Economic authorities discussed ways to “pull the economy”

The economic authorities agree that the structural transformation of the economy is inevitable and Russia needs to find its place in it. For this, it is no longer possible to “act the old fashioned way”. But what should be the new incentive for transformation and where to look for a source for its financing – an increase in budget expenditures, an increase in the tax burden, or a new stage of privatization – positions differ on this. Presidential Aide Maxim Oreshkin, Finance Minister Anton Siluanov, Economic Development Minister Maxim Reshetnikov, and Bank of Russia Chairman Elvira Nabiullina shared their views on the future of economic policy during the session “How the Russian Economy Will Develop” at SPIEF 2023.

Any increase in the tax burden on businesses will undermine investment activity, Reshetnikov said. It was the stability of the tax policy that provided incentives for the growth of private investment during the pandemic and sanctions pressure, the minister added. This position was supported by Oreshkin. According to him, raising taxes on business is counterproductive for the economy and will not give the desired effects.

At the same time, Siluanov said that it is planned to adjust the taxation of natural and economic rent. A decision has already been made on a more equitable calculation of the mineral extraction tax on oil, because “the oil companies offered large discounts,” the minister recalled. In addition, we agreed with business that it will help to make a contribution “to the general situation” in terms of taxing economic rent this year. In particular, the government adopted a tax on excess income – the so-called windfall tax, Siluanov recalled. His government has already submitted to the State Duma. According to the initiative, the tax will be levied on large and medium-sized companies whose pre-tax profit for the previous two years exceeds 1 billion rubles. The exemption includes SMEs and the oil and gas sector.

According to Reshetnikov, only private investment can “pull out the economy.” Business adaptation is going faster because the authorities have provided macroeconomic stability and sufficient “monetary oxygen” to the economy, the Minister of Economic Development noted. This is one of the key points – without financial resources it will be difficult to engage in investments, structural changes, Reshetnikov believes.

For the structural restructuring of the economy, it is not money that is needed, but the adaptation of enterprises, Nabiullina argued. The transformation of the economy does not imply a breakthrough due to budget spending and increasing public debt, the head of the Central Bank pointed out.

The position “money is not the main thing” was gladly supported by Siluanov. According to the Minister of Finance, increasing spending is “like adding fuel to a fire.” The Ministry of Finance sees elements of a warming up of the economy, so additional budgetary stimulus will lead to acceleration of inflation and an increase in rates, Siluanov said.

According to Siluanov, now there are no serious problems with federal budget revenues – the department expects to fulfill the plan for oil and gas and non-oil and gas revenues. Despite this, budget expenditures will have to be prioritized as budget conditions will be tight, Reshetnikov stressed. “Priorities are not only what we do, but also what we don’t do,” he pointed out. Thus, in the coming months, it will be necessary to stop subsidizing industries that can develop independently, Reshetnikov pointed out.

According to Siluanov, “it is necessary to change the logic” and not use budgetary resources to solve the problems of technological transformation. “The state should create demand, and make machines and enterprises – business,” he pointed out, and then the state’s share in the economy will be smaller. “Why is she puffy? State-owned companies are everywhere, we give money to these state-owned companies, they create business, interfere with commercial business,” Siluanov stressed. To do this, it is necessary to reduce subsidies, he said.

According to the head of the Bank of Russia, the temptation to manage the restructuring of the economy can lead to the fact that private initiative will be suppressed. “We confuse the activity of the state in a crisis, which should be, with the fact that we want to constantly manage the economy,” Nabiullina stressed. In addition, there are risks of “restoration of the planned economy.” To do this, it is enough for the state to “concentrate the right to decide which industries and which projects need to be developed and where to direct financial resources, instead of private initiative.”

The head of the Duma Committee on Budget and Taxes, Andrey Makarov, who moderated the session, asked the participants in the discussion whether privatization could become a source of financing for the transformation of the economy. This idea was supported by Nabiullina and Oreshkin. “I believe that, of course, it is necessary to privatize, and we have something to privatize without damaging strategic interests. We have the opportunity to do this, and this is not only a question of budget revenues, but a question of developing a private initiative,” Nabiullina said.

Oreshkin said that he was closer to the position of the head VTB Andrey Kostin. The banker previously proposed a new stage of privatization in relation to large assets, such as Rosneft, Transneft, Russian Railways or Russian Post. At the same time, the presidential aide believes that this should not be a large-scale privatization, but an exit from assets that are inefficiently used by the state.

Reshetnikov believes that the restart of privatization now should not be considered primarily as a source of replenishment of the budget. At the same time, according to him, this can become an incentive for businesses to invest in areas where the state is inefficient. “In terms of accelerating growth and investment opportunities, yes. From the point of view of fiscal issues, well, it’s probably very difficult to overestimate something in the current situation,” Reshetnikov noted.

The transformation of the economy is impossible without budget financing, but it is important to maintain a balance between state funding and private injections, says Viktor Tunev, an economist and author of the Truevalue Telegram channel. Privatization as a possible source of increasing budget revenues in the current realities is “not serious” to discuss, the expert believes. According to Tunev, there are no attractive state assets that will bring tangible fiscal results. Privatization can rather be seen as a mechanism for effective management of state property, he adds.

Traditionally, the government investment market will remain the main source of financing for the economy, Alexander Isakov, an economist for Russia at Bloomberg Economics, points out. In his opinion, there is a potential for obtaining additional income from the privatization of state assets – this applies to the sectors of the military-industrial complex, transport, and energy.

There are no reserves left to raise taxes, Tunev said. Attempts to further increase taxes have very limited effects. “In general, I consider raising taxes on business to be a counterproductive tool for the economy,” the expert noted. According to Isakov, it makes sense to increase the tax burden to compensate for the increase in the state’s fixed expenditures; when financing temporary government spending, it is advisable to compensate for them with debt. The subsequent collection of taxes on previously received excess profits, as in the case of windfall tax, will undoubtedly cause a negative effect and will lead to the need for companies to borrow funds to pay taxes, reducing investment, the economist points out.

Limiting budget spending is an anti-stimulus for economic growth, Tunev states. “If we are guided by the restriction of budget spending in order not to increase the deficit without assessing the multiplier effect for the economy, we will face problems in the future,” he said. Increasing the targeting of public funding will inevitably lead to the loss of drivers, limiting economic growth. For example, the mechanism of mass preferential mortgage became the basis for the growth of the construction industry.