Russia's government has reached a consensus that spending cuts, not higher taxes, are the best way to stabilise government finances hit by low oil prices, Deputy Prime Minister Arkady Dvorkovich said yesterday. "Over two years our expenditure will be in line with the new equilibrium (oil price) level," he told the Reuters Russia Investment Summit. "We will have to be more tough in several areas."

Russia is basing its budget on the assumption that the oil price will stay at around $50 and wants to avoid running large deficits at this level, he said. Russia is searching for ways to fill a budget hole caused by the plunge in world prices of oil, Russia's major export and a crucial source of tax revenues.

The Finance Ministry recently proposed raising an extraction tax on oil companies and is considering other taxes, but Dvorkovich said there was only limited scope for such revenue-boosting measures.

"Various tax innovations are being discussed, but we've said we will do this carefully so as not to allow a contraction in the oil and gas industry." Dvorkovich said at the Summit, held at the Reuters office in Moscow. "With regard to taxes, there's little you can do here as it will have a negative effect and reduce the tax base even more."

Dvorkovich is a pro-market economist long opposed to higher taxes. However, several government departments are resisting cuts to major areas such as social security and defence.

Dvorkovich said that state investment programmes would bear the brunt of cuts to begin with, but discussion is also turning to sensitive social areas such as pensions. There is a debate inside the government about raising the retirement age to save money, though no decision has been taken.

"Earlier the retirement age was practically not discussed, and now it is very actively being discussed," he said. He said there would be inevitably a delay before these discussions led to concrete reforms, as hasty decisions would be counter-productive. "If one is talking about the pension system, healthcare, education - these themes are much more sensitive, more complicated, than (industrial) sector themes," he said. "All the same they are being discussed at the highest level."