Russia plans array of tax hikes in 2027-29 to fund military spending

By Darya Korsunskaya

MOSCOW, Sept 24 (Reuters) - The Russian government projected a budget deficit equal to around 2% of the gross domestic product for the next three years and proposed an array of tax hikes to sustain the military expenditure, Finance Ministry materials showed on Thursday.

The government has reviewed the draft budget, which it will have to send to parliament before October 1. It said that defence and security needs were a "strategic priority" for the new budget.

"The planned resources will enable the equipping of the armed forces with necessary weapons and military equipment, the modernisation of defence enterprises, the payment of monetary allowances to military personnel," the ministry said.

The costs of the 4-1/2-year war in Ukraine have been increasing for Russia, with the economy slowing sharply last year to near zero growth and the government having to raise taxes and increase borrowing to finance the war effort.

This year Russia has faced additional pressure from Ukrainian drone attacks on infrastructure and refineries, having to spend an unspecified amount on drone defences, repairs and fuel imports to deal with nationwide shortages.

RISKS COULD SLOW GROWTH

State revenues in 2027 are projected at 43.3 trillion roubles ($509 billion) and expenditure at 48.8 trillion roubles, leaving a deficit equal to 2.2% of GDP, compared with 1.2% of GDP in earlier three-year projections.

As part of the work on the new budget, the Economy Ministry has slightly raised the growth forecast for this year to 0.6% from 0.4% due to strong consumption, but said that some unspecified risks could slow growth.

It also raised the projected average price of oil, Russia's main source of revenue, for this year to $61.2 per barrel of Urals blend, from $59 before, but said that the actual price could be higher, bringing more revenue to the budget.

Russia has revised down the outlook for natural gas and crude oil production and exports amid frayed relations with Europe, once its key market for commodity exports, confirming Reuters reports published earlier this month.

Russia hiked taxes this year to sustain military spending, and throughout the year officials have sought to reassure that there would be no more tax increases.

On Thursday, the finance ministry proposed hiking taxes on what it described as excess profits in the metals and fertilizer sectors due to high global prices, as well as taxes on trans-border electronic trade.

It had also proposed raising tax rates on so-called "passive" personal income from investment in securities, property sales, and interest from bank deposits. It said that the measure would affect about 4 million people.

INDUSTRY SHRINKS, INVESTMENT FALLS

Russian industrial output is expected to fall by 0.2% this year, marking its first contraction since 2020, the year of the COVID-19 pandemic, instead of the 0.6% growth projected earlier, a new set of government forecasts showed on Thursday.

The government raised its 2026 inflation forecast to 6.8%, more in line with the central bank's forecast, up from 5.2% previously. This adjustment followed drone attacks on refineries, which led to fuel shortages and a spike in prices.

Capital investment, affected by high interest rates and Western sanctions, is expected to fall by 5.4% this year, marking the deepest contraction since the 2015 economic crisis, when investment plunged by 10.1%.

Initially, a more moderate decline in investment of 1.5% was projected for this year. In 2027, the economy ministry expects nearly zero investment growth of 0.2%, compared with the previous forecast of 2.0%.

The data also indicated that consumption would provide some support for the economy this year, with forecasts for retail sales growth revised up to 4.6%, from 0.8% previously, while projected real wage growth was revised up to 4.0% from 2.2%.

($1 = 84.9955 roubles)

(Reporting by Darya Korsunskaya; Writing by Gleb Bryanski; Editing by Alex Richardson)