A Russian Finance Ministry proposal to overhaul the tax system could create a budget shortfall and put upward pressure on inflation, Tatiana Golikova, the head of Russia’s Audit Chamber, told Reuters in an interview.
The ministry has proposed cutting employers’ mandatory social security contributions with the aim of enticing businesses out of the shadow economy. To offset that, it proposes increasing value-added tax (VAT) to 22 percent from 18 percent.
The ministry wants the combined change to take effect from 2019. But the intervention from Golikova, an influential former government minister and deputy finance minister, indicates the proposal could face resistance from some quarters in ruling circles.
Golikova, whose audit chamber is responsible for monitoring whether the government is using budget spending effectively, said the changes would force the government to increase its support for the pension fund.
The Finance Ministry’s proposal is to cut employers’ social security contributions to 22 percent of a worker’s salary from their current level of 30 percent. A part of the contributions goes into the state pension fund to help keep it topped up.
The fund is already in deficit, a problem the Finance Ministry itself says needs to be addressed, and the drop in social security contributions will mean that less money is going into the fund, she said.
Asked if the proposed tax changes would increase the burden on the budget, Golikova said: “In this conception, in this construction, yes.”
The Russian budget had to provide around 3.4 trillion roubles ($17.40 billion) to cover the Pension Fund’s liabilities last year, an extra burden on a budget already straining under low tax revenues.
According to the Chamber’s calculations, under the finance ministry’s proposal social security payments would go down by 1.5 trillion roubles while revenues from VAT would increase by only 1.3 trillion roubles.
In the interview, Golikova said the other consequence of the proposed tax changes would be on inflation, which the central bank is seeking to get under its target of 4 percent by the end of 2017.
The Finance Ministry has acknowledged that the VAT increase may result in a one-off 2-percentage-point increase in inflation. Golikova said that would have far-reaching consequences for monetary policy and for ordinary people.
“This (proposal) means that a half or even more of that 4 percent (of inflation)... would be made by our own hands... This means that the central bank will have to make additional efforts to maintain the inflation level,” Golikova said.
“This is a significant factor affecting social policy.”
Prices rose 4.6 percent in the year to February. Upward pressure on inflation could force the central bank to keep interest rates higher for longer than it would otherwise have done, constraining an economic recovery.
Golikova said the Audit Chamber had yet to calculate how the proposal would affect economic growth. The Russian economy shrank 0.2 percent in 2016 and the economy ministry expects it to grow by 2 percent this year.

Source: Arab News