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The following OECD assessment and recommendations summarise chapter 2 of the Economic Survey of Russia published on 15 July 2009.
After defaulting on part of its debt in 1998, the federal government ran a string of surpluses and almost extinguished public debt while building up foreign assets amounting to 13% of GDP by end-2008.
Years of large surpluses reduced public debt to low levels
Source: Federal Service for State Statistics, Central Bank of Russia and Ministry of Finance of the Russian Federation.
The authorities’ reaction to the onset of the crisis was broadly in line with that of many OECD economies, although the response in Russia was unusually rapid and large, reflecting in part the substantial resources available to the authorities after years of fiscal and balance of payments surpluses. Liquidity and capital were provided to the banking system, deposit insurance limits were increased, and a number of expansionary fiscal measures were announced. All told, quantifiable announcements in the first months of the crisis were equivalent to about 13% of GDP. These measures were initially thought to be more than adequate to address the consequences for Russia of the global financial crisis, but it has become increasingly clear that Russia is facing a deeper and longer downturn than was imagined a few months ago. As the stock of available resources has dwindled while the cost of some initial measures has risen (notably the combination of limiting depreciation of the rouble while providing ample liquidity to banks) new measures are being more carefully weighed, especially with respect to possible risks to fiscal sustainability.
The main short-term challenge for fiscal policy is to maximise the fiscal multiplier while managing moral hazard and risks to long-term fiscal sustainability. The former tends to suggest expenditure measures, possibly in the form of transfers to low-income households or lower levels of government, rather than general tax cuts. Temporary measures, such as one-off transfers or temporary tax rebates, can be one effective way of maximising the short-term demand impact. Measures that are hard to reverse, such as raising entitlements or cutting tax rates, could undermine long-term sustainability. The current crisis is increasingly looking like a more extended downturn than originally foreseen, which may make infrastructure spending more attractive than otherwise, particularly since there is evidence that the fiscal multiplier is highest for such spending. The threat to fiscal sustainability would appear to be less of a problem in Russia than in many OECD countries, given low levels of gross public debt and substantial public financial assets. Nonetheless, the federal deficit will be very large in 2009, and is likely to remain at high levels for several years. Moreover, Russia faces underlying negative demographic trends and particularly serious environmental degradation problems, which could entail major fiscal costs in the future. As in other countries, therefore, it will be important for Russia to set its stimulus efforts in a medium-term context that credibly charts a return to a sustainable public debt path.
Reorienting monetary policy to achieving inflation objectives implies that insulating the economy from large fluctuations in oil prices will largely fall to fiscal policy, especially as regards the mechanisms for taxing and saving oil. During the recent period of high oil prices reserves of about 13% of GDP were accumulated in two funds, one to smooth oil-price-dependent revenue fluctuations and the other to provide for a stream of income to boost long-term national welfare. In periods of oil price weakness, allowing the lower prices to be reflected in larger non-oil deficits financed by running down the Reserve Fund will offset part of the pressure for depreciation. Using fiscal policy to lean against real exchange rate pressures arising from oil price swings helps to insulate the non-oil economy from such swings and is welcome.
Russia has made major improvements to the structure of its taxation and to tax collection. Tax bases have been broadened, rates cut, and compliance improved. Nonetheless, scope remains for further reform that could speed up convergence to advanced country income levels. Oil and gas taxation should be adjusted to capture economic rents without harming incentives for exploration and development. In particular, export taxes on crude oil and oil products should be removed in the medium term. The government should address problems with VAT refunds directly, rather than bow to demands to cut rates, given that VAT is a relatively efficient tax. Russia has scope to increase the revenue share of property taxes, which OECD research suggests is the least growth-unfriendly form of taxation. Corporate profit tax, which is found to be particularly harmful for growth performance, is already at low levels after the most recent cut to 20% but, subject to satisfactory overall revenue collection, further reductions should not be ruled out. Economic efficiency would also suggest exploring ways of reducing the comparatively high tax wedge, which again is relatively growth-unfriendly. Apart from the possibility to further improve economic efficiency, considerable scope also remains to alleviate poverty, which despite some progress during the recent episode with exceptionally high growth is still far more prevalent than in OECD countries. This may require more redistribution than can be achieved at the moment with a flat tax rate for personal income, a regressive unified social tax and relatively low real estate and wealth taxation. This issue will be dealt with in the forthcoming OECD Labour Market and Social Policy Review.
How to obtain this publication
The complete edition of the Economic Survey of Russia is available from:
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.
For further information please contact the Russia Desk at the OECD Economics Department at email@example.com.
The OECD Secretariat's report was prepared by Geoff Barnard, Roland Beck, Paul Conway and Tatiana Lysenko under the supervision of Andreas Wörgötter. Research assistance was provided by Corinne Chanteloup.