Russia: tax slowdown “set to hit local government finances”

18 Aug 15

The growth in property and corporation taxes in Russia is expected to slow in the second half of this year, an analysis by credit rating agency Fitch has warned, which could hit the creditworthiness of the country’s regional and local government.

In an analysis of likely tax revenue, Fitch said that the revenue streams would be under pressure due to lower oil prices, a weak rouble, and US and EU sanctions against the country.

As these taxes make up some 70% to local and regional government budgets, lower-than-expected increases will undermine the country’s performance and creditworthiness, the agency warned. It also expects higher capital expenditure in the country to add further strain on government finances in the second half of this year.

The review found that corporate income tax (CIT) grew by 26% year-on-year in the first half of 2015 and partially compensated weak property income tax (PIT) collection during the same period.

But CIT growth is now expected to fall in the second half of 2015 as the one-off effect of rouble depreciation slows down and financial performance in the corporate sector weakens.

Additionally, it said reduced dividend payments to individuals due to a decline in corporate profits as well as increased individual tax deduction on newly bought houses were also affecting revenues.

The country’s economic slowdown was also affecting wage growth, which in turn was leading to lower-than-expected revenues. The firm highlighted that companies were freezing wages, cancelling bonuses or turning to part-time employment in response to the economic pressures, while the extent to which people are paid without being taxed may also increase.

Due to this, Fitch has estimated that local and regional government bodies will end 2015 with a total deficit of about RUB400bn ($6bn), or 4% of total revenue.  

The agency said it would continue to assess the severity of the decline in individual authorities. So far, 19 out of 45 local and regional governments have been given negative outlooks. 

  • Judith Ugwumadu
    Judith Ugwumadu

    Judith writes about public finance, public services and economics across Public Finance International and Public Finance. She previously undertook reporting stints at Financial Adviser, Global Security Finance and The Sunday Express.

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