The improvement in public finances sincelast year, coupled with buoyant revenue due to the commodityprice recovery, has led to growing pressures for increasedgovernment spending. Recently approved budget amendmentsenvisage a 4.5 percent of gross domestic product (GDP)increase in spending on the originally approved 2010 budget,while the Mid-Term Budget Framework (MTBF) for 2011-2013projects another 12.1 percent of GDP increase in spending in2011. The main driver for the increases is the execution ofpromises made by both coalition parties to distributemonthly percentage rate, or MNT 1.5million (around US$1000)to each citizen in the form of cash and non-cash handoutsand large public sector wage increases planned for Octoberof this year. If these public spending plans materialize,they will set the stage for a renewed bout of high inflationand a possible return to the macroeconomic vulnerabilitycharacteristic of the boom-and-bust cycle of the recentpast. In the real sector, the impact of increasing inflationis evidenced through a decline in real wages. The latestinformal wage survey indicates that on average,workers' nominal wages have increased by about 10percent from January 2010 to June 2010; this is because ofan increase in job opportunities in the construction sector.Real wages, however, have declined on average due to thesignificant increase in the consumer price index.
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