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Medvedev Delivers Three-Year Budget Statement

by Tatiana Smolenskaya, Tax-News.com, Moscow

06 July 2011


Russia must modernize its economy as a priority, President Dmitry Medvedev has said, setting out a twelve point programme for the next three years, and hinting at a partial overhaul of the country's tax system and a wave of privatization.

Medvedev presented the 2012-14 Budget Address on June 29, which details Russia's budgetary policy for the next three years. Medvedev said Russia's budgetary system has served the country well, aiding the economy in its post-crisis recovery. Growth stabilized at 4% in 2010, and Medvedev expects a similar or higher figure this year. He also stressed that the budget deficit has been reduced considerably.

In the face of such progress, Medvedev emphasized that "our budget policy priorities now are to modernize our country and our economy, and establish the conditions for making our economy more competitive and ensuring stable long-term growth". He wishes to encourage innovation, a more efficient public sector, and modernization of financial and productive infrastructure.

In outlining his twelve point programme, Medvedev was frequently vague, and did not elaborate on many of the more general economic goals he set out. He spoke of the need to approve a long-term economic forecast no later than 2011, and made allusions to the concept that spending must be affordable and realistic.

In addition, according Medvedev, Russia's tax system "must be capable of responding to the challenges of a globalizing economy", and must contribute to the country's federal development.

Of greater clarity was Medvedev's announcement that the payroll tax, which is used to fund social and health insurance schemes, would drop from 34% to 30% next year for large companies and to 20% for small businesses in the social and industrial sectors. In order to fund these cuts, the government has the option of generating additional revenue through the privatization of federal assets, and further increases in oil and gas production taxes. Medvedev also said that additional revenues could be raised through higher alcohol and tobacco taxes, and stressed that Russia must replace its current property tax system with a special real estate tax.

Furthermore, Medvedev was insistent that Russia must consider sweeping privatization. His initial suggestion that privatization could fund the payroll tax cut was followed up by the argument that the state's role in the management of economic assets must be reduced. According to Medvedev, the government will need to draw up a timetable for the privatization of state owned companies, reducing its involvement to a less-than-controlling stake, or withdrawing completely where necessary.

This, Medvedev said, will help attract investment, and provide a more competitive environment. He argued that "there must be a level playing field for all - state companies and private businesses". Indeed, Finance Minister Alexei Kudrin spoke recently of the government's intention to sell several of its controlling stakes over the next three to five years. Those companies likely to be affected include oil giant Rosneft and the airline Aeroflot.

Other key elements of the proposals include the argument that the government must introduce rules for using oil and gas revenues and for limiting the size of the budgetary deficit, from 2015.

TAGS: Russia | tax | small business | economics | business | property tax | fiscal policy | public sector | budget | payroll | oil and gas | social economy | tax reform | regulation | services

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