Putin Sees Balanced Budget

Earn More, Pay More

Russian President Dmitry Medvedev has consented to a government plan to introduce a two-tier payroll tax system starting next year, bringing some closure to a dispute that has pitted the Kremlin against Vladimir Putin's government. The government will impose a 30 percent payroll tax on salaries of up to 512,000 rubles ($17,393) per year and add a 10-percent levy on wages exceeding that amount, according to the plan announced by Presidential Aide Arkady Dvorkovich on Monday.

"The president gave his backing to a government proposal to impose a ten-percent levy on payroll contributions to social non-budgetary funds for all companies where the wages per employee exceed 512,000 rubles per year,” Dvorkovich said.

It remained unclear on Tuesday if the new package includes a long-awaited reduction in payroll tax for small and medium-sized businesses. Dvorkovich said the president expects the government to introduce measures that “will compensate for increases in the tax burden on high-tech and engineering companies.” The president also wants the government to bring down payroll taxes “for certain categories of small enterprises to 20 percent,” he said. Analysts say the government's plan has effectively scuttled one of president Medvedev's top policy goals to drastically reduce payroll taxes. Instead of the hyper-hyped tax reduction, the plan has instead redistributed the tax burden between low and high income segments of the economy, the Kommersant business daily wrote on Tuesday.

Sergei Borisov, the head of Opora, the country's largest association of small and medium-sized businesses, said the double-tier tax plan would discourage employers from raising wages. “The 30-percent rate is not much different from the current rate, which is considered too high for small businesses,” Borisov said. “We can see good companies dying off. Most of those that want to survive have no choice but to go underground.” Other experts and industry leaders have said the 34 percent payroll tax may stifle small and medium business, so crucial to president Medvedev's goal to diversify the economy. “It is not only because small and medium sized enterprises generate the most sustained economic activity, but so many of the innovations and modernizations and diversification aspects of the economy that the Kremlin hopes to carry out come out of small-sized businesses,” said Peter Necarsulmer, the CEO of PBN Company.

In January, the government increased the payroll taxes – payments which companies contribute to social funds depending on the level of their employees' salaries – to 34 percent, from 26 percent in 2010. Dvorkovich said the budget could lose from 400 billion to 500 billion rubles ($14.3 billion to $17.8 billion) if the tax was to be reset back to the previous level of 26 percent. He added that the government had expected to bring in 700 to 800 billion rubles by raising the tax. The shortfall could, however, be compensated for through hikes in alcohol and tobacco excise duties, and partially by increasing revenues from oil and gas exports, the presidential aide said in April.

President Medvedev first unveiled his tax cut proposal during a landmark speech in Magnitogorsk in March. He followed up at the St. Petersburg Economic Forum in June, ordering the government to find ways to reduce the maximum payroll taxes from 2012 to 30 percent from the current 34 percent, and to just 20 percent for small businesses working in manufacturing and the social sectors. However, Prime Minister Vladimir Putin told a business forum in May that while the government agreed with president Medvedev that the payroll tax, which finances pensions and the state healthcare system, should be cut, "we have to calculate, we cannot make any mistakes here." Local media reports suggest that there have been some behind-the-scenes wrangling between the White House and the Kremlin over the issue. Dvorkovich told journalists in June that there had been no unanimous decision on payroll tax cuts.

Last month, the Russian prime minister said he was backing a proposal to levy a payroll tax on higher salaries, to offset the cut cost to the budget, which he said could reach $16.4 billion in 2012. “The missing revenues are very substantial. In order to at least partially cover them we are proposing to introduce additional contributions to social security funds on high salaries,” Putin told a government meeting in July. Russia is expected to run a fiscal deficit equal to 2.7 percent of the GDP next year. But the new two-tier tax could bring up to $5.7 billion into the budget, and with the average annual salary in Russia at only $9,640 it will only affect the minority of Russians. The Finance Ministry expects the decision to affect only the high income sectors, such as banking and energy.

"Of course, this is somewhat of a disappointment,” Alexander Shokhin, the head of Russia's big business lobby, the Russian Union of Industrialists and Entrepreneurs, said. His lobby group had earlier suggested that government should pursue a more aggressive privatization policy and use proceeds from the program to compensate for shortfalls in the budget that could result from tax reduction. “This is a redistribution of the tax burden between low and high-paying industries, but not a [tax] reduction,” Shokhin said. “Months of discussions have failed to provide answers to that question.”

Institutions and banks drag on Russian competitiveness while EMs thrive

http://www.bne.eu/dispatch_text16523

bne
September 8, 2011

Russia has seen it's ranking in the World Economic Forum's Global Competitiveness Report for 2011-2012 sag, weighed down by its weak institutions and banking sector, even whilst other BRICS and emerging economies gained on developed markets.

Russia dropped three places to 66th position in the report, with an improvement in macroeconomic stability outweighed by 'deterioration in other areas, notably the quality of institutions, labor market efficiency, business sophistication, and innovation.'

The lack of progress with respect to the institutional framework is of particular concern, the report says, suggesting that the country's weak institutions are one of the biggest drags on competitiveness. It also claims that the rule of law and the protection of property rights are other major points of concern, as are the judiciary and security levels across the country.

Competition is also stifled by 'stifled by market structures dominated by a few large firms, inefficient anti-monopoly policies, and restrictions on trade and foreign ownership.'

Meanwhile, one of the most worrying points for the Kremlin will be the drag constituted by the countries unstable financial markets and a banking sector which was particularly poor in the WEF's assessment, ranking it 129th in the world. This is dispute the huge efforts of the authorities to develop the Russian financial markets in order to promote Moscow as an international financial centre.

It wasn't entirely bad news, with Russia scoring highly for its 'high innovation potential (38th for capacity for innovation), its large and growing market size (8th), and its solid performance in higher education and training (27th for the quantity of education).'

However, the ranking is even greater a worry given that other emerging economies are racing ahead, with Russia stuck firmly at the bottom of the BRICS mini-league. As the report states: 'while competitiveness in advanced economies has stagnated over the past seven years, in many emerging markets it has improved, placing their growth on a more stable footing and mirroring the shift in economic activity from advanced to emerging economies.'

'China (26th) continues to lead the way among large developing economies, improving by one more place and solidifying its position among the top 30. Among the four other BRICS economies, South Africa (50th) and Brazil (53rd) move upwards while India (56th) and Russia (66th) experience small declines. Several Asian economies perform strongly, with Japan (9th) and Hong Kong SAR (11th) also in the top 20.'

Still, the top ten is dominated by Europe, with Switzerland landing top spot, although France managed to drop three places to 18th, and beleaguered Greece plummeted to 90th.