Tax Cuts May De-Stabilise Russia’s Economy Warns IMF

by Tatiana Smolenskaya, Tax-News.com, Moscow

01 July 2004

Comprehensive tax cuts should not be the sole means for Russia to achieve its ambitious growth targets and more should be done to improve the overall investment climate, an International Monetary Fund report has recommended.

As the government sets about fulfilling President Putin’s pledge to double economic output within ten years, Russian legislators have approved a raft of tax measures in recent months, including cuts in VAT and the elimination of the 5% regional sales tax. The State Duma also gave its backing recently to a cut in payroll tax.

However, the IMF's report as part of Russia’s Article IV consultation cautioned against a sudden fiscal loosening, and warned that the policy could drive up inflation and ultimately de-stabilise the economy.

“The notion that cutting high tax rates will quickly spur capacity enhancing investments finds little support in international experience,” the report noted.

Although the IMF broadly supported the reforms, its report argued that extra demand should not be added to the economy at such a “favourable” point in the economic cycle and that the reforms should not be achieved at the expense of increased risks to macro-economic stability.

“While the mission supports cutting the high social tax rates and partly monetizing the so-called unfunded benefits, these reforms will increase potential GDP only gradually, and only if accompanied by broad-based and sustained reforms to improve the investment climate,” the report added.

The IMF predicted that Russia’s economy will grow by 7.25% this year – unchanged on last year – fuelled by the effects of high oil prices.

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