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Analysis & Opinion
30.12.08 Year Of The Deficit
By Dmitry Babich

Out of many dangers facing the Russian economy in the coming year, a sharp decrease in the amount of taxes collected may be one of the gravest, since the majority of the country’s population is dependent on payments from the state budget. Experts believe the government will have to relinquish its cherished record of balanced budgets.

In December, the Kommersant daily published alarming statistics on the losses the federal budget could incur from a dramatic fall in tax revenues in November 2008. Citing the Russian Ministry of Finance as its source, the daily reported that the Federal Tax Service collected almost 50 percent less in taxes in November than in October.

Contributions from the Federal Customs Service also fell 25 percent short of the previous month’s level. If in October 2008 the federal budget received 937 billion rubles ($34.7 billion) in tax revenues, in November that figure was just 571 billion rubles ($21.15 billion). This is an alarming situation for a country where 109 million people out of 144 million are highly dependent on payments from the federal or local budgets.

The negative trends in tax collection may be offset for the moment by the overall positive statistics for the year 2008, where the period between January 2008 and November 2008 brought in a surplus of 2 trillion, 485 billion rubles ($92 billion). However, November alone brought a deficit of 298.76 billion rubles ($11 billion) and there is no reason to believe that the situation will improve in 2009.

“In the year 2009 Russia for the first time in 10 years will have a budget with a deficit planned in advance,” the Vedomosti daily reported, quoting an unnamed government official who predicted the deficit would be at the level of 5 percent of Russia’s GDP in 2009. According to another unnamed official from the ministry of economic development, also quoted by Vedomosti, next year the federal budget may not get 32 percent of its expected income. That means it will get 3.5 trillion rubles less than expected, and only 1.2 -1.5 trillion from these losses will be due to the fall in the oil and gas prices. The other 2.0-2.2 trillion will be due to the expected decrease in business activity that may have a negative impact on revenues from value-added tax (VAT) and income tax.

Federal Tax Service statistics reveal that sharp drops in the collection of these two “systemic” taxes are mainly responsible for the budget deficits of the last two months. In November 2008, income tax netted the federal and regional budgets just 50.3 billion rubles. In October that figure was 5 times bigger – 282 billion rubles, and a year ago, in November 2007, it was three times bigger – 147.6 billion rubles. The situation with VAT is not much better. In November it was 29.2 billion rubles, while the October 2008 catch was 157 billion rubles and in November 2007 it was 115 billion.

“Whatever the government says, we are witnessing a serious contraction of demand and, as a consequence, a drop in production,” said Anton Danilov-Danilyan, the head of the expert council of Delovaya Rossiya (Business Russia), an organization representing Russia’s small and medium-sized businesses. In Danilov-Danilyan’s opinion, drops in VAT revenues can be explained by a drop in the number of business deals signed, while one of the reasons for the contraction of income tax lies in mass layoffs and reduced salaries. In Russia, salaries are the main source not only of income tax, but also of the unified social tax responsible for the financing of the pension system and other kinds of social aid.

The Russian ministry of finance quickly drew up a revised macroeconomic forecast for the year 2009, which will be used to draw up a revised budget. According to the new forecast, oil prices will fluctuate around $50 per barrel, Russia’s GDP will grow by 2.4 percent and industrial production will fall by 3.2 percent. This scenario, however, is based on a rather optimistic forecast of the dynamics of the oil prices. If prices drop to $30 per barrel, Russia may be forced to spend its famously huge stabilization fund in just one year, according to the estimates of Yulia Tseplyaeva, the chief economist for Russia and the CIS at Merrill Lynch.

However, even if the “optimistic” scenario of the finance ministry proves right, budget spending will still have to be cut by at least 8 percent.

“This may mean that Russia will not be able to alleviate the pain from growing unemployment by giving people low-paid jobs in the budget sector,” explained Alexander Yakuba, a researcher at the Moscow-based Institute of Demography, Migration and Regional Development. “In the 1990s it was a Russian way of absorbing the unneeded workforce. The number of all sorts of clerks, servicemen and inspectors has increased manifold since the Soviet period. With a budget deficit, this cannot be done any more.”
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