Given the strict budget rule and sluggish economic growth, federal government officials are actively looking for measures to prop up the budget revenue base in the coming years. This summer, the government proposed two alternative initiatives to increase indirect taxation in Russia: a regional sales tax (up to 3%) or a 2pp hike in VAT. From the broad macroeconomic standpoint, we do not see a big difference between a VAT tax hike and the introduction of a new sales tax, although the latter would involve substantial administrative costs and is more prone to being bypassed.
We are particularly concerned that, given the recent news flow on the issue, there is a question of “which tax should be hiked” rather than “if”, as in our view 2015 looks especially undesirable for tightening tax policy in terms of timing, taking into account the cyclical picture and general stagflationary environment.
This news, however, does not indicate the final decision, just prior consent (as the Russian broadsheets reported back in early August). Today, the government is to discuss it further and the final confirmation is likely to come by the beginning of October, when the government is due to submit the 2015-17 Budget Law to parliament.
Were a regional sales tax to be implemented, that would put an additional dent in the already depressed business confidence. And given the low fiscal multiplier, its overall impact on GDP growth would be fairly negative. Moreover, the pass-through into inflation (+1.0-2.0pp to the headline CPI, depending on the scope of regions and CPI items affected) would significantly complicate the shift to inflation targeting and prevent inflation expectations from being anchored, while potentially increasing the risk that the government succeeds in diluting the CBR’s independence. Also, higher inflation in 2015 would mean higher public wages/pension indexation thereafter, thereby degrading the positive effect on revenues in 2015 (MinFin estimates it would bring around RUB 200bn)
The news implies risks to our growth, inflation and rates outlook.