…BUT QUESTIONS REMAIN ABOUT TAX REFORM AND THE BUDGET.

Tax collection is another matter, however. On February 4, Finance Minister Aleksandr Livshits said Russia’s finances were in a state of "extreme tension." (Finansovye izvestia, February 6) He blamed long delays in introducing tax and other reforms. Parts of Russia’s proposed new tax code are ready and will, Livshits said, be sent to the Duma at the end of this month. But the fact that a large number of tax breaks will have to be scrapped remains a major obstacle to implementation of tax reform. Livshits estimated that these tax breaks amount to R160 trillion a year (7 percent of 1996 GDP). Naturally, every tax break is jealously defended. It is therefore not surprising that one of Livshits’ deputies, Sergei Shatalov, has predicted that a new tax code will not be in place before 1998. (Nezavisimaya gazeta, December 4, 1996) Moreover, the introduction of a proper personal income tax and a reduction of the rates of business taxation are also central to tax reform, and these, too, cannot be swiftly put in place.

A Finance Ministry review of last year’s budgetary results provides a detailed expose of recent tax collection problems and ranks the various reasons why tax revenues were less than they should have been. (Finansovye izvestia, February 6) The shortfalls total around R50 trillion (2.2 percent of 1996 GDP). The unplanned-for fall in GDP is reckoned to account for R15 trillion, profit declines for R13 trillion, and last year’s lower-than-expected inflation for R8 trillion. Most of the rest is blamed on legislation that conflicted with tax collection plans.

The Finance Ministry, in other words, has blamed everything except the tax evasion that it has itself failed to prevent. The review does however mention end-year, accumulated tax arrears of R130 trillion (5.8 percent of GDP). It also discloses that, of 2.7 million legal persons (i.e., firms) registered by the State Tax Service, only 436,000 are not in "serious trouble" over their tax payments. Tax arrears on this scale suggest that the Russian government has two choices: either it can continue its present tight monetary policy and allow wage and pension arrears to continue to mount, or it will have to run a larger than envisaged budget deficit. That will get Moscow into trouble with the IMF and force it to issue larger quantities of treasury bills. That in turn will keep interest rates high and deter a recovery of investment and the looked for economic growth.

Indeed, a number of leading officials are now openly saying that the 1997 federal budget targets are unrealistic. This is despite the fact that a federal budget calling for 2 percent economic growth has just been approved by the Duma and is expected to be approved by the Federation Council on February 12. The chairman of the Duma’s budget and finance committee, Mikhail Zadornov, nonetheless says he expects Russia to record zero economic growth this year. (Itar-Tass, February 6) Skepticism about the federal budget has also been expressed by Economics Minister Yevgeni Yasin. (Nezavisimaya gazeta, January 29) Yasin’s unusually gloomy and outspoken statements have in recent weeks put him increasingly at odds with the official line of Viktor Chernomyrdin’s government. Izvestia has identified Yasin as the only member of the government campaigning for the reform of Russia’s natural monopolies, including, notably, the gas giant Gazprom, formerly headed by Chernomyrdin. (Izvestia, February 6)

Korzhakov Leads in Early Returns.