The President Offers the Poor a Rich Program
// Vladimir Putin Reads the Government its Duties
Economic Course
The tax board (Kommersant published a report about it on Saturday) of the Ministry of Finance and the Ministry of Economic Relations and Trade (MERT) has decided not to introduce a VAT account, not to decrease the VAT, and to decrease the unified social tax. However, it is not only memorable for this. President Vladimir Putin delivered a series of economic program statements: the number of poor had to be decreased from 20.5% to 10–15%, and economic growth of at least 7% per year had to be guaranteed in the next four years. The ruble had to be made convertible, and the issue of natural rent still had to be settled. It will not be easy to achieve these objectives, because not everything depends on the government.
Modest Tax Reform
Friday’s board meeting was officially devoted to tax reform. What were the results, or more precisely, what part of the proceedings was understandable to the ordinary citizen? For the time being, there will be no introduction of special accounts for VAT payments by companies. Earlier, company owners were very afraid of this, because it meant having to withdraw large amounts from turnover, in effect freezing them in these accounts for the convenience of the tax collectors. It is not that the board rejected the idea of the accounts; it is just that no decision was made to introduce them: the attendees neatly skirted around the issue. After the meeting ended, Minister of Finance Aleksei Kudrin noted that the introduction of VAT accounts was being postponed until at least 2006. One of the board members, an employee of the presidential administration, suggested in a conversation with Kommersant that the introduction of VAT accounts had been postponed because in Bulgaria, which in this case was an example for the Russian Ministry of Finance, this system of accounts had not resulted in any increase in VAT collection, and the Bulgarian government itself was planning to abolish the system.
There will also be no decrease in the VAT rate to compensate companies’ losses due to the accounts (Minister of Economic Development and Trade German Gref had specifically proposed this decrease). Aleksei Kudrin made it clear that there would be no rate decrease from 18 to 16% until at least 2006.
So what will change in the tax system? The base rate for the unified social tax (ESN) will decrease from 35.6 to 26% starting in 2005. It was also decided that the regressive scale of the tax would be as follows: for employee payouts of up to 300 000 rubles per year, the ESN would be collected at a rate of 26%; from 300 000 to 600 000 rubles, at 10%; and above 600 000 rubles, at 2%. Aleksei Kudrin calculated that as a result, companies would be left with an additional 280 billion rubles that could be used to increase salaries and modernize production.
A Rich Economic Program
However, citizens should not only remember the board for these rather modest tax changes. For the first time since his reelection, President Putin gave a detailed speech on economic issues at the meeting. What did he mainly talk about?
He spoke about how he was satisfied with the macroeconomic results of his previous term as president. He was satisfied with GDP growth of 7.2% in 2003, 12% annual inflation, and the increase in capitalization of the Russian stock market, which had reached $250 billion. There was a need to continue on the same lines, “successively reducing inflation, maintaining a stable exchange rate, and creating the conditions for full convertibility of the ruble.” Thus, the main buzzwords of the previous term, i.e., doubling GDP and making the ruble convertible, were still on the agenda.
At the same time, the president stressed that he would not tolerate any slowdown in economic growth or an unambitious approach by the government to planning in this matter. It had to be “a significant increase in GDP and minimum economic growth of 7%, not 5%.”
We note, however, that the question of how to achieve this significant in crease in GDP remains open. Today, the government believes that the current exceptional growth rates are mainly the result of high oil prices; German Gref, in particular, spoke about this on Friday, cautioning that these prices could fall in future. President Putin decided not to delve deeper into the prospects for oil prices and said only that, “only a diversified, diversely developed economy can be stable in the long-term outlook. We have to get rid of obsolescent and obsolete uncompetitive production facilities and create a new economic environment that is receptive to innovations and new technologies. An environment that will allow Russia to occupy a worthy place on the global market.” Some people might take this to mean that the government itself will get rid of uncompetitive facilities and introduce new technologies by some administrative decisions. Not so. As Vladimir Putin simultaneously pointed out on Friday, “As we have repeatedly discussed with you, the amount of direct government intervention in the economy must be curtailed. Today, despite all measures to debureaucratize the economy, this intervention is still excessive.” Thus, the assumption is that the government will not exert influence on business owners; they will increase competitiveness and double GDP themselves. But first, business owners might not want to do this or might be incapable of doing it (after all, companies in Western countries desperately struggle to become competitive, not always successfully). Second, what will the president and the government do in this case? As for achieving full convertibility of the ruble, that is not within the government’s competence either. Accumulating huge gold and currency reserves is not enough to achieve convertibility; high output of industrial and agricultural products that foreigners will want to buy for rubles is also needed (unlike oil, they can easily buy them for dollars). Governments do not produce anything.
Finally, Vladimir Putin made the war on poverty his economic slogan. When German Gref stated that the number of poor had to be decreased to 10–12% of the population as opposed to 20.5% in 2003, preferably within four years, the president noted: “German Oskarovich, this isn’t ‘preferable’, it has to be done.” However, this is not entirely within the government’s competence. Of course, it can increase budget payments to the poor, but in developed countries, which meeting participants referred to continuously on Friday, there is little poverty because citizens receive decent wages and pensions from their employers, not from the government. Employers in Russia may not want to pay very much, or may simply be unable to pay very much due to lack of funds.
The Long-Awaited Natural Rent
Friday’s meeting touched on another important monetary issue. Materials prepared by the Ministry of Finance for the board meeting literally stated the following: “Recently, there has been extensive discussion of the question of strengthening the rent component of natural resource taxation….Since hydrocarbon production (primarily oil) in fact generates sizable economic rent in the form of excess profit, the question of taxing this sector at higher rates may obviously be formulated…..In the Russian Federation today, the government receives somewhat less than half the world price from oil exports, or less than in some European countries (Great Britain, Norway), where the government receives about 70% of the world price….One possible mechanism for strengthening the rent component….may be the introduction of a tax on supplementary income from hydrocarbon production….The introduction of this tax could go towards a marked reduction in the basic severance tax rate. “ There was no discussion of the new tax at the board meeting; members spoke only of how the budget could gain more revenue from the severance tax and export duties. However, the president stated directly in his speech that, “the current payment system in this area does not provide for the recovery of fair and economically justified amounts of natural rent.” He asked the government to consider and “propose steps” and named the deadline: April. Maybe things will not come to a new rent tax by April; maybe they will confine themselves to export duties. But obviously the government will not leave this long-awaited rent alone.
Sergei Minaev, Petr Netreba
All the Article in Russian as of Mar. 22, 2004
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