09.05.09

The Russian Federation increasingly transforms into a kingdom of bureaucrats. Not only salaries and the administrative and material power of bureaucrats but also the number of bureaucrats itself grows year after year. Whereas federal government institutions employed 486,000 people in 1994, this figure rose to 874,000 in 2008, according to Rosstat's (Federal State Statistics Agency) data. Notably, the highest growth was observed in the years when Vladimir Putin was president. As recently as 2001, only 505,000 people worked in federal government institutions. But these are not all the "people's servants" -- these calculations do not include employees of municipal bodies of power. The army of bureaucrats has grown even though the number of Russians, whose interests the former are supposed to serve, declines every year. In 1994, the Russian population was 148.6 million, but it has shrunk to 142 million now.

Meanwhile, the government has produced more and more initiatives increasing the bureaucratic machine. On Monday (27 April), it approved the replacement of the unified social tax (YeSN) with insurance contributions as of next year. This decision, the Finance Ministry estimates, will enable the authorities, from 2011, to increase the tax burden on business by 800-850 billion rubles (R) and save the corresponding sum for the federal budget on transfers into social extrabudgetary funds. In addition, as soon as next year the authorities will start forming new divisions from bureaucrats to collect these contributions. As those are extrabudgetary funds and the money transferred into them is not taxes, it will now be collected not by the Federal Tax Service but by services established specifically for this purpose as part of each of the social funds: Pension, Social Insurance, and Medical Insurance.

Russian Pension Fund Chief Anton Drozdov already revealed unintentionally that 10,000 additional jobs would be created for this purpose in his fund alone. No doubt, quite a necessary undertaking in crisis conditions. When unemployment is high, it is better when people become state officials than go on the dole, after all. It is just that such jobs do not create any value added for the country, they only boost expenditures on the state apparatus. Not only does the state have to pay a salary to all "people's servants" but it also must equip their work places. In addition, the state will have to buy official cars for some of them -- notably, not all will agree to ride Russian-made Ladas.

It is not a sure thing that in the end the national budget will receive a major relief thanks to the replacement of YeSN because the principle "I collect money, I spend it on myself" will be used. In addition, the authorities forget that when YeSN was introduced in 2001, one of the reasons explaining the need to give up insurance contributions was their low collection rate. At that time, entrepreneurs feared tax officials much more than officials collecting extrabudgetary contributions. As a result, the arrears of enterprises in payments to extrabudgetary funds was several times, in percentage terms, those in tax payments. The federal budget had to cover the deficit of funds to avoid angering the population with pension delays and unpaid sick leaves. That hurt business, which honestly paid those contributions. It was more difficult for business to compete with the enterprises that delayed their extrabudgetary payments, preferring to spend that money on modernization or other needs. The old story may repeat itself now.

Having botched up the administrative reform, which was aimed at reducing bureaucracy and the army of bureaucrats, the Russian authorities do not even try now to hold back the increase in the number of "people's servants." However, this policy cannot be conduced forever. The national economy will not be able to handle the growth in expenditures on the state apparatus and more complicated bureaucratic procedures. After all, enterprises, too, will now have to step up their accounting operations in order to pay at once three contributions instead of YeSN. And that is on top of the additional cost of bribing out of new audits because now, apart from tax officers, they will be inspected by each of the three extrabudgetary funds.

About Alinga Consulting Group

    Audit and Taxation     Legal     Accounting and Payroll

Questions? Ask Alinga's Experts!

Source: Nezavisimaya Gazeta