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. Last Updated: 07/27/2016

Putin Asks for Deficit-Free Budget

Less than a week after the government launched a broad tax package, President Vladimir Putin on Wednesday asked the State Duma to pass a budget that - for the first time in a decade - runs no deficit.

In a letter to the Duma, Putin assumed the economy will keep growing next year, gross domestic product will amount to 6.8 trillion rubles ($212.5 billion) and the exchange rate will average 32 rubles per dollar. Inflation will slow down to 11 percent from a projected 18 percent this year, the letter said.

Should the Duma agree with the government's proposals to revamp the tax system, the federal government will collect 1.16 trillion rubles, or 17 percent of GDP, in taxes, but if the Duma fails to pass the tax package, state revenues will stand at 1.05 trillion, or 15.5 percent of GDP.

Government revenues in the first quarter of this year totaled 16.4 percent of GDP, so "the targets for next year seem realistic," the United Financial Group brokerage wrote Tuesday in its morning comment.

Earlier, the government forecast 4 percent GDP growth in real terms in 2001, but the figure of 6.8 trillion rubles suggests growth of only 1 percent to 2 percent, according to estimates made by UFG, which suspects that public authorities are playing with numbers to lower their fiscal commitments in real terms.

But while the government is gambling on the continuation of positive economic trends, economists are concerned that tax revenues could fail to match the expenditures written into the budget.

"The key issue is whether the tax package will work out as expected," said Georgy Trofimov, senior researcher with the Institute for Financial Studies.

The government hopes that introduction of a 13 percent flat income tax and axing some turnover taxes will be offset by a sixfold hike in gasoline excises and a doubling of tobacco excises. But these measures, if approved, will only generate about 40 billion rubles.

The new administration also wants to ease the burden on the industrial sector, putting all businesses on an equal tax footing by abolishing numerous tax breaks that cost the federal government 220 billion rubles a year, equivalent to 3.7 percent of GDP.

"This will lower the tax burden while increasing overall tax revenues," said Alexander Ustinov, analyst with Economic Expert Group.

Taxes eat 60 percent to 70 percent of the value created by law-abiding businesses, but many private companies dodge tax payments through various kinds of perks.

"The plan will work if the economy keeps humming along," Trofimov said.

Foreign investments increased 220 percent in the first quarter of the year to $4.96 billion, with mysterious businessmen from Taiwan plowing $2.6 billion into the local economy, for the first time becoming the leading source of capital ahead of the United States, Germany and Cyprus, the Russian Statistics Agency reported Wednesday.

Russia's investments abroad were $3.7 billion, with $3.36 billion going to the United States, according to the agency.

However, the local economy could be on the verge of spiraling down, according to Putin's top economic adviser, Andrei Illarionov, who keeps issuing warnings that growth factors behind the recent economic recovery are wearing off.

One of Illarionov's recent proposals was to reduce the share of state expenditures to 30 percent of GDP from the present 40 percent.

"This smacks of liberal populism," said Trofimov.

"Illarionov's statements are influenced by pictures of Singapore and other developed nations, but in Russia his romantic approach is redundant," he said.