Page 9 - RusRPTAug23

2.1 War budget: more taxes or more cuts?
Amid explosive growth in state spending and ever-increasing budget deficit, Russian officials are talking about cutting costs. However, it’s impossible to imagine any reduction in military expenditure at the moment and Prigozhin’s uprising could even prompt the government to increase social spending. The only way to reduce the budget deficit would be to increase taxes — but that is extremely unlikely before the 2024 presidential election. But possibly shortly thereafter, as in 2018, when the government, along with raising the retirement age, increased the VAT rate by 2 percentage points.
At the Petersburg International Economic Forum earlier this month, officials from the government’s “economic bloc” talked about the need to reduce spending in 2024. That’s hardly a sensation. Each summer, the government traditionally determines an outline for the budget over the next three years. At this time, the Finance Ministry always suggests cutting spending, claiming that there’s no money; the Economic Development Ministry insists there can be no growth without investment; and the Central Bank warns economic growth has to be balanced with preventing runaway inflation. This sort of exchange always opens the annual process to set the budget, and this year is proving to be no exception.
It’s not easy to say what the next budget will look like. Finance Ministry officials recognize that, in the coming three years, the “potential for stimulation” (i.e. higher spending) is limited. The current expectation is that there will be revenues of 27.2 trillion rubles ($312bn) and spending of 29.4 trillion ($337bn) in 2024.
Actual expenditure this year has already exceeded planned levels and, most likely, will increase even further. Economists expect the budget deficit to be 3 trillion rubles more than what was planned. The main driver of this, of course, is war-related expenditure, including construction projects in the occupied territories. According to the Stockholm Peace Research Institute, Russian defence spending increased last year from 4.1% of GDP to 9.2% of GDP.
It's already clear that 2024 will also see a large budget deficit. The size of that deficit depends not only on how much tax the state can collect, but also on how much it wishes to spend. Even if we assume that the fighting in Ukraine moves from an open to a largely frozen conflict, military expenditure — the major driver of the deficit — is unlikely to fall. Indeed, many think it will rise even further.
As well as the war, the Ukrainian territories occupied by Russia will also require a lot of investment. In the occupied regions of Donetsk, Luhansk, Kherson and Zaporizhia reconstruction is already underway. The spending by the Russian-appointed administrations in these regions is almost entirely subsidised: 88% of their funds come from Moscow.
However, officials are looking to cut expenses in other areas. At the Petersburg forum, Finance Minister Anton Siluanov said the budget includes “a lot of expenses that have not been reviewed for 100 years.” The minister added:
9 RUSSIA Country Report August 2023 www.intellinews.com