Eyewatering budget cost of Putin's spending pledges detailed by Rosbank report

Eyewatering budget cost of Putin's spending pledges detailed by Rosbank report
Putin made some big spending promises in his State of the Nation speech. / Krmelin.ru
By Ben Aris in Berlin March 22, 2018

The cost of the economic reforms announced by president Vladimir Putin during his controversial State of the Nation speech amounts to some RUB20.5 trillion ($355bn), a figure that is in excess of this year’s entire budget spending plan, according to a report released by Rosbank on March 22.

Putin laid out a long shopping list of social spending initiatives that economists say will be hard to fulfill given the reduced budget revenues.

The additional cost of the largely social spending and large infrastructure projects outlined in Putin’s speech would be RUB20.5bn in the period of 2018-2024, according to Rosbank's estimates.

That is significantly more than the RUB16 trillion of budget spending in this year’s budget plan, but of course this spending will be spread out over Putin’s next six-year term. However, economists say they have no idea how the state will finance the additional spending. Putin himself said almost nothing on the subject of funding the spending other than to suggest the government must become more efficient at collecting taxes and cutting the more wasteful spending.

The obvious gap between the promises and the reality have led to growing speculation that now the presidential elections are over and done with Putin will use his last term in office to finally hike people's taxes. When Putin took office in 2000 the first thing he did was to impose a flat tax regime at rates which are amongst the lowest in Europe. An enormously popular and successful reform, the Kremlin has been loathe to touch the basic rates of tax – there is a 13% income tax and a 23% corporate profit tax – ever since, although more recently it has been eating away at exemptions at the margin to boost revenues and cracking down on the most obvious scams.

"If the new approaches are deemed fair, if there is consensus in the society, then it really makes sense. I do not see anything wrong with it, we have lived with a 13% tax long enough and if an additional 2% is used, for example for health care, this will definitely be a plus," Russian Deputy Prime Minister Arkady Dvorkovich said on March 22.

Nothing is expected to change until after Putin’s inauguration in May, but Moscow is abuzz with talk of a large-scale government shake-up that could see Russian prime minister Dmitry Medvedev replaced as well as a change in basic tax rates and other measures. Only days after Putin secured re-election the government met and reportedly opened the discussion of hiking taxes on the population.

The fair and stimulating tax system promised by Putin in a message to the Federal Assembly, “may mean a sharp increase in the burden on the population,” according to Prime Minister Dmitry Medvedev who met with government leaders to discuss changes in taxes on March 21. Medvedev did not disclose the results of the meeting, but did acknowledge that the tax system still needs “adjustment.”

Some of the ideas on the table that have been discussed before include: raising personal income tax, introducing a sales tax, abolishing VAT benefits for social goods, raising VAT and reducing social insurance contributions. 

Even if the sum is large and the funding sources are obscure, the actual plan, if even partially fulfilled, could be transformative. Of the RUB20.5 trillion of new spending, RUB8.4 trillion is to go on developing social and transport infrastructure, while there is RUB5.2 trillion earmarked for health care, RUB3.6 trillion for education and RUB3.4 trillion for improving the demographic situation, according to Rosbank's report entitled "Russia after the elections" and prepared by Rosbank economists Evgeny Koshelev and Anna Zaigrina.

The Rosbank team estimate the funding will increase the total government spending to 34% of GDP and that one possible scenario for funding it out of existing revenues could come at the expense of reducing social spending by RUB7.8 trillion, defence spending by RUB6 trillion, an increase in tax revenues by RUB4 trillion and an increase in the non-raw-material tax base by 2.5-3% annually to produce another RUB4 trillion over six years.

However, the most promising source of funds is a weakening of the so-called budget rule (siphoning off less excess money earned from oil exports to the reserve fund), which could add an additional RUB2.7 trillion to the funds available to spend.

The budget rule is currently invoked after oil prices rise above $40 and the annual indexation by 2%, but the cut-off price can be increased, as the head of the Centre for Strategic Research Alexey Kudrin has previously suggested. The economists say that with an increase in the cut-off price to $45 per barrel and a ruble/dollar exchange rate of 64.7 it would be possible to release an extra $525bn into an economy currently worth $1.2 trillion in dollar terms.

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