Table Forecast of Changes in Tax Revenues of the RF Consolidated and Federal Budgets in Relation to Changes in Tax Law and Budget Law since 2005 (RUR billion) Scenario 1 Scenario 2 Scenario Forecast of Changes in Tax Revenues of the RF Consolidated Budget in Relation to Changes in the RF Tax Law Profit tax 40.6 0.9 55.Mineral Tax 20.8 36.0 15.single social tax –282.4 –283.2 –281.VAT –8.5 –8.6 –8.Customs duties 86.3 237.0 27.Forecast of Changes in Tax Revenues of the RF Federal Budget in Relation to Changes in the RF Budget Law Profit tax 57.4 46.6 61.Mineral Tax 63.3 77.0 58.single social tax –282.4 –283.2 –281.VAT –8.5 –8.6 –8.Customs duties 86.3 237.0 27.It should be emphasized that the presented changes in profit tax revenues are caused primarily by corresponding changes in the tax basis due to growth in mineral tax payments and the reduction of the single social tax rate. Changes in the tax duty are caused by introduction of a new oil export tax schedule and reduction in the rate of import duties imposed on other goods.
Table Forecasted Parameters, Federal Budget for Scenario 1 Scenario 2 Scenario Federal budget incomes, 3279 3467 RUR billion.
Federal budget incomes, 17.3 18.1 17. % of GDP Federal budget surplus, 231 419 RUR billion Federal budget surplus, 1.2 2.2 0. % of GDP RUSSIAN ECONOMY in trends and outlooks Thus, by adjusting the forecasted figures of the federal budget revenues in 2005 by the value of discretional changes, the profit side of the federal budget in 2005 looks as fol lows:
• nearly RUR3279 billion, under the condition of the same scenario which the draft fed eral budget for 2005 is based on (Scenario 1);
• nearly RUR3467 billion, provided that oil price in 2005 is equal to that in 2004 (Scenario 2);
• nearly RUR3179 billion, provided that oil price decline down to $22 per barrel by the end of 2005 (Scenario 3).
The forecasted surplus of the federal budget in 2005 under the conditions of the same scenario (Scenario 1) would be RUR47 billion less than that in the draft federal budget (correspondingly RUR231 billion against RUR278 billion). The federal budget sur plus may reach 2.2% of GDP, provided than the basic trends of 2004 remain the same.
Section 3. The real sector 3.1. Macrostructure of Production 3.1.1. The GDP: Trends and Factors behind Change in Ultimate Demand The 1999–2004 period was characterized by dynamic development of nearly all the sectors and branches of the economy. In the past six years, the GDP increased by 48.0%, actual ultimate consumption by households, by 48.1% and investments in fixed capital, by 72.0%. Growth in business activities (based on higher growth rates of investment than those of production and consumption) had a considerable effect on structural changes in formation and allocation of the GDP. In 2004, industrial output and agricultural output in creased by 53.4% and 26.4%, respectively, on the 1998 figure. Growth in output of goods was maintained by infrastructure of the services market, which was developed during the period of the reforms. With an increase of 57.5% in output of the physical production sec tor in the 1998–2004 period, growth in output of market services amounted to 43.3%.
Commercial cargo turn over increased by 37.8% on the 1998 figure, while the output of communication services and retail trade, by 238.7% and 49.3%, respectively (Table 1).
Table Major macroeconomic indices in the 1999–2004 period.
(% of the previous year figure) 1999 2000 2001 2002 2003 Gross domestic product 106.4 110.0 105.1 104.7 107.3 107.Actual ultimate consumption by households 97.1 107.3 109.5 108.5 107.5 111.Investments in fixed assets 105.3 117.4 108.7 102.6 112.5 110.Industrial output 111.0 111.9 104.9 103.7 107.0 106.Agricultural output 104.1 107.7 107.5 101.7 101.5 101.Cargo carriage turnover 105.8 104.8 103.2 105.6 107.4 106.Communication services 133.1 113.8 119.1 115.6 127.5 127.Retail trade turnover 93.9 108.8 110.7 109.1 108.0 112.Paid services to households 107.0 105.0 102.8 100.4 105.1 107.Foreign trade turnover 86.7 129.7 105.4 108.1 124.6 131.Real cash income 86.4 109.1 108.5 108.8 114.5 107.Real wages and salaries 78.0 121.0 119.9 116.6 110.4 110.Annual average number of employed persons 100.5 100.6 100.6 101.0 99.2 101.in the economy Number of unemployed persons (as of the 102 77 90.0 98.0 106.0 96.year end) Price indices:
Consumer prices 136.5 120.2 118.6 115.1 112.0 111.Prices of manufacturers of industrial prod 167.3 131.6 110.7 117.1 113.1 128.ucts Source: The State Committee for Statistics of Russia; the Federal Service of State Statistics.
In the past few years, a favorable situation on international markets of energy and primary resources definitely had a positive effect on economic development. In the 2004 period, recovery growth was characterized by simultaneous expansion of both the domestic and foreign market. With an increase of 70% in the aggregate demand in the 1999–2004 period, the external demand grew by 78%, while domestic demand, by 55%. It is to be noted that in the 2000–2001 period dominating growth in the domestic market (in a situation where domestic production was aimed at active import substitution) was a key factor behind successful recovery after the 1998 financial crisis. However, in the following RUSSIAN ECONOMY in trends and outlooks period growth structure was determined by external factors, which started to play a greater role (though some increase in growth rates of domestic demand was observed in the 2003 2004 period).
25,20,15,10,5,0,1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 -5,-10,-15,-20,-25,-30,GDP (resources) External demand Domestic demand Source: Data of The Federal Service of State Statistics.
Fig. 1. Rates of growth in domestic and external demand in the 1992–2004 period (% of the previous year figure) In 2004, unit weight of exports in the GDP amounted to 34.2%, as against 30.7% in the pre crisis 1997. Impact of exports on recovery growth was determined by a sustained increase in incomes received from hydrocarbon exports.
In 2004, as compared to the 2002–2003 period conditions of trade with other coun tries improved thanks to higher rates of growth in prices on export commodities and ex pansion of the demand. According to estimations by the Bank of Russia, in 2004 an in crease in international prices on Russia’s principal exports amounted to 22.8% on the December 2003 figure. In the above period, prices on energy resources grew on average by 20%, while those on non energy commodities, by 23.2%, including prices on non ferrous metals which increased by 29.5%. In 2004, prices on principal raw materials, semi finished products and products of ferrous industry increased by 100 percent. External fac tors related to high prices on oil and metals and a considerable increase in exports vol umes accounted for over 50% of economic growth in the 2003 2004 period. With a revival of the international economy and growth in demand, there was an increase in export vol umes of oil, petroleum, fuel oil, natural gas, aluminum, nickel, wood products, some sorts of ferrous metals, chemical raw materials and mineral fertilizers.
The real sector In 2004, Russian export volumes increased by 34.8% on the 2003 figure, while those of imports, by 24.7%. In 2004, in export commodities structure a share of energy products grew by 0.1% on the 2003 figure, while that of ferrous and non ferrous metals, by 3.1% in a situation where the share of machinery, equipment and transportation vehicles de creased by 1.5%. In the 2003–2004 period, dynamic growth in exports income helped overcome a slow down of the rates of economic growth. A cumulative effect of dynamic growth in incomes of the export oriented sector was seen in growing dynamics of related industries and had a dominating effect on changes in conditions and factors behind devel opment of the domestic market.
In 2003–2004 period, growing economic income received from foreign economic ac tivities had a stimulating effect on business. Rates of growth in foreign trade turnover in creased from 108.3% in 2002 to 130.6% in 2004. Foreign trade balance amounted on av erage to USD six billion a month. In the past two years, annual average growth rates of the GDP amounted to 7.2%, while those of investments in fixed capital, to 11.7% (in the 2004 period, those indices amounted to 6.7% and 9.5%, respectively) (Fig.2).
70,60,50,40,30,20,10,0,1995 1996 1997 1998 1999 2000 2001 2002 2003 -10,-20,-30,Export of goods (total) Export of crude oil, oil products and natural gas Investment in capital assets Households’ expenses on final consumption Fig. 2. Change in rates of growth in exports of commodities (including hydrocarbons), ultimate consumption by households and investment in fixed capital in the 1995–2004 period (as a percentage of the previous year figure) An extremely favorable combination of high business activities at home with high prices on raw materials in international markets contributed to intensive growth in gross savings. In the past six years, the share of gross savings amounted to 31.1%–38.7% of the GDP, as against 24.0% in the pre crisis 1997. In 2004, thanks to growth in incomes of the economy received from exports and increase in foreign investments, on one hand, and a slow down of growth in ultimate consumption by households in a situation of prevailing savings trends, on the other hand, national savings amounted to 35.2% of the GDP, as against 31.8% in 2003. It is to be noted that the effect of growing incomes received from RUSSIAN ECONOMY in trends and outlooks foreign trade operations was limited to a great extent by sectorial priorities of export oriented industries. As a result, in the 1999–2004 period the share of investments in fixed capital in the GDP remained on average at the level of 16.2% (a decrease of 1.3% on the 1997 figure). The above trends can be explained by lack of both matured investment insti tutions (which could attract investments to the real sector of the economy) and mecha nisms of transformation of savings.
In the past few years, correlation between demand in investment and ultimate con sumption were rather sensitive to changes in incomes received from exports and deter mined the specifics of the domestic market. Dramatic changes in investment expenditure on reproduction of fixed capital were neutralized by smooth dynamics of ultimate con sumption. It is to be noted that in 2004 there was less impact on dynamics of ultimate de mand of an investment component by the quarter (Fig. 3).
I II III IV I II III IV I II III IV I II III IV 2001 2002 2003 Gross Domestic Product Households’ final consumption Investment in capital assets Fig. 3. Change in dynamics of the GDP by the component of ultimate demand in the 1999–2004 period (percentage of the previous year figure) The phenomenon of economic recovery in Russia is such that with growth in actual export volumes, export related incomes and investment an increase in centralized accu mulation of capital is observed. Analysis of capital accounts also points to growing asym metry of gross savings, resources of gross savings and investments in fixed capital. As of the beginning of 2005, the Stabilization Fund amounted to approximately 4.4% of the GDP (Fig. 4). It permitted Russia to fulfill ahead of schedule its obligations to the International Monetary Fund (Russia paid USD 3.7 billion to the IMF). In addition to the above, in 2005 it is planned to spend another RUR 160 billion out of the Stabilization Fund to repay debts to the Paris Club. According to calculations by the Ministry of Finance of the RF, if resources of the Stabilization Fund were spent in Russia the rate of inflation in 2004 would have grown by another 1.5–2% a year, while the effective rate of RUR, by 1.5%.
The real sector Investment in capital assets 60,50,40,30,20,10,0,Investment in capital assets Gross accumulation Gross savings Fig. 4. Share of gross savings and investments in fixed capital in the GDP in 1992–2004 period (% of the GDP) With an increase in accumulation of “available funds” in the Stabilization Fund, in the past five years investments in fixed capital amounted to less than 50 % of national savings.
As a result, with a decrease in extent of transformation of incomes of the economy into in vestments, in 2004 issues related to redemption of Russia’s foreign debts and fulfillment of social programs started to prevail.
In the 2000–2004 period, positive dynamics of ultimate consumption was a key factor behind development of the domestic market; it is to be noted that in the 2003 2004 period correlation between consumption by households and social transfers received from public institutions and non profit organizations remained at the same level. However, in 2004 in the structure of allocation of the GDP the share of expenditure on ultimate consumption, including that by households decreased by 2.4% and 1.2%, respectively, on the 2003 fig ure. Structural changes in allocation of the GDP were caused by high rates of growth in to tal accumulation (an increase of 1.0% on the 2003 figure) (Table 2).
Table Structure of utilization of the Gross Domestic Product in the 1998 2004 period (percentage of the total) 1998 1999 2000 2001 2002 2003 Gross domestic product 100 100 100 100 100 100.0 Expenditure on ultimate consumption 76.2 68.1 61.3 65.8 68.9 68.1 65.Including:
by households 55.6 52.3 45.1 48.3 50.0 49.7 48.by public institutions 18.7 14.6 15.1 16.4 17.6 17.5 16.Gross savings 14.9 14.8 18.7 22.0 20.1 20.6 21.Including gross accumulation of fixed capital 16.5 14.4 16.9 18.9 17.9 18.3 18.Net export of goods and services 6.8 17.1 20.0 12.7 11.8 11.4 12.Source: The State Committee for Statistics of Russia; the Federal Service of State Statistics.
RUSSIAN ECONOMY in trends and outlooks Despite an increase in the share of gross savings and accumulation in the GDP, in the past three years no growth was registered in unit weight of investments in fixed capital.
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