‘Payouts to the population are easy to start but hard to stop — people get used to them quickly’
Economist Sergey Khestanov about the Russian government’s economic policy that should be expected in the short run
“Everybody here beats about the bush with the same income tax, but the total tax burden in Russia is bigger than in Germany. Public agencies’ regulation is also big. Specialists in the tax sphere say that the VAT tax burden should reduce. Moreover, it is necessary to give up constant control and the taxpayer’s presumption of guilt. If taxes are lower and clearer, if the Federal Tax Service’s control is reasonable, not repressive, the country would have much fewer shadowy sectors. Yes, self-employed people appeared here, but the people doesn’t rush to become such,” thinks economist Sergey Khestanov. In a column written for Realnoe Vremya, he explains the meaning of the wait-and-see approach of the Russian government, what the rise in income tax is fraught with and why the 10% fall in the economy in April-June isn’t a catastrophe.
It’s not so catastrophic so far
The 9,6% fall in Russia’s economy in April-June is both serious and at the same time not very scary. On the one hand, such a fall is significant: GDP is a conservative indicator, and any of its decrease by more than 2-3% is taken by experts very seriously. But most economists anyway look at annual GDP numbers, and according to my colleagues’ forecasts, the Russian economy’s fall in 2020 will be about 4-6%. It is perceptible but not catastrophic and notably softer than the fall in 2008 or 2015.
Let’s remember then the crisis hit then many sectors of the Russian economy more or less evenly, almost everybody had problems, while now the sectors that work with citizens, that’s to say, services and retailing (mainly non-food) have received the biggest blow. A reduction in prices for oil, gas, metals was the main factor of non-stop businesses, while they didn’t feel the effect of the lockdown, this is why the fall in GDP in 2020 will correlate with a half or two-thirds of what we experienced in the same 2008.
State supporting measures: we can debate, but there is reasonability
The Russian authorities’ supporting measures during the tough period of the pandemic were again both sufficient and insufficient. If we compare them with those measures taken in EU countries and in the USA, then, of course, they looked almost invisible — support for both businesses and people in Russia dropped many times. On the other hand, the measures designed for citizens, first of all, payouts to families with children were effective. 80% of low-income citizens in Russia anyway are people who have minors, this is why targeted payouts to such people solve the problem quite well. Moreover, they approximately complied with experts’ recommendations they gave to the government at the beginning of the epidemic.
As for assistance to enterprises, here we can debate on its effectiveness very much because different countries have different approaches to what should be done in this area, but what was done in Russia was reasonable, give or take, in these uneasy conditions. The budget in our country can’t help small and medium enterprises as much as this was done abroad, this is why what was done was within the limits of its capability.
We should pay attention to the fact that most affected enterprises are in the service industry, while here a lot of companies will emerge quite quickly as soon as the situation in the market improves. Yes, a considerable number of enterprises providing services will disappear in 2020 and 2021, people will lose jobs, business owners will lose investments, but most firms will be reborn. The experience of previous years talks about it, and a lot of entrepreneurs are sticking to this experience by closing their businesses now. Of course, hotels will “die”, it will be very hard to revive it, but this might not be a threat for the same travel agencies with small capital. I know the experience of many agencies that they closed in 2015 and reopened in late 2016.
The same can be said about restaurants and cafe: if their owners rented spaces, it will be easier for them to close and open. If they run a risk, the risk is in the rent deposit and employees’ salary. Of course, those who own realty like shopping malls will find it harder, they’d better not bring the situation to bankruptcy.
Not all countries and not all managers love to talk about such things in public, but some Russian functionaries already said that in the case of a second wave of coronavirus, the economy wouldn’t be blocked like it was during the first wave simply because for some economic regions the danger of starvation is scarier than the coronavirus. This is why if the second wave anyway gets to Russia, the government’s actions will be softer. The authorities anyway know what happens in such situations — there are statistics, accumulated crisis management experience, most regions already have a stock of beds in the case of mass hospitalisation of patients infected with the virus.
Low key rate — any return?
The reduction in the key rate is almost neutral for our economy because we don’t see any mass lending boom. As there is no mass lending, any manipulations with the rate have almost no positive meaning. It is likely that under lobbyists’ pressure the Central Bank had to show that it was doing something, but it isn’t a timely decision. Yes, classically, it is correct because the key rate needs to reduce when the economy has problems. On the other hand, it is clear why there is no lending boom, and the CB has limited resources to reduce the rate. Mechanically, it can go below zero, but it doesn’t work in practice — the countries with such a rate don’t have a boom in the economy.
This is why any opportunity to lower the rate is a limited resource. Moreover, there is sense in spending any resource to get a return. But a return from the rate reduction can be achieved when the economy hits the famous bottom and weak recovery begins. And from a perspective of a further reduction of the rate, the CB should “save ammunition” for a more favourable moment.
When I hear that the CB’s rate will lower mortgage rates, I reply this way: “When citizens’ incomes are notably lower than the 2013 level and tend to reduce, is it sensible to develop a mortgage in these conditions?” No, people will just get higher chances of becoming bankrupt, this is why now it isn’t the best time to develop a mortgage.
Tax measures — what’s next?
The 15% income tax for citizens whose income is above 5 million rubles a year opened the next Pandora’s box. Once, when the flat 13% rate was introduced, everybody criticised it as well, but this decision provided a double positive effect: firstly, the tax discipline increased — there is less tax dodging, secondly, payments to the budget rose. And the smartest thing was not to change this flat rate because the business climate is already not simple.
Yes, this 15% tax applies to not a big number of people, but a small lie gives birth to big mistrust — after a mistake, there will be created a rule, and we will get migration of the same IT specialists because owners of such businesses are covered by such a tax. But should we trust the authorities’ new decisions on lower taxes and insurance premiums for the IT sphere, that this will stay for long? Our country in the person of its head promised to build communism by the 1980s, this is why one should consider all promises with sound scepticism.
Suffice it to remember two examples. When electrical energy was reformed, the authorities opened the road for investors to it, but then they cheated them saying like they weren’t ready for such work. The second example is the famous agreements on production sharing. When oil was $7-8 and the country was poor, the authorities invited investors to oil projects — the projects Sakhalin-1, Sakhalin-2, Sakhalin-3 appeared, in which the state promised them to give a part of the oil. But the promise was broken again.
Some interim conclusions about the action of such measures will appear in a year, while one should wait for 2-3 years for normal conclusions, no less. Of course, IT businesses develop faster than others, but not everything is smooth here. Trials on IT firms are already underway, and the moods aren’t good there.
Support for economy — both reasonable and risky
Now some of my colleagues say that the government should support sectors that can yield a good return, for instance, agriculture or pharmacology. But those enterprises that create sought-after products in the country don’t need any support, while those who have, let’s say, obsolete equipment will not do any good, no matter how much you support them. I am in general against any artificial support — nobody supports wild animals in the forest, while they are strong because they won others. Why did the USSR have, for instance, very bad TV and cars? Because the domestic market was closed to imports.
If we want a boost in the economy and quality goods, we simply should create conditions for all producers, and profitable things will appear themselves. Which conditions are important? To lower taxes and cancel excessive public agencies’ regulation of businesses. Everybody hear beats about the bush with the same income tax, but the total tax burden in Russia is bigger than in Germany.
Public agencies’ regulation is also big. Specialists in the tax sphere say that the VAT tax burden should reduce. Moreover, it is necessary to give up constant control and the taxpayer’s presumption of guilt. If taxes are lower and clearer, if the Federal Tax Service’s control is reasonable, not repressive, the country would have much fewer shadowy sectors. Yes, self-employed people appeared here, but the people doesn’t rush to become such.
It is impossible to achieve sustainable growth with artificial measures. If you will feed an enterprise with money, it will run, if you stop — it will kick the bucket. There might be made an exception, for instance, to remote airlines because if they aren’t supported, people will have no transport. As for the rest, this support isn’t much needed.
But money can be allocated for science, here the state won’t overtax itself. But as a former worker of the USSR Academy of Sciences, I don’t really believe in such serious support. Science is international enough, and a scientist can just move to another country, at times there is no need to move — one can work for a European company from home. Science is such a thing that needs decades of investments until it bears fruit, but many of our scientific schools have been simply destroyed since the late 80s (and more capable people stopped becoming scientists — salaries are low there). But I am not ready to believe that our state will wait for the effect during these years — only some enterprises will feed science. And I will tell today’s students interested in science the following: “Lads, learn English and think where you will move, you won’t be able to seriously deal with science linked with equipment in Russia”.
One should think twice about new payouts to children
I wouldn’t forecast the government’s urgent serious measures in the short run. The government will perhaps look at economic indicators in September, and there will be another payout of 10,000 rubles to families with children. As for new payouts to children, the authorities must be very careful. What’s the misfortune of such payouts? It is easy to start paying them but hard to stop — people get used to this quickly, start to take the payouts for granted and in general will be very indignant if they stop. This is why one should think twice here. Payouts to children anyway are, first of all, an extraordinary measure for those who are doing very bad.
I think to revive the economy we need the practice of a moderate rise in pensions and salaries of public workers. We have a lot of both pensioners and public workers who receive too little money, and this isn’t normal. Will there be taken such measures? All the economic policy now is a wait-and-see attitude, observatory: there aren’t serious protests, no important enterprise has gone bankrupt, yes, people’s incomes will fall by 4-5% but they had already fallen more seriously. There is nothing terrible for the authorities, so why does the government need measures? The authorities chose a wait-and-see attitude and will stick to it in 2020.