23 March 2004 10:04
Russian finance minister links tax cut to plant modernization
Russian Finance Minister Aleksey Kudrin has expressed the hope that the recent decision to cut the country's
social tax to 26 per cent will provide the private sector with up to 10bn dollars in extra cash which can be invested in
plant modernization. In an interview with the Russian newspaper Kommersant, Kudrin conceded, however, that the cut would
have an impact on pension provision and that the government was already looking at alternative ways of making up the
shortfall. He also said he believed the recent reform of the government structure would eliminate Soviet-style
"anti-market" practices, mainly by cutting staff numbers and thereby reducing officials' capacity to
interfere with the economy. The following is the text of the interview, published on 22 March; subheadings have been
inserted editorially:
This weekend Finance Minister Aleksey Kudrin submitted to the government his proposals for the next stage of tax
reform, and expounded their essential features to Kommersant commentator Petr Netreba.
[Netreba] You have completed the latest stage of tax reform by reducing the single social tax. Do you not think it
would have been possible to take more radical action?
[Kudrin] When people say more radical reform is needed, I ask: What will we achieve in this way? Should enterprises
pay even less? If you take all the effects of influence on economic growth, influence on the legalization of business,
and the preservation of decent pensions, we have presented the optimum parameters. The tax system ensures, first and
foremost, expenditure on the social system. If you are talking about the tax burden in general, it is being reduced
markedly, year on year, at a sufficient pace to ensure the doubling of GDP. This will be all the more apparent given the
cut in the single social tax. As a result of the latest cut, business will get R280bn which could be invested in the
economy. It is important that this money should work as hard as possible for the modernization of enterprises. I think
10bn dollars is quite enough for now.
I do not think a substantial increase in the legalization of business would take place quickly even if we were to
reduce the single social tax to 20 per cent. The main legalization has already taken place. For many small enterprises
or those that operate "grey" schemes, even that cut would not seem enough.
Now to pension provision. I would like to ask business people, could they live on a monthly pension of R2,100? By
reducing the single social tax to 26 per cent we are again reducing the opportunity to increase pensions. That is why I
consider even this cut to be radical. This has already forced us to look for new ways to improve pension provision. Our
accumulation pensions model will not be fully operational until 2032. Until then we will be forced to operate within the
framework of a distributive system, and that is why current payments and the single social tax rate are of considerable
importance. Today the single social tax no longer allows for even a moderate, inflation-linked increase in pensions. In
2005 the federal budget will have to subsidize the Pension Fund by R167bn. In the coming years that subsidy could rise
to R360bn. But by 2012 it is planned that it will fall to zero. Based on the principle of not increasing budget
expenditures, we will subsidize the Pension Fund by reducing other expenditures. But apart from that R167bn we have also
taken on a commitment to increase pensions by R164bn in connection with the abolition of concessions. As a result, in
2005 subsidies to the Pension Fund will total R341bn.
Changes in VAT procedures
[Netreba] What made you abandon the introduction of VAT accounts, and is this decision final?
[Kudrin] We have postponed it for the time being. We are working on special information technologies that by their
nature will be similar to VAT accounts but will not attract enterprises' funds. We will work again on questions of
tightening the administration of VAT. At the enterprise council in February the entrepreneurs themselves asked us to
strengthen the law-enforcement component in combating VAT evasion. It is strange, of course, to hear this from them, but
I understand them. We should have the opportunity to choose - whether to tighten law-enforcement administration or to
tighten administration through taxes. The entrepreneurs decided that is better to let the law-enforcement bodies do the
work. In addition, we will be introducing electronic billing account systems. We are preparing to introduce the payment
of VAT on the dispatch of goods. That will also improve the administration of VAT.
[Netreba] Will you reduce VAT to 16 per cent in 2006?
[Kudrin] Probably, yes.
Impact of government reform
[Netreba] The entrepreneurs are entitled to suspect that the first stage of administrative reform was won by the
officials and that the drastic change in the structure of the government achieved nothing. Do you agree?
[Kudrin] It is hard to tell, in a week. It is already clear that [newly appointed Deputy Prime Minister] Aleksandr
Zhukov's commission will go much further than [former Deputy Prime Minister] Boris Aleshin's commission. Boris
Aleshin only deleted the functions that were recorded in the ministries' own statutes. In reality, what the
ministries were doing was considered natural by everyone but it was not actually stipulated anywhere. For instance,
every year the Agriculture Ministry used to set up a spring fieldwork staff. The governors and oil sector workers were
assembled and issued with plans for fuel deliveries to various regions, and they even set the price of the deliveries.
These are anti-market measures that are not stipulated anywhere. The new structure and rules for the government's
work should exclude initiatives of that kind.
[Netreba] How will you ban it?
[Kudrin] As a result of the reform they will not have enough people for that - the numerical strength of the sector
ministries is being reduced significantly. The Agriculture Ministry, for instance, will be halved. In addition, we have
various kinds of supervision, such as energy supervision, which used to exist quite legitimately, funded by payments
from the very people who were being audited. Within a year all supervisory bodies will be transferred to budget
funding.
Role of Finance Ministry
[Netreba] By the way, about numbers. People in the White House are already saying that the Finance Ministry is to
turn into the government's bookkeeping office and be cut to 200 people. Will that happen?
[Kudrin] The Finance Ministry was never the biggest ministry. I do not know who the joker is, but that anonymous
source is obviously not familiar with the role of the Finance Ministry. The Finance Ministry, even under the new
presidential edict, formulates tax, budget, currency and debt policy and the rules of conduct on the financial markets,
prepares for talks on all financial issues, and provides support in formulating the budget not only for Russia but also
for the Eurasian Economic Council, the CIS and other unions. In addition, the functions of defining methodological
activities for the tax department and for customs have also been transferred to us. I can tell you that the Finance
Ministry, if it had not received powers from other ministries, would have been reduced. But in the light of its new
functions the Finance Ministry will retain approximately its former strength - about 1,600 people. Although time will
tell.
I totally understand the next step regarding the ministry - we will transfer budget preparation functions to the
ministries themselves. But budget implementation functions will increasingly be concentrated in the treasury. The
Finance Ministry itself will mainly be concerned with pure budget policy and the rules for shaping the country's
main financial law. Debt policy will go over to the debt agency that is being formed. What is happening now is only the
first step out of a dozen steps that we will take in the future.
[Netreba] Why was the ministry of taxes and levies transferred to you, while customs, which accounts for 40 per cent
of budget revenue, was transferred to [Economic Development and Trade Minister] German Gref?
[Kudrin] The problem of protective measures and the question of regimes governing the processing of goods is
important for our country. At the moment, in connection with WTO admission, it is German Gref who is conducting talks
with all countries specifically about these regimes and is preparing a series of agreements. We agreed that for the
period of WTO admission and for the transitional period after that, customs would be under the control of the Ministry
of Economic Development and Trade.
[Netreba] Are you confident that revenue from customs will not be reduced because of this distribution?
[Kudrin] Absolutely confident, I do not see any possibility of any kind of budget problems here.
[Kommersant] |
RUSSIA IN FACTS
