Russian officials seek to streamline budget spending, but disagree on tax hikes

By Darya Korsunskaya and Alexander Marrow

MOSCOW (Reuters) – Faced with a $42 billion budget hole so far this year, Russian officials on Thursday acknowledged the need for more efficient budget spending but clashed over the prudence of further increases in the tax burden.

With soaring military spending and sanctions squeezing Russia’s energy revenues, Moscow faces a battle to keep its budget deficit in check, with spending cuts, higher taxes and more domestic borrowing among the possible strategies.

Finance Minister Anton Siluanov told an economic forum in St Petersburg that he expected revenues to be in line with the plan this year and reiterated his ministry’s promise of a deficit no higher than 2% of gross domestic product (GDP).

“In terms of revenues, we have already taken steps this year and we will probably move further in this direction – fair taxation of natural rents,” said Siluanov.

Russia’s government has already announced plans to levy a one-off windfall tax of around 300 billion roubles ($3.58 billion) on corporate profits.

Economy Minister Maxim Reshetnikov said prioritising budget expenditure was required, suggesting fewer subsidies in some sectors and opposing higher taxes.

“Any increase in the tax burden on business now will undermine investment,” said Reshetnikov. “This will be a direct deduction from economic growth.”

Presidential adviser Maxim Oreshkin agreed: “My conviction is that raising taxes on business is simply counterproductive, it will have no effect.

“We will lose more revenues from the economy slowdown than we will hypothetically gain from raising taxes on business.”

‘OIL ON THE FIRE’

However, Deputy Finance Minister Alexei Sazanov said the government’s hands could be tied on tax if the budget deficit requires financing.

“To a large extent, the decisions that are taken in the future will depend on what the budget deficit is and the sources of financing (it),” Sazanov said.

“If it is determined that taxes will also be one of the sources of budget deficit financing, then, of course, tax changes are unavoidable.”

Siluanov said areas of budget expenditure that have not been tweaked since Soviet times were ripe for adjustment and warned that spending must have its limits, so as not to fuel inflation and higher interest rates.

“When we see elements of the economy overheating, increasing budget stimulus, spending, the deficit – this is like pouring oil on the fire,” he said.

Central Bank Governor Elvira Nabiullina has for months warned of the inflationary threat posed by the deficit and said budget sustainability was key, requiring “hard work on prioritising spending”.

“You have to decide either one thing (tax increases), or the other (spending cuts). There is no other way,” Nabiullina said. ($1 = 83.7500 roubles)

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