Putin Unveils $14.6Bln Tax Cut

Prime Minister Vladimir Putin unveiled a new $14.6 billion measure Thursday aimed at helping businesses withstand the current economic downturn, spending likely to further drain the Reserve Fund next year.

Putin, the leader of United Russia, although not a member, made the announcement at the ruling party's congress in a speech focusing on countering current economic woes.

Sprinkled lavishly with promises of more money for businesses and particularly hard-hit segments of the population, the speech resembled more the state-of-the-nation addresses delivered by Putin when he was president than an address to the party faithful. The address was also much heavier on spending initiatives than President Dmitry Medvedev's state-of-the-nation address two weeks earlier.

"We will do our best to prevent the problems of past years, the collapse of past years, from repeating itself in our country again," Putin said, in a direct reference to the collapse of the Soviet Union in 1991 and the difficult economic times that followed, leading up to the default crisis in August 1998.

In the most expensive of the proposals, Putin vowed to cut profit taxes by 4 percent, to 20 percent, effective in January — a move estimated to reduce federal budget revenues by more than 400 billion rubles ($14.6 billion) next year.

"All this money will remain at work in the economy," Putin said.

Other measures included reductions in taxes for small businesses, quicker value-added tax refunds and an increase in monthly unemployment benefits of 1,500 rubles, to 4,900 rubles ($178) next year, items contained in an anti-crisis program he signed two weeks ago.

Putin also said the government would stick to ambitious spending plans for the development of health care, education, roads and electricity transmission lines under a long-term strategy until 2020.

The government had already pledged more than $200 billion worth of measures to counter the domestic effects of the global financial crisis, but most had been aimed at providing banking liquidity and shoring up share prices.

Finance Ministry spokesman Andrei Saiko said he was unable to say immediately Thursday how the government would cover the loss of revenues from the tax cut.

A likely option would be tapping into the oil reserve funds that have been built up from the enormous energy export revenues of recent years, said Andrei Shastitko, director of the Bureau of Economic Analysis, a think tank.

Doing so would represent further depletion of the fund, as Finance Minister Alexei Kudrin had already said Wednesday that the government might dip into the funds to the tune of more than 500 billion rubles next year to maintain social spending against a backdrop of slowing economic growth and low oil prices.

Combined, the commitments would account for a quarter of the Reserve Fund's current holdings, which Kudrin put at 3.6 trillion rubles ($131.3 billion) as of Monday.

Coming so soon after the anti-crisis plan announcement, the arrival of the proposal for the new tax cut underscored the rapidly changing nature of the economic environment.

"No one knows yet just how big the crisis is," Shastitko said. "I wouldn't be surprised if we saw more new proposals in a while, depending on how the situation unfolds."

The economy will start feeling the effect of the tax cut by the end of the first quarter next year, Shastitko said.

Andrei Tikhonovsky, deputy chief of the budget and taxes committee of the Russian Union of Industrialists and Entrepreneurs, the country's big-business lobby, described the cuts as "substantial."

There was concern Thursday, however, that the measure would only provide a boost to companies who were able to keep their heads above water anyway.

"If they are not making any profits, a cut in profit taxes is not going to be much help," said Tatiana Orlova, an economist at ING Bank.

On the positive side, she said, the measure would benefit businesses across the board, not just industries that have been designated as priorities by the government.

The talk of higher welfare payments and other increases in government spending was in stark contrast with Medvedev's Nov. 5 state-of-the-nation address, which contained no new major budget outlays.

Medvedev opened the congress with a short speech, saying that the state would fulfill its social obligations. Television coverage later showed him sitting in the front row and clapping as Putin announced one of the spending initiatives.

The contrast between the two speeches appeared to some as an indication that there is some kind of division of responsibilities that reserves economic pronouncements for Putin.

"This, at least, would explain the logic of leaving most of the economic rhetoric out of [Medvedev's] address," said Mikhail Vinogradov, a political analyst at the St. Petersburg Policy Foundation, a think tank.