Russian Federation: Selected Issues
Author: International Monetary Fund
Publication Date:
30 Sep 2004
eISBN:
9781451833119
Language:
English
Keywords:
ISCR; CR; Russia; tax; oil price; oil tax regime; government's estimate; government spending; federal government; Oil prices; Oil; gas and mining taxes; Pension spending; Wages
Download PDF (319.8 KB)

This Selected Issues paper for the Russian Federation reviews trends in private capital flows to Russia by decomposing the flows into its subcomponents. Russia became a net lender to the international banking system, as a complement to the prolonged period of large current account surpluses. The nonbank corporate sector in Russia began to have better access to both bank and nonbank sources of external finance, with improving investor perceptions and a favorable external environment. The relatively lackluster performance of equity issuances and foreign direct investment has been an outcome of both global and local factors.

Abstract

This Selected Issues paper for the Russian Federation reviews trends in private capital flows to Russia by decomposing the flows into its subcomponents. Russia became a net lender to the international banking system, as a complement to the prolonged period of large current account surpluses. The nonbank corporate sector in Russia began to have better access to both bank and nonbank sources of external finance, with improving investor perceptions and a favorable external environment. The relatively lackluster performance of equity issuances and foreign direct investment has been an outcome of both global and local factors.

IV. Key Fiscal Measures for 2005: An Assessment48

  • The most important fiscal measure for 2005 is a tax cut, entailing a reduction in the effective social tax rate by 5–6 percentage points. As a result, the general government is likely to lose revenues by nearly 1¼ percent of GDP. Offsetting revenue measures are limited to hikes in oil taxes, designed to raise substantial revenues only at very high oil prices. Social benefit reform, aiming at eliminating unfunded benefit entitlements, is another major element of the 2005 budget.

  • While these measures are positive steps in principle, their timing might not be optimal. Absent further offsetting measures, they are likely to add fiscal stimulus to the already buoyant economy, increase vulnerability of the budget to oil prices, and limit the scope for fiscal easing in the next economic downturn. In addition, the cutback of the funded pension system, associated with the tax cut, is a regrettable reversal of pension reform.

  • Given sizeable budget surpluses in recent years, low public debt, and a very high level of international reserves, the fiscal measures do not appear to jeopardize longterm fiscal sustainability. They would, however, reduce room for maneuver in the future, given potentially large resource needs for important reforms and better social services. Additional spending pressure could also arise from large unfunded pension obligations and contingent liabilities associated with the recent introduction of deposit insurance.

A. Introduction

1. The government has adopted several important fiscal measures for 2005. They include a reduction in the social tax rate, hikes in oil taxes, and reform of social benefits. The tax cut is the most important among them in terms of the scale. The measure is also important qualitatively, with the tax cut package entailing modifications of pension reform and, more broadly, hikes in oil taxes. This chapter describes key elements of the tax cut package, discusses its economic and policy background, assesses its fiscal implications, and discusses policy issues arising from the social tax cut, the oil tax increases, and the social benefit reform.

B. Key Elements of the Tax Cut Package

2. The social tax is the single largest tax of the general government. It amounts to nearly 8 percent of GDP and finances the bulk of social expenditures administered by state social extrabudgetary funds, including the state pension fund. The tax is also one of the most stable taxes, based almost entirely on wage bills. The tax rate was already reduced in 2001 from a flat rate of 39.5 percent to regressive rates with an average effective rate of about 30 percent and a top rate of 35.6 percent. However, the social tax is still widely seen as overly burdensome. Many claim, and Fund staff agree, that the high social tax rate hampers the growth of small and medium-sized businesses, impedes investment, and leads to tax evasion and hidden activities.

uA04fig01

Revenues of the General Government

(In percent of GDP)

Citation: IMF Staff Country Reports 2004, 316; 10.5089/9781451833119.002.A004

3. There have been three main competing proposals for the tax cut, differentiated by the scale and modality of the cut. The first, which passed its first reading in parliament last year, envisages a reduction in the effective rate by about 8 percentage points. The second, approved in principle by the previous government late last year, is to decrease the effective rate by about 5–6 percentage points. A third, more recent, version called for a more drastic cut—a reduction in the effective rate by as much as 10 percentage points. The radical approach, based on an assertion that the tax base could be expanded only by a very large tax cut, has received broad public support, in part bolstered by sustained budget surpluses and rising international reserves.

Table 1.

Marginal Social Tax Rates for Employers*

(In percent of annual wage bills)

article image

Standard rates. Preferential rates are applied to individual entrepreneurs, lawyers, agricultural workers, and qualified small businesses.

Or fixed at Rub9600.

Including mandatory pension contributions of 2-4 percentage points to be paid by employees to their own individual retirement accounts. These contributions are currently paid by employers as part of the unified social tax.

4. Eventually, the new government, formed after the March presidential election, endorsed the most modest version, entailing a reduction in the effective rate by 5-6 percentage points. The State Duma passed the bill in late June and the president signed it into law in late July. Details of the changes are as follows:49

  • The standard top rate of 35.6 percent will be cut to 26 percent. In detail, the social tax collected by the federal government will be cut from 14 percent to 6 percent; mandatory contributions to the social insurance fund will be cut from 4 percent to 3.2 percent; and those to the medical insurance fund from 3.6 percent to 2.8 percent. In contrast, total mandatory contributions to the state pension system, including the pay-as-you-go part and the funded part, will remain unchanged at 14 percent.

  • Preferential rates for small businesses and certain occupations will be mostly preserved. This will be achieved by reducing the preferential rates largely in proportion to the cut in the standard rates. Specifically, the basic preferential rate for small businesses will drop from 13.2 percent to 10 percent, for agricultural producers from 26.1 percent to 20 percent and for lawyers from 10.6 percent to 8 percent. These preferential rates will remain much lower than the new standard top rate of 26 percent, although absolute differences in the rates will be narrowed.

  • The average tax rate will decline sharply for most employees. The average tax rate will fall for wage brackets below an annual average wage of Rub 280,000, or about $800 per month, while those above the threshold will remain largely the same. Given that the national average wage is currently well below Rub 100,000 per annum, most employees are expected to be in the top bracket, for which the tax rate is set to drop the most, by 9.6 percentage points.

  • The funded pension system will lose a substantial portion of pension contributions in order to finance the pay-as-you-go system. The enacted tax cut bill effectively discharges ⅓–½ of qualified employees from the defined contribution system (or the funded system). Their contributions to the defined contribution system, estimated at around ¼ percent of GDP, will instead be transferred to the defined benefit system and used to finance part of the gap caused by the tax cut. This means that middle-aged employees, who have been accumulating contributions to the funded pension system since 2002, will be no longer allowed to continue tax-deductible pension saving. This is a sharp reversal of an ambitious pension reform, which was launched in late 2001 with the aim to develop financial markets and ensure long-term financial viability of the public pension system.

uA04fig02

Average Social Tax Rates for Each Income Level

Citation: IMF Staff Country Reports 2004, 316; 10.5089/9781451833119.002.A004

C. Economic and Policy Background

5. The social tax cut, while justifiable in principle, needs to be assessed against the economic and policy background. The government accelerated tax reform in mid-2000 as one of its top priorities. The reform entailed streamlining tax rules, reducing or eliminating exemptions, cutting and unifying tax rates, and centralizing revenues to the federal government (Box 1 and IMF 2002). One of the core commitments of the government was to reduce the tax burden by 1 percent of GDP per year, starting from 2004 and sustained for the next two to three years. As part of the committed reform, the standard rate of the value-added tax (VAT) was cut from 20 percent to 18 percent in 2004. Also, the sales tax, a major local tax, was eliminated in 2004.

Key Tax Reform Measures

President Putin, after winning the presidential election in early 2000, introduced sweeping tax reforms in mid-2000. The objectives were to make the tax system fairer, simpler, more stable, more predictable, and more efficient.

Specific reform measures included:

  • Elimination of turnover taxes including housing tax (2001), tax on fuel sales (2001), road fund tax (2003) and sales tax (2004);

  • Reduction of the standard social tax rate from 39.5 percent to 35.6 percent, and the top personal income tax rate from 35 percent to 13 percent (2001), the profit tax rate from 35 percent to 24 percent (2002), and the standard VAT rate from 20 percent to 18 percent (2004);

  • Introduction of a low, flat income tax rate of 13 percent (2001); introduction of a mineral extraction tax (2002), of which rate is linked to world oil prices; introduction of a simplified tax system for small businesses (2003) and agriculture (2004); and

  • Removal of domestic tax havens (2004) and reduction of a variety of exemptions and tax privileges.

6. As intended, tax reform led to a considerable decline in non-oil taxes. Non-oil taxes collected by the general government dropped by about 1 percent of GDP in 2003 compared to the pre-reform year of 2000, breaking a trend of steady non-oil tax collections in the post-crisis period. Non-oil taxes declined less at the federal level as a result of the centralization of tax revenues. Nontax revenues however increased, reflecting buoyant property incomes.

Table 2.

Tax Performance Before and After Tax Reform

(Changes within periods in percentage points of GDP)

article image
Source: Ministry of Finance and author’s estimates.

Excluding end -year non -cash revenues and offset, estimated at 1 percent of GDP.

Excluding the unified social tax.

7. The true size of tax losses was masked by high oil prices. Despite tax cuts, oil tax collections remained largely unchanged relative to GDP between 2000 and 2003. This mainly reflects high oil prices and changes in the oil tax regime, which made oil taxes more progressive with respect to oil prices (Kwon 2003). A surge in oil production and oil exports after the crisis also contributed to the strong performance of oil taxes.

D. Fiscal Implications of the Tax Cut Package

8. The tax cut package has several fiscal implications. This section discusses budgetary costs of the tax cut and assesses its possible compliance effects. This section also discusses their implications for the vulnerability of the budget to oil prices.

The impact cost of the tax cut

9. The tax cut is likely to cost the budget of the general government nearly 1¼ percent of GDP in 2005. This impact cost estimate is consistent with the government’s initial estimate of some Ruble 280 billion, or slightly over 1½ percent of GDP. The staff’s estimate is slightly lower than the government’s estimate as it takes into account an expansion of other tax bases because of the tax cut, notably profit tax and personal income tax.

10. Compensatory revenue measures are limited to hikes in oil taxes, designed to raise substantial revenues only at very high oil prices. The government estimates that the hikes will add revenue by some ½ percent of GDP at Urals oil prices over $30 per barrel but very little at prices around $20 per barrel. Some gains are expected in personal property tax, tax on dividends and unified tax on mixed incomes, but they are likely to be minor. These changes will increase the sensitivity of the budget to oil prices from an already high level, as discussed further at the end of this section.

11. Explicit expenditure measures are so far confined to modest savings in health and pension expenditures, totaling about ¼ percent of GDP. Specifically, the social insurance fund will save about 0.1 percent of GDP by shifting its financial responsibility for the first several days of sick leave to employers.50 A similar saving scheme is being considered for the medical insurance funds, although no concrete schemes have been agreed yet.51 The state pension fund could reduce pension expenditures by slowing down the indexation of pension payments, but the sustainability of this approach is doubtful, given the already low level of pension benefits.

Assessment of possible compliance effects of the tax cut

12. Proponents of the tax cut argue that revenue losses are overstated as the tax cut will lead to a large and rapid improvement in tax compliance. There is little doubt that so-called hidden wages are substantial—they account for a quarter of total labor compensation accrued in the economy according to the State Statistical Agency. Indeed, there is little evidence of massive tax evasion in the declared part of labor compensation, typically taking the forms of excessive deductions and fraudulent claims for preferential rates; the state pension fund reports that over 90 percent of reported wages are charged at standard rates with less than 10 percent at preferential rates. Thus, a significant increase in the tax base would be impossible without reduction in the so-called shadow economy.

uA04fig03

Labor compensation and social tax bases

(in percent of GDP)

Citation: IMF Staff Country Reports 2004, 316; 10.5089/9781451833119.002.A004

13. There is, however, considerable uncertainty about the scope for rapid improvement in tax compliance since hidden wages are mostly in sectors where tax administration is traditionally very difficult. Detailed national account data show that slightly more than ⅓ of total value added in the economy was produced in 2002 by agriculture, real estate businesses, trade, and restaurants, where wages are inherently mixed with other incomes and practically often non-taxable. In contrast, wages reportedly paid by these four sectors were much less than one tenth of total labor compensation in the economy, which includes official estimates of hidden wages. The large discrepancy between the sectoral value added and the sectoral wage contributions suggests that a significant portion of hidden wages are in these four sectors since, otherwise, employees in these sectors would have received wages equivalent merely to one tenth of the total value produced by these sectors—a share clearly out of line with the national average of 50 percent and the conventional range of 50–70 percent in other economies.

uA04fig04

Labor Compensation and Valude Added

(in percent of total)

Citation: IMF Staff Country Reports 2004, 316; 10.5089/9781451833119.002.A004

14. Moreover, experience with previous tax cuts suggests that revenue losses are only partially and gradually compensated by increases in tax bases. Surely, collections of personal income tax improved substantially almost immediately after the introduction of a low flat income tax in 2001. Based on a panel data regression, Sinel’nikov-Murylev and others (2003) attributed the improvement mostly to a positive impact of the tax cut. However, experience with other tax cuts—notably profit tax and VAT—suggests that this was most likely an exception, explained largely by a boost in disposable income associated with public wage hikes and simultaneous cuts in other taxes sharing common tax bases (Gurvich and others, 2003).

15. A case in point is previous experiments with the social tax regime. Already in 2002, individual entrepreneurs, a potentially large untapped tax base, became eligible for preferential rates, which are less than half the standard rates. But there has been little improvement in collection since the change. Similarly, a comparable preferential regime was granted to agricultural workers in 2004, without any positive impact as yet. Furthermore, weak VAT performance after the recent tax cut and emerging evidence of large-scale refund fraud suggest that tax cuts are unlikely to be self-financing unless combined with strengthened tax administration. In this regard, the outlook for quick improvement in compliance is not good, particularly because tax administration remains weak and the new tax structure will preserve highly preferential rates.

Vulnerability of the budget to oil prices

16. The share of oil revenues in the budget has steadily increased since the 1998 crisis. Its share in the revenues of the general government soared from less than a fifth in 1998 to a quarter in 2003. The share in federal revenues rose even more sharply, from a quarter to 40 percent, as more oil taxes were shifted to the federal government. As noted above, these developments reflect changes in the tax regime, high oil prices, and relatively strong growth in oil output and exports, which in combination more than tripled the sensitivity of federal revenues to oil prices compared to the pre-crisis level.

uA04fig05

Marginal oil tax rates*

Citation: IMF Staff Country Reports 2004, 316; 10.5089/9781451833119.002.A004

* Marginal tax rates for oil export tariffs and oil extraction tax

17. The planned replacement of the social tax with oil taxes will further magnify the sensitivity of the budget to oil prices. At Urals oil prices higher than $25 per barrel, the new oil tax regime will increase the combined marginal tax rate for the two major oil taxes, including the oil export tariff and oil extraction tax, from 59 percent to 86 percent. This sharp increase will lift the oil price sensitivity of federal revenues—at the top price range of over $25 per barrel, a one dollar decline in oil prices is estimated to reduce general government revenues by about 0.41 percent of GDP, compared to some 0.37 percent of GDP in 2004.

18. The oil stabilization fund, put in place this year, will certainly help to mitigate the vulnerability of the budget but, in its current form, would not be sufficient to limit downside risks. In an attempt to reduce oil dependency of the budget, the government introduced a law on an oil stabilization fund in 2003 and created the fund in January 2004. The fund is set to accumulate the oil revenues that can be attributed to Urals oil prices in excess of $20 per barrel. The fund’s resources can be invested only in high-quality foreign securities, with investment incomes retained within the fund. The resources are allowed to be withdrawn to fill financing gaps when oil prices fall below the benchmark price of $20 per barrel. A critical drawback in this arrangement is that these rules work only until the fund reaches a cap of Ruble 500 billion (about $17 billion or 2¾ percent of GDP). If the fund accumulates resources beyond the ceiling, the government could use the excess oil revenues to increase expenditures, regardless of the level of oil prices.

E. Policy Issues

Political economy considerations

19. There could be a case for a tax cut from the viewpoint of political economy. Experience of many commodity exporting countries suggests that the accumulation of windfall revenues tends to increase political pressures to spend them and often ends up with wasteful expenditures (Talvi and Vegh, 2000; Tornell and Lane, 1999; Gelb 1988). In such a case, a tax cut could be supported as a better alternative to wasteful spending on the ground that money left with the private sector is usually utilized more efficiently.

20. A risk in this strategy is that expenditures could still increase with or without tax cuts. Such a risk has been amply demonstrated by a recent decision of the government to increase expenditures by about ¾ percent of GDP, which together with the tax cut would cost the 2005 budget about 2 percent of GDP. The extra spending could be justified as it is expected to help marshal critical political support for eliminating unfunded social benefits (Box 2). A concern, however, is that there might be other equally justifiable expenditure needs in the near future, given the challenging agenda of major structural reforms, including energy reform and civil service reform. Experience of other countries also illustrates a considerable risk of spending hikes following or in tandem with tax cuts (Stockman 1986, for example).

Reform of Unfunded Expenditure Mandates

One of the biggest challenges in intergovernmental fiscal relations in Russia is the so-called “unfunded mandates”—social benefit obligations imposed by federal laws on subnational governments without any identified source of financing. In practice, the bulk of these benefits have simply been not available in most regions because of the lack of funding. Only a fraction of them have been provided to limited beneficiaries in certain regions at budgetary expense or, more commonly, through cross-subsidies or de-capitalization of benefit providers. Correspondingly, the federal government has regularly suspended most of enabling laws through annual budgets, accounting for about ⅔ of the unfunded mandates, but this practice has been increasingly challenged in the constitutional court. Unsuspended unfunded mandates have been left to the discretion of subnational governments, which reportedly finance only a fraction of them.

The precise amounts of total unfunded mandates are hard to estimate due to legal ambiguities. An added complication is difficulties in pricing the social entitlements, most of which are Soviet-era remnants of inkind benefits in transportation, communication, health care, and public utilities. The ministry of finance estimates the amounts roughly at about 15 percent of GDP, subject to a wide margin of error, which is equivalent to the size of consolidated regional budgets.

The government has recently embarked on a sweeping social benefit reform, aiming to resolve the issue of the unfunded mandates. The measures, which require parliamentary approval, include the delineation of funding responsibilities among different layers of governments; the elimination of most of statutory—yet unaffordable—commitments; the assurance of a sufficient funding of the remaining benefits and their monetization; and the assignment of full authority to subnational governments in determining the size and scope of social benefits for certain categories of beneficiaries. According to the plan, the federal government will be solely responsible for 14 categories of beneficiaries totaling about 13 million while subnational governments will need to take care of some 21 million people, including Soviet-era political victims and certain types of veterans.

This is a welcome step in principle. The unfunded mandates are highly distortionary, non-transparent, and simply unaffordable. Payment in monetary form, which will be standard for federally-funded benefits according to the plan, will also help improve efficiency and ensure transparency of social spending. It is nonetheless unclear whether the monetization of in-kind benefits will be sufficiently well-targeted and whether subnational governments will have adequate resources and the political will to eliminate the unfunded mandates under their jurisdiction.

Short-term stimulus effect

21. On balance, the tax cut and social benefit reform are likely to add fiscal stimulus to an already buoyant economy, and so add to inflationary pressures. Signs of macroeconomic tensions include tightening labor markets, emerging capacity constraints, entrenched core inflation at a double-digit level and a recent acceleration in real ruble appreciation. The output response to fiscal stimulus in this environment would likely be minimal, if not negative, consistent with empirical studies on the short run fiscal multiplier (Hemming and others, 2002).

22. Empirical evidence suggests that an increase in oil taxes owing to high oil prices will not mitigate the inflationary effect of the tax cut and social benefit reform. A variety of regressions applied to quarterly data between 1995–2003 show that a fall in the overall fiscal balance, a conventional indicator of fiscal stimulus, does not show any significant, meaningful relationship with inflation or output growth. In contrast, strong and stable links are identified between inflation, in particular that of non-tradable goods, and increases in the non-oil deficit, measured as the difference between expenditures and non-oil revenues. These empirical findings indicate that a main fiscal driver in aggregate demand is government spending and taxes net of windfall oil revenues (see annex tables for typical results). These outcomes are largely preserved in dynamic settings including vector autoregression and error correction models, although their significances depend on the number of lags and the choice of exogenous variables. These findings on fiscal stimulus an inflation are broadly supported by outcomes of separate regressions taking government spending as an exogenous variable. They show that the impact of government spending on inflation outweighs that on output by as much as three times. Its inflationary effect is both strong and stable, particularly with respect to non-tradable goods.

Long-term fiscal sustainability

23. Given sizeable budget surpluses in recent years, low public debt, and a very high level of international reserves, the tax cut does not appear to jeopardize the long-term fiscal sustainability. The stimulus measures in the 2005 budget would nonetheless reduce room for maneuver in the future, given that pressures on limited public resources are set to remain high. In particular, the tax cut would weaken the already tenuous long-term solvency of the state pension system, which is expected to deteriorate progressively in the next two decades due to aging baby-boomers and declining labor forces as discussed below.

24. The demographic outlook in Russia is highly unfavorable, even relative to EU countries, which face serious fiscal challenges due to adverse demographic profiles. In Russia, the share of the population over 60, the retirement age for men, is projected to surge from the current rate of 30 percent of the working age population to 40 percent by 2020 and then further to some 60 percent by 2040. This escalating trend in the old-age dependency ratio is steeper than in most EU countries, where a comparable dependency ratio is to rise, on average, from about 25 percent in 2000 to some 50 percent in 2040 (EPC 2001). Among EU countries, only Italy is comparable to Russia in the steepness of its trajectory.

25. The social tax cut aggravates the solvency of the already fragile state pension system. In an earlier study by the World Bank (2002), public pension expenditures are projected to rise sharply in the long term, by as much as 4 percentage points of GDP from 2002 to 2040. This is based on a baseline scenario, assuming no changes in pension policies and tax rates, no deterioration in the replacement rates—the portion of wages covered by pension payments—and steadily increasing wage bills relative to GDP. The Pension Fund projects that the recent tax cut will aggravate the financial viability of the state pension system, putting the Pension Fund in an underlying deficit of about 1½ percent of GDP in the short and medium-term, even assuming a steadily declining replacement ratio. This projection is broadly consistent with preliminary estimates done by the World Bank (2004).

uA04fig06

Public Pension Spending

(in % of GDP)

Citation: IMF Staff Country Reports 2004, 316; 10.5089/9781451833119.002.A004

26. Other warning signals of potentially large future spending needs include low public wages and the existence of unfunded benefit commitments in the subnational governments. Another important source of contingent liabilities is a weak yet rapidly expanding banking sector, with household deposits now under a state guarantee.

Long-term growth implications

27. The long-term growth implications of the tax cut are ambiguous. Economic literature suggests that the growth implications of tax cuts depend on the reactions of the private sector and the nature and extent of compensatory measures. A self-financed tax cut, if it happens, would certainly be positive for growth, as the costs of business would be reduced without causing revenue losses. Also, empirical growth literature suggests that a tax cut combined with offsetting spending reduction could be positive to growth to the extent that the spending cuts do not adversely affect the quality of public services (Barro 2002). A strong case could be made in Russia in this regard since the cut in the social tax, which is widely seen as overly burdensome, would reduce distortions in the labor market and promote small and medium-sized businesses. However, in an equally, if not more, likely scenario of sustained revenue losses and associated deficits, growth would be negatively affected as deficits would crowd out private investment and reduce national saving. In sum, empirical studies on economic growth demonstrate that a tax cut alone, without supporting structural measures, would hardly contribute to sustained economic growth (Tanzi and Zee, 1997)

F. Conclusions

28. The reduction in the social tax rate and the social benefits reform, two key elements of the 2005 budget, are in principle positive measures. The social tax cut, the single most important fiscal measure for 2005 reduces distortions in the labor market and promotes small and medium-sized businesses. The ambitious social benefit reform is a welcome effort to eliminate large unfunded expenditure mandates and to improve the efficiency and transparency of social spending.

29. However, the timing of the tax cut and social benefit reform might not be optimal. If not accompanied by offsetting tax or expenditure measures, they are likely to add fiscal stimulus to the already buoyant economy, to increase the vulnerability of the budget to oil prices, and to limit the scope for fiscal stimulus in the next economic downturn. The planned increase in oil taxes will not mitigate the inflationary effect of the stimulus measures. Another shortcoming is the cutback of the funded pension system, which reverses hard-won gains made in pension reform. Moreover, although these expansionary fiscal measures do not appear to jeopardize long-term fiscal sustainability, they would reduce room for fiscal maneuver in the future, given the need to mobilize additional resources for important reforms and better social services. Finally, additional spending pressure could arise from large unfunded pension obligations and contingent liabilities associated with the recent introduction of deposit insurance.

APPENDIX I

Social Security System in Russia

The current system of social security is provided mainly by three extrabudgetary funds, the pension fund, medical insurance fund, and the social insurance fund. The pension fund is the biggest, spending around 5–6 percent of GDP per year. The old pay-as-you-go pension system was replaced by a mixed system in 2002, consisting of a flat basic pension, a notionally defined contribution scheme (NDC), and a fully funded scheme. The standard contribution rate has been set at 28 percent, with half of the contribution used for basic pensions and the remainder split between the NDC and the fully-funded scheme. Both the basic pension and NDC schemes are pay-asyou-go systems, although the NDC has certain elements of a funded system (World Bank 2002).

The social tax cut entails further changes in the social security system, substantially weakening the fullyfunded part. Contributions for old employees will continue to be fully transferred to the pay-as-you-go part. However, those for middle aged employees, currently split between the NDC and the fully funded part, will be wholly shifted to the NDC part. For young employees, the contributions will remain unchanged for 2005–07 as opposed to a planned increase of one percentage point for the fully-funded part at the expense of NDC part.

uA04app01bx01fig01
*Deductible to the social tax. These are commonly called the social tax, but strictly speaking not a tax.**Varying by ages but the sum of insurance contributions to NDC and the funded pension should be 14 percent.

APPENDIX II Selected Empirical Evidence of Fiscal Impulse to Output and Inflation

Table 3:

Inflation Indicators and Non-oil Budget Deficits

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Table 4:

Inflation Indicators and Government Consumption

article image

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48

Prepared by Goohoon Kwon.

49

See Box in Annex for a summary of the current social security system and planned changes.

50

This saving measure is in line with recommendations of a TA mission on public expenditures in 2000.

51

It is doubtful whether, without an overhaul of the state medical insurance system, a significant saving could be achieved in the medical insurance funds, which most local experts claim already run a large deficit, with the gap covered by private payment and de-capitalization. A recent reform initiative advanced by a government working group proposes that 1.5–2 percentage points of the unified social tax rate should be shifted to the private insurance system to promote competition and improve quality of medical services, with the resulting gap to be financed by the federal budget. Critics argue that this scheme will only worsen the viability of the state medical insurance system by transferring wealthy and healthy contributors to the private insurance scheme—the socalled adverse selection problem.

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Cover IMF Staff Country Reports
Russian Federation: Selected Issues
Author: International Monetary Fund
Volume/Issue:
Volume 2004: Issue 316
Publisher:
International Monetary Fund
ISBN:
9781451833119
ISSN:
1934-7685
Pages:
91
DOI:
https://doi.org/10.5089/9781451833119.002

Revenues of the General Government

(In percent of GDP)

Average Social Tax Rates for Each Income Level

Labor compensation and social tax bases

(in percent of GDP)

Labor Compensation and Valude Added

(in percent of total)

Marginal oil tax rates*

Public Pension Spending

(in % of GDP)