006 has been fixed as the deadline for removing every provision for benefits in the budget. The very term - benefits - is set to disappear.

The caution ministers have displayed is understandable, as this is a highly sensitive issue. More than 30 million people, over a third of Russia's adult population, receive benefits. Other estimates put the figure at half the adult population. Millions pay only 50% of their communal and telephone bills, while millions of pensioners do not have to pay for medical care or public transport. Soldiers, law-enforcement officers and civil servants also enjoy a multitude of benefits... The total amount of benefits in kind the state provides comes to a staggering two trillion roubles (about 30 billion dollars), which is comparable with all federal budget revenues.

In explaining its unpopular plans to the population, the government says that the current system is unfair. There is an element of truth in this: rural pensioners in distant regions, for example, cannot enjoy either lower telephone bills or free public transport for the simple reason that they occasionally have access to neither a telephone or a bus. Likewise, no sober-minded person in the country can explain why such far from hard-up sections of the population as prosecutors, judges or civil servants have the right to travel for free and pay only 50% of their telephone bills.

But there is another aspect to the issue, which is highly significant for the government. The benefit system, in terms of the budget and the economy, is not only unjust, but also non-transparent, inefficient and far from market friendly. It distorts the real economic picture. With the present system, it is impossible to calculate and track how many benefits were used and by whom within a period of time, which departments should pay for them and to what extent, and whether the intended benefit reached or missed the target person. And so on and so forth.

The government's plans have certainly given those who receive benefits a real scare, especially when ministers made the preliminary cash compensation figures public. The former feared they would be stripped of their benefits and receive no money. But then the government did some backpedalling and started saying that claimants would be given a choice between cash and benefits. Following a public discussion, the bill was updated and the compensation payments were increased three- or four-fold, but now most benefit-related budget obligations have been shifted to the regions. The bill also provided for indexing cash compensations in line with inflation.

The upshot is that society has now got used to the idea that the benefit reform is inevitable and today is discussing the best models for it. So it can be said that things have started moving and there will be no going back. The reform may last two years, which today's plans stipulate, or even ten, which may be the case after Parliament debates the bill. Whatever the outcome, the reform is here to stay.

Political analysts forecast that Vladimir Putin would use the beginningof his second term to enact unpopular but economically essential measures. The benefit reform is an example of an extremely unpopular measure.

The population has so far been surprisingly calm in accepting these plans in general. If the government can hit on the least painful way to convert benefits into cash payments, and make the compensation sum as decently large as possible, then one might well be able to conclude that a leader the population trusts is in a position to put through the most unpopular reforms in Russia.