Russia's VAT hike to 20% to increase inflation by 1%

Russia's VAT hike to 20% to increase inflation by 1%

Russia's current inflation is 2.5%, the VAT hike from 18% to 20% will increase inflation by 1%, Russian Central Bank Governor Elvira Nabiullina told the state Duma.

She said that inflation in Russia could shortly rise above 4%, but it will return back to its target level, Reuters reported.

But at the same time Nabiullina noted that monetary policy needs to be careful in the coming years so that inflation can be anchored at low levels.

Russia’s government has proposed raising value-added tax (VAT) to 20% from 18%, starting from 2019. Russian Prime Minister Dmitry Medvedev earlier said that "tax manoeuvre", which envisages a gradual increase in the mineral extraction tax (MET) and a cut in export duties on oil and refined products, was on track to be completed in 2024.

First Deputy Prime Minister, Finance Minister Anton Siluanov noted that additional budget revenues from the increased VAT rate will amount to over 600 billion rubles annually starting from 2019.

The advisor on macroeconomics to the CEO of the 'Opening-Broker' brokerage house, economist Sergey Hestanov, speaking to a correspondent of Vestnik Kavkaza, noted that the Central bank's forecast  is in line with the expected events. "Yes, that sounds about right. There are also more stricter estimates of inflation growth, by 1.5%, just to reach the4% target of total annual inflation. There are sound arguments in favor of the figures published by the Central Bank, but also there's still a chance that the real statistics will be a little worse," he expects.

At the same time, Sergei Hestanov drew attention to the fact that inflation growth is not the worst consequence of the VAT rise. "The growth of inflation is not so terrible, its return to indicators of last year or the year before last is not dangerous. Another thing would be much worse - it is possible that as a result of the increase in VAT, our economic growth will be stalled by 1%, according to different agencies and experts. It will create a significant problem for the economy, since we have only 1.5% growth so far. In this regard, the decline in economic growth to close to zero values ​​will be much more significant than the growth of inflation," the advisor on macroeconomics to the CEO of the 'Opening-Broker' brokerage house stressed.

Professor of the RANEPA faculty of Finance, Money Circulation and Credit, Yuri Yudenkov, also agreed with the Russian Central Bank's forecast. "Of course, inflation will grow, but not very much. There is a very low consumer demand in Russia, it is slowly growing, and an increase in VAT, which will lead to higher prices, will negatively affect consumption. Therefore, inflation could not increase higher, 3.5% sounds about right. But the problem is that all the hope we had for economic growth was due to the growth of consumption," he said.

The expert stressed that by raising taxes, the Ministry of Finance acts exclusively in its own interests, not caring about the Russian economy as a whole. "The idea of ​​raising the VAT for filling the budget does not take the whole market into account - while the revenues from increased oil prices already exceed the income from the growth of the value-added tax. That is, on the contrary, they could reduce it. The VAT increase to 20% will hit manufacturers, that is, it will slow down the growth of production. In fact, it was an ill-conceived political and economic decision in which no one is interested, except for the financial department," Yury Yudenkov concluded.

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