The finance ministry has been discussing fiscal policies for 2007. Alyaksandr Lukashenka made it clear that he was not satisfied with the tax system. However, the finance ministry does not seem to have a clue how to ease the tax burden on enterprises before 2010.
On the surface the draft Guidelines of Budgetary and Tax Policies for 2007 inspire optimism. The document declares simplifying the tax system and reducing the tax burden on enterprises the government's priorities for the period until 2010.
The finance ministry suggests revoking all taxes on proceeds, easing the tax burden on companies' wage fund by revoking emergency tax, reducing and unifying customs duties, and revising the social security tax rates and payment mechanism.
The ministry's forecast is based on the premise that the external market situation will remain favorable for Belarusian goods. It does not take into consideration a production downturn and a rise in unemployment, which would be inevitable if the government were to restructure the economy.
It is clear that the government is determined not to change the planned economy for at least five more years. The finance ministry has not cut key taxes such as VAT, income tax and tax on foreign trade revenues. Although the government is trying to persuade voters that they will be paying less taxes next year, the proposed measures do not go far enough, considering that the country is at the bottom of the world ranking in simplicity of tax systems.
The revocation of a three-percent emergency tax, paid on companies' wage fund, would result in a reduction of annual budget revenues by 560 billion Belarusian rubels. The annulment of a one-percent tax that was paid into the Employment Promotion Fund means a loss of 187.5 billion rubels for the budget. This is a small amount that will not affect the budget as a whole.
As for the local taxes, the government plans to scrap a three-percent infrastructure development and public transport replacement tax, which was levied from after-tax profits. However, to meet the growing expenditures of the central budget, the government plans to raise income tax from 24 to 26 percent "to compensate for the revoked local taxes." What a surprise! The government cancels insignificant local taxes only to increase key taxes.
The finance ministry estimates that the overall tax burden per GDP will drop by 0.5 percentage points, or 423 billion rubels. Therefore, an overwhelming majority of the enterprises will not even feel the difference. Moreover, the income tax increase will not go unnoticed. In addition, an increase in taxes collected from proceeds will cause a rise in retail prices of goods.
The finance ministry apparently does not know how to cut spending. Taking into account "voluntary" donations collected by the authorities from Belarusian companies to support state programs, mandatory supplies of certain products at government-set reduced prices and quasi-fiscal operations, public expenditures account for about 60 to 65 percent of GDP. The government's fiscal reform boils down to shifting part of the tax burden from one group of taxpayers to another. Such a proposal cannot be called reform.
As for the spending part of the budget, the finance ministry gives priority to ensuring stability of the pension system. Important items of the fiscal reform program are the elimination of cross-subsidies in the utility sector through a revision of rates and pricing mechanisms and "the optimization" of budget subsidies that are used for financing the public transport system.
The choice of priorities shows that the government gears up for a hike in prices of energy resources, preparing to shift part of the fiscal burden to households. Without significant changes in the tax burden, the price hike would force the government to turn to households to meet the rising cost of social and economic programs. Since households are unlikely to offer a lot, the government would try to use enterprises' working capital. If this is not enough, the National Bank would be forced to print money. Therefore, the finance ministry's proposals are fraught with a loss of financial liquidity.
The government projects a GDP growth of 8.5 to 9.5 percent in 2007. The average wage is slated to rise to 700,000 or 710,000 rubels ($320-325). Consolidated budget expenditures are expected to account for 36.3 percent of GDP, down from 37.3 percent in 2006. It should be noted that the latter do not include expenditures from the Social Security Fund, which alone account for 12 to 13 percent of GDP. This means that the total expenditures will make up as many as 50 percent of GDP.
Therefore, the overall amount of finances controlled by the authorities will remain very high in 2007. Some experts fear that the government's promises to ease the tax burden, liberalize the economy and facilitate private investment will remain on paper.