Kudrin also reiterated his view that the crisis in the euro zone may lead to a double dip recession in the global economy, but he remained confident of the long-term viability of the single currency.
"We in Russia, base our policy on the assumption that the euro will be volatile, but will keep its significance," he said in an interview ahead of the St. Petersburg Economic Forum this weekend.
As well as lower spending, the budget situation can be improved by higher taxes on mineral extraction and increased excise duties, he said in an interview on Tuesday.
Kudrin, a fiscally prudent 10-year veteran in the minister's post, faces a tough fight to keep a lid on spending as Russia heads for parliamentary and presidential elections in 2011-12.
"We need to weigh it up. Do we want to increase spending by increasing the deficit and entering the debt market where we will compete with the private sector? Or do we want to increase taxes and again take away from the real sector?," Kudrin said.
"The effect (on the deficit) will be virtually zero ... we will take away that growth through increasing the deficit or hiking taxes."
Russia's worst recession in 15 years left the budget some 2.3 trillion rubles ($79 billion), or 5.9 percent of gross domestic product, in the red in 2009. Kudrin sees the deficit easing to 5.4 percent this year and 3.3-4.0 percent in 2011.
During the crisis Russia focused on social spending, such as raising pensions, while investment spending was curtailed in what analysts warned could delay the modernization and diversification of the natural resource-dependent economy.
Kudrin called for investment spending to be cut by 20 percent in real terms over 3-4 years to meet deficit goals.
"Our economic growth depends on lower inflation, on a stable exchange rate policy. If we do not change this, then the stimulus for growth will be several times greater than it was through state investment," Kudrin said.
For spending to be effective, Russia needs to thoroughly reform its system and increase control at every stage of the spending process, Kudrin said, adding that rash laws risked just creating more problems.
"We can see that everywhere. We are talking a lot about how the police force works, which affects our whole life, but the same is true of any state service in Russia," he said.
Russia's police have been criticized for corruption and inefficiency, with President Dmitry Medvedev firing high-ranking officials and ordering the service to clean up its act.
Russia is "comfortable" as long as the price of oil, its chief export, holds above $60 a barrel, Kudrin said. But officials are looking at other ways to boost revenues.
Proposals include reforming the mineral extraction tax, which companies pay for being allowed to extract oil, gas, metals and minerals which are officially state property.
"I agree that there is a certain potential here, first from oil, gas and metals ... From 0.5 to 1.0 percent of GDP I am ready to discuss," Kudrin said.
A similar amount of cash could be collected from higher excise duties on petrol and tobacco, he added, while the third potential source of extra cash would be changes to property taxation.
"This system has great potential, but this potential can be unwound over around four years into a more modern property tax. We are now preparing," Kudrin said.
