Mr Kudrin's address:
Good afternoon, ladies and gentlemen.
Esteemed colleagues, today we are analysing the year that was probably the most problem-laden in Russia and the whole world from the economic point. I hope we will have such a hard year never again. Last year has put us face to face with new challenges and advanced problems to tackle urgently. It demands a new, post-crisis Russian economic model to rest not on high oil prices and huge short-term investments in Russia but, first of all, on the establishment of our own financial system and extremely stable macroeconomic policy enabling private persons, companies and investors to make deposits in Russian financial agencies thus to provide essential assets that eventually will promote the modernisation of the Russian economy.
Our dependence on high oil prices in the years preceding the crisis was reduced by sizeable accumulation of oil profits. Still, I might say that our savings were not sufficient. Not stocking up reserves for the crisis but, most of all, the rapid strengthening of the rouble and the persisting galloping inflation were the most formidable obstacles to the normal performance of our financial system, and crediting and investing in the Russian economy. We must overcome their impact on our oil-dependent economy.
We encountered new problems in administering many taxes. A year ago, I paid attention to the necessity of improving the quality of fiscal management during the crisis. There were occasional improvements though we felt sometimes that the pre-crisis managerial problems persisted. Today I can say that on the whole, the Federal Tax Service has met its objectives. Federal budget revenues were provided though certain revenues shrank. I know that everything possible was done to collect revenues necessary to form the national budget and guarantee not only public welfare expenditures but also sufficiently active anti-crisis measures. In particular, these goals were attained thanks to reserve funds accumulated in the previous years mainly from mining, mineral extraction taxation and export duties.
These reserves had their effect and are having it now. They will bring fruit in 2010, 2011 and 2012. We have stocked up necessary reserves for the crisis years, and we live now thanks to this safety cushion.
On the whole, budget revenues have shrunken by 20%, which is much for any country. Russia owes this shrinkage to its dependence on oil prices, among other factors. We revised revenue indices for 2009 to see major improvements, with a several trillion rouble increase by the year's end. After that, many noticed a budget surplus of 623 billion roubles. Many asked me: "We have streamlined and reduced our expenditures. Where are extra revenues coming from?" But then, these revenues have a structure as no other. Their bulk is made by oil and gas. We based our calculations on the average oil price of $40 a barrel when we corrected the budget last year, compared to the previous forecast of $95. We revised our calculations proceeding from $41 but the real price was roughly $61.
We made our oil price forecasts more conservative at the beginning of the year. The market showed, however, that prices remained rather high even during the crisis, which had drastically reduced oil demand, thanks to a huge amount of liquidity, which the central banks of the entire world channeled into the economy to support demand. The money rushed to the petroleum contract market. A major part of oil was not consumed but became an investment resource due to the hope that oil prices would grow further and would become more reliable at a certain time than securities, which were going down at the time.
We cannot say now that oil prices will grow on. They might remain high for some time yet-half a year or a year, while the fiscal packages of economic incentives are working in all countries, and when the leading nations' budget deficit reaches 10-12%, which is inconceivable and improbable from the point of economic theory even during a crisis.
There were no such deficits during the previous recession but we see them now. They are partly compensated by loans in the market, which central banks support with additional liquidity. Consequently, these incentive packages will shrink soon as sizeable economic investment is beginning to reduce. According to our medium-term forecasts, certain commodity prices may even grow due to inflation the next two or three years but oil prices are expected to go down. I repeat, we and the Ministry of Economic Development expects moderate prices, approximately $70, though this is a circumspect but optimistic forecast.
We have received greater revenues than what we planned in the middle of the year thanks to oil and gas. On the contrary, oil and gas revenues forecast in February and March proved smaller by 300 billion roubles. The income basis was reduced mainly due to the economic crisis, as its objective result. Revenue collection shows indices perfectly understandable to us and connected with the global economic depression.
Another effect has emerged: taxpayers try to minimise their fiscal payments by many ways of tax avoidance as they want to retain their economic efficiency and stay afloat through tax sheltering. Some businesses shift to the shadow economy, though I cannot say that such shifts have attained a mass scale. Still, there are such instances.
Fiscal agencies should focus attention during this period on management quality and on the detection of shadow businesses and incomes. The Ministry of Finance had a board meeting last week to discuss guidelines of fiscal policy for 2011-2013: a document that starts preparations for a new budget cycle and drawing up the three year budget. Unlike last year, we are working according to the traditional procedure, on which all fiscal initiatives are adopted before the draft budget is submitted to parliament. The draft should be submitted with consideration for relevant laws that have entered into force by that time.
The budget still retains its deficit, which amounted to 5.9% of the gross domestic product in 2009, and to 6.4% if we consider National Welfare Fund expenditures on subordinated loans to banks, and support of the Housing Mortgage Agency and Vnesheconombank. Despite all, we hope to keep the budget deficit no higher than 6.8% to the end of this year, and not cross the 7% barrier, though we had grounds for more pessimistic forecasts at the beginning of the year. Now, economic development is improving quicker than expected, and expenditures, especially targeted ones, are curbed, so we think we will keep within the 7% limit.
We have set a more ambitious goal for 2011, to reduce the budget deficit to 4% of the GDP and to 3% in 2012. New rates of social fund insurance fees will become effective next year. They will certainly increase the tax burden on businesses. The [federal] Pension Fund will have to make major efforts for the management of such revenues. We hope it will cope with the task.
Pension funds are proceeding for managerial purposes from the 26% rates this year as yet. It is a heavy burden on businesses. The matter is under discussion, and the Ministry of Finance has proposed to increase the rate to 32% instead of 34%. So such part of the increase that aims to enhance Pension Fund revenues will rise by 6%. We should follow this decision. As for the part where the rate increases by 2% for the mandatory health insurance system, we have proposed to consider it once again because the 2% increase amounts to extra 230 billion roubles collected to the benefit of healthcare, which, as I see it, needs certain reforms to make it use the resources to greater effect. The system should not get big money before it becomes more efficient.
This goal demands new laws and departmental regulatory acts, and put the management of new huge resources to an evaluation test. Tax rates should not be raised before this is done. We need guarantees of the money not to miss their recipient and to be used effectively. I deem it possible not to increase the rate by 2% before we prepare the grounds for the new reforms. The rate rise has been introduced legislatively already. Now, we should streamline the new law before its implementation starts.
We think also that oil and gas revenues should once again form the Reserve Fund and the National Welfare Fund mainly to deter the Dutch disease, prevent the rapid strengthening of the national currency due to high oil prices, avoid inflation and, last but not least, to make reserves in case of more shocks to come. This might be not the last crisis on such a great scale. Who knows? To all appearances, the current situation will not repeat soon. But then, Russia encountered similar risks in 1998, mere twelve years ago. They took the form of the oil price of $12 a barrel, and even $8 in certain months of 1998. So Russia is still facing hazards and needs relevant funds.
This is why we want to preserve, on the whole, the present-day system of taxing the raw material sector though we will certainly improve the practical patterns. We should guarantee the effectiveness and neutrality of non-raw material taxation: value added tax, profit tax, private income tax, property tax and excises.
I want to remind you how I was breaking lances not to reduce VAT. Now, it is the steadiest of all taxes during the crisis and, on the whole, retains its previous proportion to the GDP though the latter has shrunken a bit, while the proportion of other taxes to it has reduced dramatically. That is why value added taxation remains the most stable at the federal level.
As for the tax base and the income basis for all constituent entities, they shrank by mere 14% last year, less than at the federal level because federal agencies shouldered the greatest burden, just as we had expected, where other resources than oil and gas were concerned. This is why it is our duty in the essentials of our fiscal policy for the years to come is to establish such a system of taxation that would not merely avoid impeding economic development and diversification but would become an economic incentive. This is what the new changes in our fiscal system aim at.
The package of tax incentives being discussed now has been submitted to the presidential commission for modernisation and innovation. The government is discussing the package, and we will submit it to an upcoming government meeting. We will certainly lend an attentive ear to parliamentary and other opinions, and we are willing to improve particular points.
First of all, it concerns the promotion of research and development, and new incentives to innovation through tax policy, in particular. We need incentives to capital renewals, the use of R&D in industry, and removal of bureaucratic and fiscal obstacles to the work of small innovative businesses. Tax policy should be a tool for the formation of demand for innovation and its supply.
One of the basic instruments in terms of importance to taxpayers is insurance fees to social welfare funds and government extra-budgetary funds. It has no bearing on tax policy any longer. In this respect, we will join hands with the Ministry of Healthcare and Social Development to propose the preservation of low rates of such fees for certain types of companies or corporate groups-not 34% or 32% as the Ministry of Finance has proposed but 14%. Our proposal concerns the sphere which has greater concentration of innovative commodity designers, residents of special technical innovation zones, programmers, software exporters, and small university innovation businesses.
We should go on improving our yardsticks for businesses we will qualify as industrial and innovative. Such yardsticks are vague as yet. This is why we are deterring the expansion of those companies. However, we have posed ourselves the goal of determining relevant criteria and defining the companies that qualify, so as to manage their taxation. Socially-oriented extra-budgetary government funds will receive reduced fees paid on behalf of such companies' personnel. It is up to the federal budget to appoint the scissors between 14% and 34% or 32%, which implies considerable sums. For instance, as far as we know, about 30 billion roubles will be paid as fee compensation this year for exporters alone in case they retain high growth rates.
We must complete the depreciation assessment reform and enhance the efficiency of the fiscal accounting of R&D expenditures. We must make the accounting of such expenditures for profit taxation absolutely explicit; introduce expenditure identification with the 1.5 coefficient; establish a special reserve of future R&D expenditures to guarantee its regular funding; shorten the list of papers necessary to confirm the legitimacy of the zero VAT rate for exporters; and consider the prospects for exempting energy-saving equipment from property taxation for up to three years since the beginning of its exploitation so as to promote extensive implementation of such equipment.
We should consider the prospects for ceding to regions the right of decision-making on investment tax crediting, postponements of tax payments, and authorisation of tax payments by instalments. This right should concern taxes coming to regional budgets at the level of constituent entities. In other words, it will be a simplified procedure brought closer to the level of constituent entities for them to make relevant decisions irrespective of quotas.
I feel obliged to get back to the necessity of improving fiscal management. The job should balance out the rights and duties of taxpayers and fiscal agencies as representing the government, so as to free taxpayers from bloated administrative pressure. On the other hand, the arrangement should preserve fiscal agencies' rights sufficient to supervise legal compliance.
We cannot afford to reduce taxes again and again so as to compensate corporate expenditures on the public administration and regulation of whatever activities. However, it is our duty to improve the performance of government agencies. We should balance taxpayers' and government agencies' rights and duties. This is our responsibility, just as tax payment is the responsibility of businesses.
We have been doing much of late in the field of administrative legislation. We cannot considerably limit fiscal agencies' right of inspection, which is their principal right and duty. At the same time, we should prevent the abuse of this right. Otherwise, tax inspectors think a check has failed when they do not impose sanctions or additional charges.
Such administration can be judged by ratings and representative opinion polls. We often hear that it is no easier for a private person to receive budget compensation of the income tax than for a corporate exporter to have value added tax reimbursed. Fiscal agencies are occasionally guilty of corruption, just as the other ruling bodies. However, let us leave it aside because our present theme is responsibility and the quality of management. When they are deficient, public confidence in fiscal agencies naturally dwindles.
Suits are frequently filed to abrogate fiscal authorities' ungrounded and clichéd decisions, which make taxpayers undeserved damage. Tax officials often tell me that police and the prosecutor's officers find fault with them unless they demonstrate how tough they are on whatever instance with additional tax assessments and lawsuits. When they make checks, they are often accused of insufficient protection of state interests.
We should work in team with the Ministry of the Interior and the Procurator General's office to analyse these numerous typical situations. Meanwhile, we exercise excessive pressure on taxpayers to protect ourselves from possible problems with law enforcement bodies. Let us together with them elaborate work patterns which would make it clear that tax officials are protected as they make their responsible professional decisions. That is the way to rule out their undeserved accusations.
There is the other side of the coin, when the prosecutor accuses fiscal agencies of excessive pressure on businesses. Criminal proceedings are launched on such cases when the investigation reveals such pressure. There is a list of such cases, though I will not enumerate or exemplify them now. Balance is necessary here, and it is our duty to achieve it.
I hope that this year, which has just begun, will improve the economic situation and corporate finance. I wish you not to make checks on every company working at a loss, and investigate whether it is going bankrupt because of abortive improvements or due to objective hardships. Such situations demand huge and tiring administrative efforts.
I hope this year will be better. We forecast economic growth by 3.1-3.2%, and many prognosticate even greater improvements. They may be right. Improvements often come in the year after depression because the starting point is low and so there is ample room for progress. However, as we expect, rapid economic growth will drop pace in 2011 for the next two or three years due to global economic problems and the situation in our national economy, with some bad credits staying unpaid and certain businesses' future remaining vague.
Companies are reducing expenditures to stay afloat everywhere, and the thrift drive is going on. Jobs are cut month in, month out, and other measures are taken to cut corporate expenditures. Certain businesses are insolvent. All this will persist for the next two or three years. I repeat, we do not know all hazard areas, and do not know what risks we might run in these two or three years because the current crisis has an unprecedented scope.
Be that as it may, I wish you every success on your job. I wish you to cope with the reform of the fiscal system and tax management. I think we will ensure stable national revenues to help Russia hit all its targets.
Thank you.