The news leaked this week that the Russian government is planning to reverse a cut in the payroll tax by 2014 confirmed what most experts already knew – that a social tax relief recently implemented by the government was largely electioneering.

Kommersant reported that a 2012-2014 budget plan for the pension fund, presented by Health Minister Tatiana Golikova on Wednesday, assumed the payroll tax (Unified Social Tax), which goes toward healthcare and pensions, will increase to 34 percent by 2014.

President Dmitry Medvedev ordered a reduction in the tax, paid solely by employers, earlier this year to 20 percent for small and mediumsized companies and 30 percent for everyone else. The reduction kicks in only in January 2012.

The measure is good for encouraging business start-ups, which had been suffocated under the previous regime, but bad for state coffers, already troubled by a gaping budget deficit.

Finance Minister Alexei Kudrin estimated that the tax cut would cost the budget 400 billion rubles ($13 billion.)

While Gorlikova’s presentation was not open to journalists, Prime Minister Vladimir Putin announced increases in social spending at Wednesday’s government session and hinted that Russia should “stimulate taxes” rather than relying on a high oil price. The spending increase includes a 70 billion ruble ($2.2 billion) increase in spending on maternity capital over the next three years.

Natalia Orlova, chief economist at Alfa Bank, told The Moscow News that the reversal in the tax was unsurprising given that forecasts suggest the pension fund will be in a poor condition by 2014. “Our population is aging and the government requires more and more money to meet [pension] obligations,” Orlova said. “At the same time, it still isn’t clear where the money for the fund will come from.” “If previously the decisions made on social taxes were based on the needs of the pension fund, now election interests prevail. After the elections, economic considerations will come back to the fore,” she added.

Analysts say that an increase in Russia’s retirement age is inevitable after the elections. Russia has one of the lowest retirement ages in the world, at 60 for men and just 55 for women, and the government is running a multi-billion dollar pension fund budget deficit.

Currently pensioners constitute around a third of the number of workers in Russia and the Standard and Poor’s credit ratings agency estimates this ratio to grow to 50/50 by 2030.

Analysts say there is an urgent need for the government to restructure its taxation policy and find alternatives to the flawed payroll tax.

Mark Rubenstein, head of research at the Metropol investment bank, advocates a direct tax increase imposed exclusively on the commodities sector, which would ease the burden on smalland medium-sized companies.

This idea was already partially fulfilled by Putin’s budget announcement Wednesday, in which he said that part of the funds for increased social spending would come from higher taxes on the stateowned gas monopoly Gazprom.

Orlova of Alfa bank said that any reform in the structure of the pension fund needs to focus on decreasing spending rather than increasing income, which points toward raising the retirement age as the best solution. The measure has long been encouraged by Kudrin, but is unlikely to happen ahead of the elections.

http://www.themoscownews.com/finance/20110922/189062134.html