By Darya Korsunskaya and Douglas Busvine
MOSCOW (Reuters) - Russia cannot afford to keep raising state spending, President Vladimir Putin said on Thursday, but it must find the money to fulfill the social commitments he made on his return to the Kremlin last year.
Putin, in an annual presentation of the government's three-year budget plan, said that "the possibility of constantly and quickly raising state spending has been exhausted."
The 60-year-old leader won a third presidential term last year with the help of aggressive pre-election spending hikes.
But a slowing economy and falling prices for oil - Russia's main export earner - are now squeezing the public finances, while foreign capital continues to flow out of the country.
The set-piece event offered Putin a chance to persuade investors, who have been selling stocks, bonds and the rouble, that he has a credible development plan after an election season marked by rising urban discontent in Russia.
But Alfa Bank chief economist Natalya Orlova said Putin failed to give much detail on how he would manage trade-offs between investment and social spending. Nor did he outline key targets.
"I am missing an understanding of where they want to prioritize and what costs they are willing to accept," she said.
Russian stocks hit new one-year lows on Thursday while the rouble picked up after an emerging markets sell-off, propped up by central bank interventions aimed at dampening sharp market moves.
The 10-year treasury bond firmed slightly, but its yield has risen by nearly a full percentage point to 7.46 percent over the past month amid concerns over when the U.S. Federal Reserve will start to withdraw monetary stimulus.
Outflows of capital, and its increasing cost, have raised concerns that Russia's $2 trillion economy may not pull out of a soft patch. Growth slowed to just 1.6 percent in the first quarter, less than half last year's outturn.
GROWTH AND DEVELOPMENT
Putin has accused the government of being slow to implement a string of decrees he issued on taking office in May 2012 to hike public sector pay, social benefits and regional development programs. Three ministers have since lost their jobs.
"It is necessary to optimize the budget's structure, to find reserves and to redirect them towards the strategic tasks spelt out in the decrees," Putin told senior officials.
"We should increase the share of spending on projects that have the greatest impact on economic growth and social development."
Putin said he would not backtrack on plans to spend more than $700 billion to re-equip Russia's armed forces through 2020. "We adopted this program," he said. "We need to fulfill it, but fulfill it effectively."
That is likely to put strain on a so-called fiscal rule, designed to restrict new borrowing, that Moscow introduced only last year.
"If you don't want to violate the fiscal rule, then you must be ready to shift military spending to health and education," said Ivan Tchakarov, Russia economist at Renaissance Capital. "This is not consistent."
The three-year fiscal package to be proposed by Finance Minister Anton Siluanov foresees Russia running a budget deficit until at least 2016, breaking Putin's pre-election promise to balance the books by 2015.
Factoring in higher spending, the oil price at which the federal budget would balance has risen to $115 per barrel. That is above the $103 at which Brent crude, the benchmark grade used in European markets, currently trades.
Putin has expressed concern over the outlook for Russia's $2 trillion economy, saying this week that forecast growth of 2.4 percent this year was below the level needed for stable development.
Putin ramped up federal spending by 17.8 percent last year but under the government's current fiscal targets outlays will grow by just 3.8 percent this year. The new spending package is due to go before parliament this autumn.
(Reporting by Darya Korsunskaya; Writing by Douglas Busvine; Editing by Steve Gutterman and Hugh Lawson)