Russia Cuts Defense Budget for First Time Since 2014
Increases Social Welfare Spending Amid COVID-19 Crisis
Plans to Raise Taxes on the Wealthy
[Asia Economy Reporter Naju-seok] Amid the crisis of the novel coronavirus infection (COVID-19), Russia has significantly cut its defense budget. This measure aims to increase social welfare budgets amid worsening fiscal conditions due to low oil prices. Russia has decided to impose higher taxes on the wealthy to secure the necessary funds.
The Russian Air Force is holding an aerial parade over Moscow to commemorate the victory in World War II. [Image source=EPA Yonhap News]
According to foreign media on the 21st (local time), the Russian government submitted a budget proposal to the parliament that cuts next year's defense budget by 5%. This is the first time since 2014 that Russia has reduced its defense spending. Russia faces a dilemma of needing to increase expenditures while its fiscal revenues are declining due to COVID-19. This summer, Russia announced a large-scale economic stimulus package to revive the economy hit by COVID-19. On the other hand, Russia, which had recorded fiscal surpluses due to oil exports, is now experiencing reduced fiscal revenues due to low oil prices. Additionally, the economic downturn caused by COVID-19 and sanctions from Western countries have worsened the economic situation.
Considering the fiscal shortages caused by COVID-19, Russia has decided not only to increase taxes on the wealthy but also to significantly expand its fiscal deficit.
Budgets related to social welfare have been increased by about 10%, exceeding 25% of the total budget.
Russia has also decided to reduce subsidies provided to oil companies despite the defense budget cuts. Conversely, taxes on raw material companies such as metals and minerals will be increased.
Russian nuclear submarine crew members line up at sea in Saint Petersburg to commemorate the Russian Navy Day. [Image source=AP Yonhap News]
Additionally, Russia plans to raise taxes on high-income earners with annual incomes exceeding 5 million rubles (76.6 million KRW) and deposit holders with more than 1 million rubles. Taxes on luxury and indulgence goods such as tobacco have also been increased.
Russia will also adopt a medium- to long-term fiscal deficit budget. The Russian Ministry of Finance expects a fiscal deficit of 4.5% of GDP this year, followed by 2.4% of GDP next year, and 1% of GDP the year after. As the shortfall will be covered by external borrowing, Russia's debt ratio is expected to rise from 13% at the beginning of this year to 20% next year.
Russian Prime Minister Mikhail Mishustin stated, "We must maintain the social foundation and fulfill national development goals through fiscal policy."
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