Can the problem of budget deficit be solved by raising the rates of excises on alcohol products?

A few days ago, the RF Ministry of Finance put forth some ideas concerning the possible ways for generating additional revenues in the budget system. Alongside the considerations relating to the fiscal consequences of the increased rates of tax on the extraction of mineral resources for natural gas, the transport tax and the size of state duties, priority is also given to the issue of an additional increase of the rates of excises above the levels previously approved for the year 2010.

The overall effect on the budget from the indexations suggested by the RF Ministry of Finance is expected to be at the level of 241 billion rubles, of which 90 billion rubles should be generated by excises on alcohol products. For this target to be achieved, the RF Ministry of Finance suggests that the excise rates should be increased by 20 % against the already approved figures for all groups of commodities except beer, the excise rates for which are to be tripled by comparison with the 2009 level.

In our opinion, the expected volume of additional revenues generated by increased excise rates alone can hardly be viewed as realistic, even when set against the actually received volume of revenues in 2008, when this category of excisable commodities yielded approximately 120.5 billion rubles. If one takes into consideration the possibility of a decline in the production and sales volumes of alcohol products in 2009 and the 10 % indexation of the excise rates by comparison with 2008, it can be expected that the amount of revenues from excises on alcohol products in 2009 is not going to be higher than that of 2008 in absolute terms. This means that the indexation should result in a rise in revenues by almost 75 %.

In fact, although the indexation of excise rates for alcohol products have been kept slightly below the inflation level, from the fiscal point of view only a slight increase of the excise rates for alcohol products with per cent volume of ethyl alcohol over 9 % and for beer appears to be justifiable. In conditions of declining real incomes of the population and the worsening financial situation at the enterprises operating in this sector of the economy, any significant indexation can only create incentives for further growth of shadow business, which, in its turn, will reduce the overall tax revenues from this industry. At the same time, all the non-tax measures designed to curb the illegal turnover of alcohol products, as suggested by the RF Ministry of Finance (except the requirement to introduce minimum retail prices for vodka and spirituous liquors, to be set by producers), can hardly result in any significant positive effects.

In its turn, the threefold increase of the excise rate for beer will result in significant growth of its retail prices. Thus, in 2009 the share of excises and VAT in the price of a half-liter bottle of beer is approximately 1.77 rubles. In the event of a threefold increase of the excise rate, in 2010 this share will grow to 5.31 rubles, thus raising the price of each bottle of beer by 3.5 rubles. This will be particularly noticeable in the middle- and low-price segments (under 20 rubles for 0.5 l), which are the most popular ones among the consumers. And, although beer belongs to the group of commodities with weak price elasticity, this measure will result in the most substantial drop in demand in these segments, as well as in further expansion of the shadow sector.

I. A. Sokolov - Candidate of Economic Sciences, Head of the Department for Budget Policy