The Budget's Dilemmas After the VAT Increase Was Scrapped

Nobody envies the government's economic team right now: it is, one might say, in a position of zugzwang. Cancelling the VAT rate increase means finding new solutions, but money cannot be conjured out of thin air. As I wrote earlier, tax administration and a review of tax exemptions will be the main source of new revenue. In this respect, it is not clear what is worse: raising rates, or abolishing exemptions and improving tax administration.

Now that the rate increase has been cancelled, let us consider what difficulties abolishing exemptions and improving tax administration will bring.

In Kazakhstan, VAT exemptions are concentrated mainly in the exemption of imported goods from VAT and in the use of the offset method. It should be understood that this is not quite the kind of exemption that brings permanent additional revenue, since for the most part it is simply a deferral of VAT payments to future periods. VAT works in such a way that the VAT a company pays is later offset and reduces its payments in the future. This produces a one-off effect, which then fades as payments are reduced through the offset VAT.

A large share of exemptions exists in the banking sector, in the taxation of securities. As far as I know, only the notes have been brought under taxation, while the rest was fended off. Accordingly, it will not be possible to increase revenue from banks. Moreover, interest rates will now fall, as will the profitability of the banking sector, which will not allow for an increase in CIT revenue. The accrual of interest on current accounts has still not been restored, which means that businesses and households will not receive additional income.

SMEs enjoy a colossal number of exemptions, and the main problem here is business splitting. Until last year there was a moratorium on inspections. With the moratorium lifted, it seems to me, attempts will be made to combat splitting, but doing so is extremely difficult. Everything is decided locally by minor officials, and we do not have the resources to monitor the tax officers themselves. Introducing a transparent digital system is proving very hard: so far we have only learned to assess risks. Building such a system will take three to four years and substantial IT investment. Moreover, as soon as the pressure grows, and wherever there is subjectivity, which there will be here, complaints will begin, along with constant appeals from business representatives and from Atameken. So there is a chance that, after another thump on the table, the authorities will be asked not to touch SMEs, and no significant increase in revenue will materialize.

There are many other exemptions that will also be extremely difficult to remove: those in agriculture, on the stock exchange, in special economic zones, the AIFC, the Hubs and so on, and in every case there will be a rationale for keeping them.

If it is hard to increase revenue, spending must be cut. But spending presents the same problem. All expenditures went through the budget process, with numerous procedures and approvals. As the previous government put it, budget requests exceed available funds "several times over." Every Akim will stand firm for his own spending; whoever has the greater bureaucratic weight will keep his budget. Cutting expenditures effectively, systematically and with quality in a short time is extremely difficult. In two weeks it can only be done subjectively and superficially. Moreover, budget expenditure is the country's income; that is the essence of the fiscal impulse. Spending cuts will affect business activity and reduce GDP. So how, then, can GDP growth of 6% or more be achieved? That, too, is a problem.

Budget revenue could also be increased in nominal terms through currency depreciation. There is room for this: the tenge is now stronger than ever, and this would probably be one of the quickest and most effective measures. But here another problem arises, namely inflation, which would react instantly. That would feed through to the base rate, pushing the question of market lending into the background, as well as the growth of real household incomes. True, household incomes can only be raised through growth in labor productivity, but there is no quality program in this area. We place more emphasis on employment.

All this requires a radical reset of economic policy, and in our case it will be extremely difficult to avoid painful decisions. But it is better to carry out painful reforms at the start of the journey than to realize in three or four years that they are unavoidable when it is already too late, and then to adjust the goal of doubling GDP by extending the deadlines. Unfortunately, macroeconomists have to be pragmatists and see two steps ahead, because short-term prosperity does not mean that things will be just as good in the future. Venezuela, Argentina, Turkey, Ecuador, Zimbabwe and a number of other countries have demonstrated this vividly.