II Recent Revenue Developments
Author:
Mr. Liam P. Ebrill
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Language:
English
Print Publication Date:
30 Aug 1999
Keywords:
OP; country; revenue action plans; government; cash revenue; GDP ratio; federal government revenue statistics; revenue ratio; revenue performance; decline in the CIS country; Baltics
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Abstract

General government revenues, which include revenue from both central and local governments, collected within the Baltics, Russia, and other countries of the former Soviet Union had already fallen below Soviet-era levels by 1993. Revenue as a share of GDP declined on average by the equivalent of about 5 percentage points, from about 35 percent of GDP (weighted average) in 1993 to under 30 percent of GDP in 1995. This reflects a modest increase in the Baltics since 1993, more than offset by a decline in the revenue to GDP ratio of substantially more than 5 percentage points for most CIS countries (Table 1). Thus, for example, the revenue-to-GDP ratio fell by 23 percentage points in Azerbaijan, probably at least 15 percentage points in Tajikistan, and 11 percentage points in Armenia from 1993 to 1996.2 In Georgia, while no comparable data are available for earlier years, the 1993 revenue-to-GDP ratio of 3.4 percent, reflecting the civil strife at the time, clearly indicates that there must have been a precipitous drop from the preceding period; thus the rising trend after 1993 is not surprising. To summarize the situation for the CIS countries in the late 1990s, experience ranged from a sizable decline in the revenue-to-GDP ratios—for example, in strife-torn Georgia and Tajikistan, where revenue dropped to 10–12 percent of GDP—to little if any change in places such as Ukraine and Belarus, where economic and structural reforms were less advanced and revenue remained as high as 40-45 percent of GDP.

General government revenues, which include revenue from both central and local governments, collected within the Baltics, Russia, and other countries of the former Soviet Union had already fallen below Soviet-era levels by 1993. Revenue as a share of GDP declined on average by the equivalent of about 5 percentage points, from about 35 percent of GDP (weighted average) in 1993 to under 30 percent of GDP in 1995. This reflects a modest increase in the Baltics since 1993, more than offset by a decline in the revenue to GDP ratio of substantially more than 5 percentage points for most CIS countries (Table 1). Thus, for example, the revenue-to-GDP ratio fell by 23 percentage points in Azerbaijan, probably at least 15 percentage points in Tajikistan, and 11 percentage points in Armenia from 1993 to 1996.2 In Georgia, while no comparable data are available for earlier years, the 1993 revenue-to-GDP ratio of 3.4 percent, reflecting the civil strife at the time, clearly indicates that there must have been a precipitous drop from the preceding period; thus the rising trend after 1993 is not surprising. To summarize the situation for the CIS countries in the late 1990s, experience ranged from a sizable decline in the revenue-to-GDP ratios—for example, in strife-torn Georgia and Tajikistan, where revenue dropped to 10–12 percent of GDP—to little if any change in places such as Ukraine and Belarus, where economic and structural reforms were less advanced and revenue remained as high as 40-45 percent of GDP.

Table 1.

General Government Revenue Developments: Total Revenue

(In percent of GDP)

article image
Sources: Data provided by the authorities; and IMF staff estimates.

Data cover the first and second quarters for Armenia, Georgia, Latvia, Lithuania, and Russia; for all others, the data cover the first through the third quarters.

Including grants

Including external grants

State budget only (i.e., excluding payroll taxes and other revenues of extrabudgetary funds).

Data are not strictly comparable across years due to the falling value of noncash revenues in 1994 and 1995 and the change of the national currency in mid-1995. State budget only.

Most intra-year variation due to strong seasonality in GDP.

Weights based on output in 1994.

Figure 1 likewise suggests a relationship between revenue decline and general progress on transition.3 Countries that significantly delayed reforms and retained more of the Soviet-period mechanisms of control over enterprises were generally able to maintain or quickly regain high levels of revenue collection. Belarus, Turkmenistan, and Uzbekistan arc clear examples; Ukraine, in which reform began to move forward only in 1995, is broadly similar, though its revenue did decline more sharply after 1994. Countries that proceeded with reforms and that were not affected by civil strife, such as Kazakhstan, the Kyrgyz Republic, and Russia, all experienced a clear trend reduction in their revenue ratios.4 In the Baltics, where reforms came early and advanced rapidly, there was neither a perceptible revenue decline nor indications of revenue levels that were too low for reasonable government operations. These developments suggest that while avoiding economic reforms might have helped maintain revenue close to levels of the Soviet period for some period of time, substantial and sustained progress in reform gave even better results.5

Figure 1.
Figure 1.

General Government Revenue

(In percent of GDP)

Sources: Data provided by the authorities’ and IMF staff estimates.1. State budget only.

The most noteworthy feature as regards the pattern of changes in the major revenue components (Table 2) is the uniform decline in enterprise profits taxation, largely independent of overall revenue developments. This decline reflects, among other things, a combination of falling profitability, growing difficulty in administering profits taxes in economic transition, and the removal of excess wage taxes.

Table 2.

General Government Revenue Developments: Components of Revenue

(In percent of GDP)

article image
article image
Sources: Data provided by the authorities; and IMF staff estimates.

The Health Insurance Fund was added to payroll taxes as of January 1997. “Other” taxes does not include nontax revenue.

The importance of revenue mobilization has been highlighted by the August 1998 economic crisis in Russia. The crisis had several causes, but a key one was the inadequacy of federal government tax policies in achieving a sustainable improvement in revenue mobilization. The economic downturn in Russia and, looking forward, the contagion effects arising from the crisis are likely to have spillover effects on other CIS countries. This is particularly unfortunate since, before these most recent developments, trends indicated that the general revenue decline in the CIS countries had begun to be corrected in many instances. For nine of the twelve CIS countries (Armenia, Azerbaijan, Belarus, Georgia, the Kyrgyz Republic, Moldova, Tajikistan, Turkmenistan, and Ukraine) the revenue/GDP ratio rose between 1996 and 1997 (Table 1). The ratio remained about the same in Kazakhstan and Russia. Only Uzbekistan experienced a significant decline in its revenue ratio in 1997; the revenue ratio fell by about 4–5 percentage points as revenue from profits taxes, excise taxes, and oil taxes declined markedly, reflecting a poor 1996 cotton crop and a reduction in state orders.

In general, the more favorable revenue outcomes experienced in 1997 reflected a stronger performance of both indirect taxes and taxes on labor (individual income tax and payroll taxes), which tended to compensate for weaker enterprise profits taxes (Table 2). In many cases this can be attributed to a resumption of growth. For a few countries, however, the recent increase in the revenue/GDP ratio partly reflected special factors. For example, tax collections were boosted by large tax offsets in Armenia and Ukraine.6 In Turkmenistan, the significant increase in the ratio is related to a large decline in GDP (the denominator in the ratio), but is also partly due to special factors—a large payment of revenue arrears, and the partial transfer to the budget of the receipts of payments on rescheduled gas debt.

Data for the beginning of 1998 reveal that revenue performance continued to improve or stabilize in most countries compared to the same period in 1997. Specifically, partial data for 1998 suggest that through the first half of the year revenue increases continued for most CIS countries, with three noticeable exceptions: Azerbaijan, where lower oil prices affected tax revenue; Moldova, where a combination of slower growth and collection problems caused a decline; and Turkmenistan, which suffered adverse revenue consequences following a virtual cessation of gas exports.7 As already noted, however, whether the general trend toward higher revenue yields is sustained in the near term will depend on the fallout from the recent Russian crisis.

In Russia, one should distinguish between trends in cash receipts and noncash revenues or tax offsets as well as between developments at the federal and regional levels. The decline in cash revenues at the federal level has been dramatic. Revenues for regional governments, including tax offsets, during the period 1993 to 1997 remained at about 22 percent of GDP while federal government cash revenues declined from about 14 percent to just over 9 percent of GDP. This difference has less to do with fiscal—federal relations than it does with the extensive and growing use of tax offsets by regional governments. The precise extent to which tax offsets are used by regional governments is not known, but they are believed to account for the bulk of revenue at present. At the federal level, the use of such offsets, on the order of 3 percent of GDP in 1997, is reflected in the revenue data during the years prior to 1997. Beginning in 1997, the definition of federal revenue ex-eluded any offsets. The federal/regional pattern in the most recent revenue developments in Russia is significantly different from that in earlier years. Specifically, in the first half of 1998, the federal government’s revenue-to-GDP ratio rose by 1 percentage point compared to 1997. while that of the regional governments fell substantially, resulting in an overall decline in the revenue-to-GDP ratio of 0.8 percentage points.

Tax offsets and related payments in kind are extremely important mechanisms for most CIS countries, not only Russia. Some suggest that offsets are an inevitable byproduct of an economic system that systematically overstates total value added in the economy, particularly in the old state sector where tax liabilities are still most easily assessed.8 This may be, but the use of offsets undermines the proper functioning of the tax system by masking the true extent of both liabilities and collections. In a number of the CIS countries, complete elimination of this device has been a major focus of IMF programs. The relative importance of this mechanism, though difficult to measure in precise terms, clearly varies by country. The Baltics have virtually abandoned the use of offsets. For most of the countries in the region, offsets probably represent between 1 and 3 percent of GDP, but substantially higher reliance prevails in four countries. Moldova derives about 20–30 percent of revenues (5–10 percent of GDP) through tax offsets, but with a clear declining trend. For Turkmenistan, offsets constitute about 40–50 percent of revenues (10–18 percent of GDP), in this case with an increasing trend after 1996. In Ukraine, they remain at about 20 percent of revenues (about 8 percent of GDP). For Russia, offsets at the federal level now amount to perhaps 3.5 percent of GDP (though, as noted, since 1997 these do not appear in the federal government revenue statistics). According to anecdotal evidence, regional tax collections in Russia are mostly in noncash forms, suggesting that at least 10 to 15 percent of GDP is collected in this form. This appears also to be a major issue with respect to regional/local revenues in Kazakhstan.

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Cover Tax Reform in the Baltics, Russia, and Other Countries of the Former Soviet Union
Tax Reform in the Baltics, Russia, and Other Countries of the Former Soviet Union
ISBN:
9781557758026
ISSN:
0251-6365
Publication Date:
30 Aug 1999
Publisher:
International Monetary Fund
DOI:
https://doi.org/10.5089/9781557758026.084
Pages:
36
Figure 1.

General Government Revenue

(In percent of GDP)

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