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Overall, the above measures aimed at expansion of the tax base of the corporate profit tax failed to substantially reverse the unfolding in 2009 tendency to contraction of the volume of payments by the corporate profit tax.

Section Monetary and Budgetary Spheres On the backdrop of a substantial fall of revenues by main taxes to the countrys budget system, the 2009 volume of the VAT-based revenues rose by 0.2 p.p. of GDP. But considered in absolute terms, it tumbled. The tax revenues in question slid due to the deteriorated business activity in the domestic and national economies and under an adverse effect of measures devised to improve calculation and administration of the tax. More specifically, they include the abrogation of the obligation to pay VAT in cash equivalent under non-cash kinds of settlements, exemption from VAT of payments for technological equipment, granting the right to deduct VAT from advances.

But in some months the VAT collection rate would outpace the respective figures of the prior year. The trend does not mirror an improvement of its collection - rather, it can be ascribed to modifications of the respective payment and refund timelines. Given that in 2008 VAT was paid on the quarterly basis, ie the whole amount of tax obligations was payable as a single payment in a month following the reporting quarter, in 2009 the taxpayer was able to effect the payments at his discretion - that is, either quarterly, or monthly, in equal installments. The novelty secured some equalizing of revenues from the tax in the span of the year, but, at the same time, has complicated comparison of the annual dynamic of the 2008 with that of 2009.

The 2009 volume of revenues from excise taxes did not undergo any substantial changes and remained at the level of 0.9% of GDP, notwithstanding a traditional indexation of its rates. To exemplify, the excise rate on straight-run gas surged up to Rb 3,900 per ton vs. the previous 2,657/t; excise rates on liquors were indexed by the inflation rate on average, while those on cigarettes soared by 20 to 25% relative to the prior year. The excise rates on passenger cars with the engine capacity of over 67.5kW (90 HP) and motorcycles with the engine capacity over 112.5 kW (150 HP) were raised roughly by 9%.

An important move in 2009 became the RF governments decision to drastically index excise rates on low-alcoholic and tobacco products since 2010. Specifically, excise rates on low-alcoholic goods with the volume ratio of up to 9%, alcohol-containing products and wine were indexed at 30% on average, and those on beer at 50%. As concerns cigarettes (including Russian cigarettes), the ad-valorem component of the respective excise tax on them calculated proceeding from the maximum retail prices is envisaged to rise by 0.5%; meanwhile, the specific component of the excise rate on the filter cigarettes should be raised by 30% on average, while that on Russian cigarettes by 50%. We believe such a drastic increase of excise rates on low-alcoholic and tobacco goods is a quite timely move and it appears fairly justifiable from the fiscal perspective and from the perspective of promotion of a healthier lifestyle in Russia. But the move should not entail a substantial decline of demand for these excised products, nor should it derail the investment attractiveness of the respective sectors.

The 2009 revenues from the personal income tax to the budgets accounted for 4.3% of GDP, up by 0.3 p.p. of GDP vis--vis the respective figures of 2008. Meanwhile, the revenue volume declined slightly in absolute terms. Some growth in the PIT-based revenues in relative terms does not at all evidence its collection has improved. Rather, it was driven by a higher dynamic of deceleration of the economys growth rates compared with revenue volumes from the tax. More specifically, according to preliminary estimates, the 2009 increase in the populations real disposable incomes (incomes less compulsory payments adjusted by the CPI) followed the 2008 dynamic and accounted for 1.9% relative to the prior year. Meanwhile, real salaries and wages tumbled by 2.8% vs. the respective figures of 2008, while a number of benefits reducing the PIT tax base were put in effect, including:

RUSSIAN ECONOMY IN trends and outlooks - increase of the child benefit up to Rb. 1,000 and the respective amount of the annual income eligibility threshold (up to Rb. 280,000);

- increase of the upper marginal amount of the social tax benefit by the PIT with regard to expenses on the savings part of the labor pension from Rb. 100,000 up to 120,000;

- calculation of income in the form of interest on Rb.-denominated bank deposits is made using the CBR refinancing rate +5%, which to a significant degree reduces the tax base vis--vis the earlier set one;

In addition to the tax novelties associated with individual taxes and levies, the year of saw introduction of amendments that regulate the basic procedure of provision of a tax credit:

- In September, the RF government approved a bill On introducing amendments to Section One of the Tax Code of the Russian Federation with regard to regulation of tax, levy, penalty and fine arrears. With the amendments in place, it has become possible to grant the taxpayer determent of payment, installment of date in connection with the threat of the rise of insolvency (bankruptcy), should the tax payment be nonrecurrent. However, the risk of bankruptcy should be proved by documented evidence;

- the credit ceiling of the investment tax loan extended to the taxpayer in the event he runs R&D projects, pilot-plan works, or technical rearmament is increased from 30% of his assets to 100%.

Affected by the domestic and external factors, the 2009 aggregate indicator of tax burden on the economy slid by nearly 5% of GDP and accounted for not more than 31% of GDP (see Table 2).

With the revenues to the enlarged governments budget being in decline, its expenditure component demonstrated an opposite dynamic and posted growth equivalent to 6.7 p.p. of GDP (see Table 3). Interestingly, in the last months of 2009 budget funds were spent more intensively than in the beginning of the year.

Table Execution of Expenditure Obligations of the Budget of the Enlarged Government in 20082009, as % to GDP 2009 Bias, as p.p. of GDP As Rb. bn. As% of GDP As Rb. bn. As% of GDP Expenditures, total 15847.3 40.6 13989.2 33.9 +6.including General public administration matters 1290.6 3.3 1287.6 3.1 +0.including the public and municipal 236.6 0.6 189.3 0.5 +0.debts servicing National defense 1191.2 3.1 1043.6 2.5 +0.National security and law enforcement 1245.9 3.2 1092.1 2.6 +0.National economy 2782.3 7.1 2253.1 5.5 +1.Housing and utilities sector 1005.9 2.6 1149.2 2.8 0.Environmental protection 29.7 0.08 31.2 0.1 0.Education 1777.9 4.6 1665.5 4.0 +0.Culture, the motion picture industry, mass media 324.4 0.8 310.6 0.8 Health care and sport 1653.1 4.2 1548.6 3.8 +0.Social policy 4546.1 11.7 3607.7 8.7 +3.Source: the RF Treasury, the IET calculations Section Monetary and Budgetary Spheres As far as expenditure management is concerned, the RF governments budget policy rested upon the anti-cyclic principle. With a significant fall in budget revenues, there were no expenditure cutbacks. But already in the beginning of the year the structure of expenditures by directions of their use displayed notable modifications, with investment expenditures being cut vis--vis extra funds being earmarked for the sake of financial support of the population and domestic businesses. The funding by the item Social policy hit a record-breaking value of 11.7% of GDP vs. 8.7% of GDP reported in 2008. A considerable increase in expenditures was noted by the item National economy up to 7.1% of GDP in 2009 vs. 5.5% of GDP in 2008. As well, substantial funds were earmarked to finance the items National defense and National security and law enforcement activity 3.1% and 3.2% of GDP, respectively, each up by 0.6 p.p. compared with the respective figures of 2008.

2.2.3. Execution of the Federal Budget of Russian Federation The global crisis has battered the revenue collection to the federal budget the revenues found themselves in a steady decline since October 2008. Notably, it was not just oil-and-gas revenues, which directly depend on oil prices, that tumbled considerably, but non-oil-and-gas ones too, due to the general deterioration of business activity indicators in the country.

According to the Federal Treasury, between January and December 2009 revenues to the federal budget accounted for 18.8% of GDP, or down by 3.7 p.p. compared with the respective 2008 figures, while expenditures outran the prior years level at 6.4 p.p. of GDP and hit the mark of 24.7% of GDP (Table 4). Such a drastic increase in expenditures is explained by a large-scale funding of the anti-crisis measures set for accomplishment in 2009, as well as by a far smaller nominal volume of GDP in 2009.

The key cause behind the absolute and relative contraction in the volume of the federal budget revenues in the period in question vis--vis the same period of the prior year was the fall of the proportion of oil-and-gas revenues in the budget. At this point, it should be noted that while the volume of revenues from the mineral tax and foreign trade activities are directly dependant on the dynamic of the world carbohydrate prices, the rate of their production and the exchange rate of the Rb., the size of the structural (non-oil-and-gas) revenues is determined by the current state of the national economy.

The federal budget revenues, without regard to investment revenues to the Reserve Fund and the National Welfare Fund (NWF), worth a total of Rb. 205.1bn and 63.4bn, respectively, collected to the budget in January 2009, as well as Rb. 4.1bn-worth interest on the NWFs deposits with the VEB, proved to be substantially smaller than in 2008.

Table Main Parameters of the Federal Budget of RF in 2008 2008 2009 Bias As % to the As% of As% of As p.p. of budget estimate As Rb. bn. As Rb. bn. As Rb. bn.

GDP GDP GDP Revenues, 9274.1 22.5 7336.8 18.8 109.3 1937.3 3.including:

Oil-and revenues 4389.4 10.6 2983.9 7.6 145.1 1405.5 3.Expenditures 7566.6 18.3 9636.8 24.7 97.0 2070.2 +6.Surplus (deficit) of the federal budget 1707.5 4.2 2300.0 5.9 78.1 4007.6 10.Non-oil-and-gas deficit 2681.9 6.5 5283.9 13.5 95.7 2628.2 7.GDP estimate 41256.0 39016.Source: the RF Ministry of Finance (preliminary estimates), the IET calculations RUSSIAN ECONOMY IN trends and outlooks As concerns execution of the expenditure part of the federal budget, their financing was extremely uneven and erratic. Table 5 presents the dynamic of spending of the federal budget funds in 2009 according to the functional classification of budget expenditures. As evidenced by the Table, the rate of spending was lower than in 2008; however, the bias the federal budget funds in spending on the whole was not as significant on average as the one across individual directions of spending. More specifically, the 2009 federal budget expenditures were executed in a proportion of some 97% of the specified budget estimate, or just at 0.8 p.p.

lower than the prior years rate. It was items General public administration matters, Culture, the motion picture industry, and National economy by which the federal budget spending lagged behind the 2008 figures at most, with the respective cutbacks accounting for 3.1-6.3 p.p. of GDP. By contrast, the advanced rate of spending (by 0.4-5.7 p.p. of GDP vs.

the 2008 figures) was posted by financing of items Housing and utilities sector, Interbudgetary transfers, and Healthcare and sport.

Table Cash Execution of the Federal Budget in 2008(as % to the Annual Budget Estimate) 2009 . 2008 .

Expenditures, total 97.0 97.Including:

General public administration matters 85.3 91.the public and municipal debts servicing 86.9 97.National defense 98.7 99.National security and law enforcement 99.7 99.National economy 93.5 96.Housing and utilities sector 99.3 93.Environmental protection 97.5 98.Education 100.6 101.Culture, the motion picture industry, mass media 97.4 100.Health care and sport 99.3 98.Social policy 97.7 98.Interbudgetary transfers 99.7 98.Source: the RF Ministry of Finance (preliminary estimates), the IET calculations The main cause behind a substantial increase in the federal budget expenditures became the need for implementation of stimulus measures aimed at mitigation of the adverse effects from the global financial crisis and their economic and social consequences. It is particularly worth noting that in addition to the financing of the anti-crisis program out of the budget, the RF government vigorously deployed quasibudgetary sources, including funds of the Central Bank, extrabudgetary funds, public corporations, tax credits, etc. (Table 6).

Section Monetary and Budgetary Spheres Table Structure of the Financial Anti-Crisis Measures in 2008Planned for execu- Executed as of Budgetary anti-crisis measures tion in 20082009, January 1, 2010, as Rb. bn as Rb. bn.

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