Russia puts more social-oriented budget forward
Spending on state-backed industries may surpass defence spending for the first time since 2014
The Kremlin aims to continue with increased social spending despite the current budget deficit, which is expected to last until at least 2022. To compensate for economy support measures, Moscow intends to cut expenses on defence, increase state borrowing and raise taxes on wealthy industries and individuals.
Russia will spend more on supporting its economy than funding its armed forces next year for the first time since 2014, says Financial Times. The new budget envisages lower defence spending and reduced support of oil companies as well as higher taxes on metal and mining industries and high-earners and increased borrowing. The project. which was approved by the government last week, now has to be discussed in the Russian parliament.
Defence spending will contract by 5%, while social measures will increase by almost 10% and total more than a quarter of the entire budget. According to Prime Minister Mikhail Mishustin, the budget “should preserve its social orientation and ensure the implementation of the national development goals”. Instead of flat income tax, a higher rate will be applied to people earning more than 5 million rubles ($65,000) a year. Besides, a new tax will be levied on bank deposits larger than 1 million rubles. The government’s idea of “slightly increasing taxation on a number of lucrative industries” includes proposals to abolish tax breaks for oil production, raise levies on mining of metals and hike excise taxes on tobacco products.
“Russia’s budget policy rests on a mix of populism, higher taxes for the middle class and promises of continued fiscal support for the poor, each seen as an effective tool to garner support for the ruling party in an election year,” considers Chief Economist at BCS Global Markets Vladimir Tikhomirov. He also points out that “the need to keep high volumes of spending on anti-crisis measures [. . .] has led authorities to agree to a significant rise in the volume of domestic public debt”. The country’s public debt-to-GDP ratio is meant to jump from 13% at the beginning of 2020 to about 20% in 2021.
Extra borrowing is aimed to fill the budget deficit, which is set to replace Russia’s fiscal surplus of recent years. This year, the government expects to see a deficit of about 4,5% of GDP contracting to 2,4% in 2021 and 1% in 2022. Nonetheless, the Kremlin intends to stick to increased social spending in a bid to mitigate the damage caused by the coronavirus pandemic and arrest a steady fall in living standards and household incomes.