From this Table it follows that the balance of the budgetary system of the Rus sian Federation cleared of the oil and gas balance is negative. Besides, as esti mated by the IMF, prior to 2004 the deficit was gradually declining in relation to GDP (from – 5.2 % to – 4.3 % of GDP), whereas from the year 2005 onward it be gan to grow, and consequently by the the results of 2006 it may amount to ap proximately – 7.4 % of GDP. It we look at the IET’s estimations, for the year they will be rather close to those of the IMF, while for 2006 the discrepancy be tween the two is much higher. Moreover, the IET’s estimations for 2006 are com patible with the estimations of the RF Ministry of Finance, judging by which the year 2006 saw a certain improvement of the federal budget’s balance cleared of the oil and gas balance (in % of GDP).
Table The value of the oil and gas balance of the RF federal budget cleared of the oil and gas balance (in % of GDP) 2002 2003 2004 2005 Balance of RF consolidated budget, in % of GDP 1.0 1.4 4.5 7.7 8.Balance of RF federal budget, in % of GDP 1.4 1.7 4.3 7.4 7.Balance of RF federal budget less oil and gas balance, in % –5.2 –4.6 –4.3 –5.9 –7.of GDP (IMF’s estimation) Balance of RF federal budget less oil and gas balance, in % – – – –5.5% –5.of GDP (IET’s estimation) Section Monetary and budgetary spheres The estimations cited here demonstrate that when the situational component of the budgetary system’s revenue is eliminated it can be seen that in the last years expenditure has been markedly higher than revenue. It is obvious that the revenue from the oil and gas sector in the state budget cannot be disregarded en tirely, because the raw materials sector plays a very important role in the national economy; however, these estimations do confirm the timeliness of the proposals as to the necessity for these revenues to become structured and subsequently used in accordance with legislatively established mechanisms.
In addition to the estimation of the consolidated and federal budgets’ balance cleared of the oil and gas balance, it is necessary to analyze the influence of the international prices on individual budget indices. In particular, the situational (de termined by the behavior of international oil prices) and the structural (independent of their behavior) components of tax revenues should be separated. For this pur pose, the IET has applied regression based estimations of the dependence of the main budget items on the oil prices. According to the obtained results, the elasticity of the tax revenues in the federal budget (in % of GDP) relating to the prices of Urals amounted to approximately 0.28, that is, the growth of the international oil price by $ 1 increases the tax revenues by 0.28 % of GDP. In this connection, the value of the situational component of the tax revenues was determined on the basis of the estimated elasticity and the difference between the actually registered price of Urals and its long term average price (for the period between 1990 and 2006).
The structural component, on the contrary, represents the difference between the actual share in GDP of the tax revenues in the federal budget and the value of the situational component. The estimated values of the structural and situational com ponents of the tax revenues in the federal budget in % of GDP, as well as the actual share of the tax revenue in GDP, are shown in Table 14.
As seen from the Table, throughout the period of 1996 – 1999 the situational component of the tax revenues in the federal budget in % of GDP remained nega tive. Later on, in 2000, there occurred a marked growth of this index from –2.1 % of GDP to 0.5 % of GDP, after which in 2001 and 2002 it once again remained nega tive due to the fall in oil prices during that period. Since 2002, the improving situa tion on the international oil market was conducive to a noticeable growth of the situational component which, by the results of 2006, has reached its historic high of the whole period under consideration and amounted to approximately 7.0 % of GDP.
Table The estimated structural and situational components of tax revenues in the RF federal budget (in % of GDP) 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Actual tax revenues 11.0 10.9 8.8 10.7 13.2 16.2 18.6 18.0 18.8 22.3 22.Structural compo 12.3 12.7 12.5 12.8 12.7 16.7 18.9 17.4 16.1 15.8 15.nent of tax revenues Situational compo –1.3 –1.8 –3.7 –2.1 0.5 –0.5 –0.3 0.6 2.7 6.5 7.nent of tax revenues RUSSIAN ECONOMY IN trends and outlooks 2.2.5. The main developments in the budget sphere and the changes introduced in tax legislation The RF Government in 2006 was paying much attention to the issues of im proving tax legislation and tax administration, managing the resources accumu lated in the Stabilization Fund and the RF’s debt policy, as well as to the forecasting of the parameters of budgeting policy in the short and medium term perspective.
First of all, throughout the year 2006 representatives of the Ministry of Finance were voicing proposals concerning the improvement of existing tax legislation, as well as offering comments in respect of the proposals put forth by some members of the government for certain changes to be made to tax legislation. Thus, accord ing to the estimations of the Ministry of Finance, if tax legislation is amended as proposed, in 2007 – 2009 the tax load on the national economy may be decreased to the level of less than 27 % of GDP. In particular, in 2005 the tax load cleared of the influence of oil prices amounted to 27.4 % against 33.6 % in 2001. One group of new provisions concerning taxes came into force during 2006, whereas the rest is to become effective from 1 January 2007. Among the latter is the shortened and simplified procedure for VAT refunds to exporters, the abolition of the restriction of the carry forward of the tax losses of the past years within the tax base for the prof its tax, and the abolition of the provision concerning the determination of the effi ciency of results and expenditures relating to research and development. It is also planned that, from 2008 onward, solutions should be provided to a number of problems associated with the taxation levied on the use of objects of aquatic and biological resources.
While discussing some of the proposals concerning the changes in the pa rameters relating to individual taxes and levies in Russia, the issue of lowering the rate of the single social tax should not be overlooked. Thus, during the year, some proposals were put forth that the rate of SST should be lowered to 13 – 14 %. How ever, as estimated by the Ministry of Finance, in this case, in order to compensate for the unreceived revenues, the level of wages and salaries in the private sector of the national economy should be increased and become, on the average, in the re gion of $ 2,000 – 2,500. Otherwise it would be necessary to look for supplementary sources, by way of compensation for the unreceived revenues. The arguments put forth by the Ministry of Finance are based on the statistics of the revenues received by the budget and off budget funds and generated by taxes and levies after the rate of SST had been decreased to 26 %, with the expected resulting growth in the volume of legal wages and salaries. However, as seen by the results of 2005, the budget and the Pension Fund incurred losses in the sum of approximately 295 bil lion roubles as compared to the results that would have been achieved should the rate remain unchanged. According to RF Minister of Finance S. Shatalov, the tax able base increased only slightly. No additional legalization of incomes has been observed so far as a result of a lowered SST rate: on the whole, the volume of shadow remuneration and the use of various tax evasion schemes remained at the same level as before. According to a variety of estimations, approximately 30 – Section Monetary and budgetary spheres 35 % of the remuneration money in Russia is still changing hands “below the counter”.
During last year, the issue of reforming the value added tax was also the sub ject of an active discussion. Thus, toward the year’s end, the Ministry of Finance had planned to complete the work relating to the establishment of a special column for the entry of VAT in the order for payment form. Besides, in 2007 a law may be adopted concerning the introduction of a system for registration of VAT payers from the year 2008 onward. The main purpose of such registration will be to relieve many companies – at least small sized ones – of the responsibility to pay VAT and to register for this purpose. Also, the registration will make it possible to signifi cantly reduce the number of companies with the right to tax deductions. At present, in the RF there exist more than 2 million registered juridical persons, many of whom are formally VAT payers but do not submit any tax reports.
According to the Ministry of Finance, the federal budget’s revenues gener ated by the value added tax (VAT) will grow, and by 2009 their sum will be equal to approximately 7.8 % of GDP. Thus, the revenues from VAT in 2006 amounted to 5.7 % of GDP, the forecast for 2007 is in the region of 6.6 % of GDP, and that for 2008 is 6.7 % of GDP. The very low rate of growth in the revenues from VAT in 2008 is as sociated with the fact that the refunds of VAT to exporters will be granted not in the permitting procedure (as it is done now), but in the advising procedure. Besides, in legislation it is envisaged that the tax should be paid on a quarterly basis, instead of the current monthly basis.
At the same time, RF Minister of Finance A. Kudrin said that is was not at all impossible that, from 2009 onward, the rate of VAT might be lowered to 15 % – 16 %, if the federal budget expenditure continued to grow. In other words, it would be possible to take advantage of the potential offered by the reduction in this tax only if the budget expenditure remained relatively stable. Thus, for example, in 2006 the level of the budget’s non interest expenditures was approximately 15.4 % of GDP, in 2007 it may become 15 5 % of GDP, and in 2008 – 16 %. At the same time, the average level of such expenditures between 2000 and 2005 amounted to approxi mately 14.7 % of GDP. The Ministry of Finance’s standpoint is that the government must maintain this level and avoid any further increase of expenditures.
By 1 January 2007, the arrears of VAT refunds had been estimated as equal to approximately 140 billion roubles. The goal of the tax agencies is not only to refund the currently paid VAT, but also to provide some additional settlements so that, dur ing 2007, “it (the arrears) could be brought to minimum values”. By comparison, as of 1 January 2006, the volume of arrears against VAT refunds was approximately 197 billion roubles. And this outstanding debt continued to grow, because the prices of commodities and trade turnover were also increasing. On the whole, for the next three years the Ministry of Finance is planning no changes in the rate of VAT, the personal income tax and the profits tax, nor is it planning to bring down the rate of SST, because the budget is bearing a substantial burden of supporting the budgets of off budget funds.
RUSSIAN ECONOMY IN trends and outlooks As for the other taxes, in 2006 the law on the introduction of a reduced rate of the tax on the extraction of mineral resources for nearly exhausted deposits was adopted, the criterion being the exhaustion level of 85 % of reserves. The law also envisages the granting of tax holidays in respect to the tax on the extraction of min eral resources to the newly developed deposits in Eastern Siberia and the continental shelf. At the same time, in the event of prospecting of such deposits, the tax holiday may be extended with due regard for the period of prospecting. Besides, in 2007 no indexation of the excises on oil products is envisaged. However, in 2007 it is planned to levy excises on oil refineries. Previously, excises were levies on sellers and resel lers, and not on producers, which resulted in a distorted distribution of revenues be tween regions. Now the regions receive 10 %, while another 50 % of the collected excises is redistributed through the federal treasuries.
From 1 January 2007, for purposes of excise taxation, the upper margin of the price of tobacco products has been set, on the basis of which the excises are to be calculated. The information concerning this upper margin should be printed on the package of a tobacco product. This has to do primarily with the ad valorem compo nent of the excise on cigarettes. In this connection, according to the estimations made by the Ministry of Finance, it is expected that the average price growth should be no more than 1 rouble in all categories of tobacco products. Moreover, from 2007 onward the rate of excise on tobacco products will be raised by 30 %, and later on, in 2008 – 2009, will be increasing at a rate approximately twice as high as the rate of.
The sufficiently high oil prices throughout 2006 were conducive to further growth in the volume of resources accumulated in the RF Stabilization Fund. In par ticular, as of 1 January 2007 its size was approximately 2,346.9 billion roubles. A part of the resources of the Stabilization Fund in 2006 was spent on the redemption of the RF government debt. Thus, in early April the RF Government considered the issue of an early repayment of a part of the RF’s debt to the Paris Club and put forth its proposals to the Club’s representatives. During the negotiations it was decided that the residual debt should be repaid before the end of August. In August the Russian Federation effectuated the relating transfers, which settled the whole sum of debt due to the Paris Club. Therefore, the total savings of the interest payments in the federal budget for the period until 2020 will amount to $ 12.0 billion.
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