Putin’s VAT Increase Will Hit Harder, Sooner and More Broadly than Pension Age Change, Shelin Says

Paul Goble

            Staunton, July 8 – Although the Kremlin’s plan to increase retirement ages has attracted more attention and protest, the value-added tax (VAT) increase the government is now pushing through the Duma will hit harder, sooner and more broadly, driving down industrial production and overall growth and increasing inflation next year, Sergey Shelin says. 

            With little debate or public complaint, the Rosbalt commentator says, the Duma has passed the government’s tax measure which will increase the VAT from 18 to 20 percent, go into effect not gradually but all at once in January 2019, raise inflation by about two percent, and cut GDP growth to 1.4 percent (rosbalt.ru/blogs/2018/07/06/1715701.html).

            Despite suggestions to the contrary, the additional revenues from this VAT increase will not go to boosting pensions, Shelin says. Instead, they will provide about half the funding needed to meet Vladimir Putin’s “May decrees” about infrastructure, education and health care.  Thus, this measure was needed to meet Putin’s announcement regardless of its impact on the economy.

            But this prompts two other questions, the Rosbalt commentator says. On the one hand, why was this proposal advanced at the same time as the project for raising the pension age?  And on the other, why has business which will be hit hard by this measure remained completely quiet instead of protesting?

            “It is easy to answer the first question,” Shelin says. Initially, the finance ministry wanted to put all this out as a single package but then the government divided it up so that the total consequences of the government’s efforts for the population would not be so obvious to everyone.

            Judging by the population’s almost exclusive focus on the pension issue, that calculation seems to have been justified, he continues.

            But why are businessmen so quiet? There, the situation is more complicated. It is not just about conformism. Many businessmen have shown they are prepared to complain when government policies hurt them.  Rather it is that some production is excluded from the hike and so businessmen can shift their efforts into those sectors.

            That works especially in areas where the Russian producers are competing with imports. If the latter are blocked entirely or taxed at a higher rate as they would be, domestic producers can not only gain market share but do so while raising prices at the same time, the commentator continues.

            Who says the Putin economic system doesn’t work? It increases taxes but in such a way that domestic producers can raise prices. Russian consumers pay for both, but those around the Kremlin become wealthier as a result of tax and price maneuvers that few Russians understand but that many will suffer from as a result, while a tiny minority benefit from both.