The State Duma failed Friday to pass the first reading of the tough 1995 budget, setting off what promises to be a full-scale battle with the government.


The vote came one day before President Boris Yeltsin was to chair a government meeting to discuss an Economics Ministry forecast stating that Russia faces a stark choice between stagnation or progress, based on a tight budget.


Friday was the first day of the budget debate in the Duma, the lower house of the parliament, but most factions had already made it known that they were extremely dissatisfied with the government's budget proposal and that they would not settle for cosmetic changes.


Despite a confident performance by Finance Minister Vladimir Panskov, making his first appearance before the Duma, deputies refused to approve even the basic concept of next year's budget. Instead, they voted 227-57 to form a conciliatory commission of government and told Duma representatives to come up with a more acceptable proposal by Dec. 10.


Deputies said they expected the commission to make major alterations in revenue figures and ways of covering the deficit.


Panskov, who indirectly acknowledged that the budget was not perfect, and other cabinet ministers showed their willingness to compromise on some points of contention.


"If it's just a matter of some money lacking here and there, that can be resolved in the process of discussion," Panskov said.


Even First Deputy Prime Minister Anatoly Chubais, known for his tough reformist views, told reporters he was not concerned that the budget may be buried.


"A healthy solution can always be found," he said. But this conciliatory spirit was belied by the Economics Ministry's forecast, published by the official newspaper Rossiiskiye Vesti ahead of Saturday's meeting on the economy. It called the proposed budget, with its rejection of inflationary Central Bank credits to cover the deficit, "the key" to economic stabilization.


Duma deputies indicated, however, they would not be satisfied with vague promises of concessions. Many, including the pro-reform Budget Committee chairman Mikhail Zadornov, said some things about the budget proposal were fundamentally wrong.


Zadornov said the current ruble exchange rate of 3,200 to the dollar, on which the budget relied, would be impossible to maintain through next year. He added that the budget proposal did not take into account more than 13 trillion rubles ($40 billion) in government debts carried over from 1994. The government expects to spend only about 70 percent of the current budget by the end of the year because of lack of revenue.


Apart from these drawbacks, Zadornov said the budget was unrealistic in its assumption that the deficit would be as low as 7 percent of gross domestic product and that it can be covered with foreign loans and sales of government bonds. "It's an inertia budget," he said, adding that the government was expecting results without trying to change fundamental things.


The Duma last week rejected a key government taxation proposal that ministers have said would increase tax collection and bring in extra revenues. A conciliatory commission is working on a compromise version now.


Panskov, whose attitude to the budget is lukewarm, openly criticized the tax proposal Friday, saying there were "some flaws in it that have to be worked on." He acknowledged that the budget was not perfect, but said it fit the situation.


"Like in any Russian family, there is not enough money," the finance minister said. "We would like to increase spending on defense and agriculture, but there's simply no money."


However, conservative deputies would have none of that.


"The Agrarian Party faction believes that there is no political and economic justification to the part of the budget that deals with agriculture," thundered Gennady Kulik, deputy head of the budget committee. "The only argument in favor of it that I keep hearing is that there's no money. Well, that's no argument to me."