The Russians are preparing to increase inflation, after the unexpected VAT increase. New Finance Announcement, against the background of record military spending
People buying fruits and vegetables in the “slow” hypermarket in Moscow, Russia, on November 3, 2023. Photo: AP / AP / Profimedia
Moscow's plan to increase value added tax (VAT) in order to finance increasing and security expenses will determine an increase in consumption prices by approximately 1% next year, the Russian Minister of Finance, Anton Siluanov, according to the independent publication The Moscow Times on Monday.
“The VAT can affect the financial results of the companies. Its impact on inflation is estimated at about 1%, which was taken into account in the projections regarding the indexation of salaries and social payments,” Siluanov said in front of the Federation Council-the upper Chamber of the Russian Parliament.
Last month, the Ministry of Finance has unexpectedly proposed the increase of the VAT rate from 20% to 22% from next year, to contribute to the reduction of the increasing budget deficit, against the background of the record military expenditures. It is estimated that the deficit will reach 5.74 trillion rubles ($ 69 billion), or 2.6% of GDP in 2025.
Previously, the chief economist of T-Investments, Sofia Donets, said that the global impact of increasing the proposed VAT rate could be an inflation of about 1.5% in the first months of next year, because companies adjust prices to maintain their margins and transfer costs to consumers in advance.
Separately, the Minister of Economic Development, Maxim Reschetnikov, told the parliamentarians on Monday that the high interest rates continue to affect the profits and investments of companies, despite the slowdown of inflation at about 8%.
The reference interest rate of the Central Bank of Russia is currently at 17%, and analysts are expected to reduce the rate during this year.
However, the Vice -President of the Central Bank, Alexei Zabotkin, said that the decision makers remain focused on stabilizing inflation before new rate reductions. The central bank of Russia announced last month that inflation is expected to reach 6-7% by the end of this year and return to the 4% target in 2026.
Siluanov also said on Monday that VAT increase, if approved by parliamentarians, as well as higher economic growth and additional income, will eventually create space for the central bank to relax monetary policy.
