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. Last Updated: 07/27/2016

Zhukov: Cut Taxes, Nix Budget Surplus

ReutersAlexander Zhukov
The government must use windfall gains from high oil prices to cut taxes rather than keep running a budget surplus, Deputy Prime Minister Alexander Zhukov said Monday, underscoring a change in fiscal policy.

Zhukov's remarks seemingly reverse a fiscal strategy that has emphasized debt repayment and financial prudence over an expansionary policy.

Planned surpluses were originally meant to curb government spending, mop up excessive capital liquidity and counter inflationary pressures.

But now a planned surplus "barely makes any sense," Zhukov said in an interview with Reuters.

Zhukov's proposal "marks a change in policy that was always expected to come at some point," said Al Breach, an economist at Brunswick UBS. "Countries do not run surpluses forever."

Zhukov said he expects tax cuts to boost job creation.

The unemployment rate hovers at 8 percent, according to the International Labor Organization, but these figures mask persistent underemployment.

The government has already pursued tax cuts, even as it piled up budget surpluses, now in their fourth consecutive year.

Officials have said they plan to lower the main payroll tax, the Unified Social Tax, by cutting the top rate by a quarter to 26 percent. The resulting $10 billion gap in revenues would be filled by tax hikes on natural resources such as oil.

"I have always said that first of all we need to cut the UST. It is our biggest tax," said Zhukov, who is responsible for the government's economic program. "We also hope it will lead to a rise in wages."

Zhukov first indicated a new direction last week, telling reporters that a large surplus was unnecessary after the creation of a stabilization fund financed by windfall revenues.

The government's midterm economic strategy -- adopted under former Prime Minister Mikhail Kasyanov and Finance Minister Alexei Kudrin -- projects a budget surplus of 0.5 percent of gross domestic product this year and 0.9 percent in 2005.

Zhukov's proposals do not necessarily contradict these plans, said Yevgeny Gavrilenkov, chief economist at Troika Dialog.

Gavrilenkov calculates the surplus this year could reach 1.5 percent of GDP. This surplus would buffer the effects of tax cuts, allowing the government to keep its fiscal pledges.

Furthermore, a cut in payroll tax might entice many hidden wages to come into the open, Gavrilenkov said, expanding the tax base and slowing the reduction in revenues.

Meanwhile growing GDP and an appreciating ruble has reduced the real burden of the government's dollar-denominated debt, especially after last year's debt repayment peak, said Alexei Moisseyev, fixed income analyst at Renaissance Capital.

Some economists are wondering whether the government's newfound zeal for expansionary fiscal policy will involve higher spending.

Chris Weafer, chief strategist at Alfa Bank, is convinced that it will.

Just last week, under pressure from President Vladimir Putin, Economic Development and Trade Minister German Gref raised 2004 GDP growth forecast by a quarter to 6.4 percent, a commitment that might require extra government spending.

Last year, the federal government spent 17.7 percent of GDP, according to estimates from Aton.

"The best way to go about cutting taxes is to cut spending by the same amount," said Peter Westin, an economist at Aton. Extra expenditures and subsidies could get misdirected because "governments in general tend to be very bad about picking winners and spending it right."

So far, the government has not announced major spending increases.

Putin said later Monday that the economy will receive a windfall of 280 billion rubles ($9.8 billion) as a result of tax reforms. Zhukov expressed the hope that "the money that stays in enterprises will be used in particular to increase wages and become a source of additional investment and accelerated economic growth," Interfax reported.

Zhukov also said he expects the stabilization fund to reach 300 billion rubles to 350 billion rubles by the end of the year.