HSBC has assessed the risks of a fiscal devaluation in Russia

The government is returning to strategic budget planning, and intends to hold the so-called “fiscal devaluation” — reduce business contributions to social funds and at the same time to raise the VAT, writes in his review (have) economist HSBC across Russia and the CIS Artem Biryukov. About the plans of such a broad tax maneuver in recent months, the media wrote and said Federal officials. It can be part of a broader medium-term program to stimulate economic growth, as the fiscal devaluation is primarily aimed at stimulating net exports, said economist at HSBC.

The fiscal devaluation economists understand the use of tax reform to achieve the same incentive effects of the devaluation of the national currency. In General we are talking about tax cuts that affect the cost of production (insurance contributions for workers or income tax), taxes on final consumption, such as VAT. In theory it makes goods cheaper and more attractive in international markets (export operations are not subject to VAT).

In June, “Interfax” reported that the government may reduce the total rate of social security contributions up to 20% of salary (from the current 30%) and instead to increase VAT to 25% (from current 18%). HSBC has assessed this option and estimated that in this case, the annual losses of the budget will be 300 billion rubles, says the review. Another negative point is the acceleration of inflation by increasing VAT. Therefore, the maneuver is likely to be delayed until 2019 in order not to put pressure on achieving 4% inflation by year-end 2017 (the promised goal of the Bank of Russia)”, said Biryukov.

A Federal official familiar with discussions in government said this month that VAT could be increased from mid-2018 or 1 January 2019 while reducing profit tax (now in most cases is calculated at the rate of 20%).

The reduction of social contributions to the theory can bring out the grey of the shadow wage. The Finance Ministry estimates a shortfall of budget revenues due to the “shadow” salaries in 2 trillion rubles. From this it follows that the shadow is about 4-5 trillion of salaries, says HSBC. “At the moment we are quite skeptical about the possibility to withdraw such a huge amount of the shadow wage in the foreseeable future due to the relatively low level of confidence in the current model of the pension system,” — said Biryukov.

The government wants to balance the Federal budget by 2020. This will require fiscal measures amounting to about 4% of GDP, the authorities plan to reduce the deficit by 1% of GDP per year. “The de facto government approved the freezing of the Federal budget expenditures at the level of 15.8 trillion in years 2017-2019. According to our estimates, this will reduce the Federal budget deficit 2.7% of GDP from the required 4%”, — the report says HSBC. The rest is planned to due to the incentive income, in particular, to increase tax collection.

The impact of such fiscal consolidation on economic growth will be “quite moderate” — is unlikely to exceed in the aggregate 0.5% of GDP, says HSBC. But there are a number of risks that can interfere with these plans. In particular, President Vladimir Putin has so far not publicly voiced its position on this issue, said Biryukov, although the return of Alexei Kudrin in the number of people responsible for the development of medium-term economic strategy, can be interpreted as “a kind of support by the President for fiscal consolidation”.

To disrupt the programme of fiscal consolidation, according to HSBC, could a sharp rise in oil prices or, conversely, their sharp fall. A return to high oil prices is simply to deny the government incentives for its implementation, a sharp fall will highlight the need for fiscal stimulus.