Russia to cut defense spending to support struggling economy

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Russia will spend more to support its economy than to fund its armed forces next year for the first time since 2014, as the Kremlin increases borrowing to pay for increased social spending ahead of critical parliamentary elections.

The Russian economy has been in the doldrums for years amid low oil prices and Western sanctions, and will contract sharply this year due to the effects of the coronavirus pandemic.

The Kremlin has announced a spending spree this summer in a bid to mitigate the damage caused by Covid-19 and stop a steady decline in living standards and household incomes that has hurt President Vladimir’s ratings Putin and the popularity of his ruling party, before the elections next September.

Moscow is poised to cut defense spending and cut back on donations to oil companies, while increasing taxes on the metal and mining industries and top incomes to help pay for increased spending, alongside higher taxes. borrowing that will increase its public debt by about 50 percent.

Russia’s budget surplus in recent years is expected to dip to a deficit of around 4.5% of gross domestic product this year © Yuri Kochetkov // EPA-EFE / Shutterstock

The budget, details of which were released by state news agencies, was approved by the government last week, he said in a statement on Saturday. It will now be discussed in the country’s parliament.

The budget “should preserve its social orientation and ensure the implementation of national development goals,” Prime Minister Mikhail Mishustin said on Friday.

Defense spending will be cut by 5%, which will bring it below the level of spending on state-supported industries for the first time since 2014. Social measures will increase by almost 10% to represent more than one quarter of the total budget.

At the same time, as a result of the proposals put forward by Mr. Putin earlier this year, Russia’s fixed income tax will be removed in favor of a higher rate for those earning more than 5 million rupees. ($ 65,000) per year and a new tax will be levied on bank deposits larger than Rbs1m.

Mr Mishustin also proposed “to slightly increase the taxation of a number of lucrative industries,” including proposals to reduce tax breaks for oil production, increase levies on metal mining and increase taxes on tobacco products.

“Russia’s fiscal policy hinges on a mix of populism, higher taxes for the middle class, and promises of continued tax support for the poor, each seen as an effective tool for garnering party support for the power in an election year, “said Vladimir Tikhomirov, chief economist at BCS Global Markets in Moscow.

“The need to maintain high volumes of spending on anti-crisis measures. . . led the authorities to accept a significant increase in the volume of domestic public debt.

Russia’s budget surplus in recent years is expected to dip to a deficit of around 4.5% of gross domestic product this year, according to the government forecast, which expects a deficit of 2.4% in 2021 and by 1% in 2022.

Further borrowing to close this gap will push the country’s public debt-to-GDP ratio up to around 20% next year, from 13% at the start of this year, according to the country’s finance minister.

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