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How can Kazakhstan increase its budget revenues?

Experts Discuss Potential Solutions for Kazakhstan's State Finance Crisis
How can Kazakhstan increase its budget revenues?

In recent years, Kazakhstan has been experiencing a persistent budget deficit. According to the Ministry of Finance, in 2023, it has reached 2.2 trillion tenge. However, analysts from Halyk Finance estimate that without the National Fund's resources, the deficit would amount to 11.6 trillion tenge.

The National Fund continues to be the primary source for covering the budget deficit: over the past three years, it has financed 20% of expenditures.

The frequency of drawing on its resources is increasing due to the government's underperforming tax collection and rising state expenditures—support for the economy, infrastructure repairs, social programs, and servicing public debt.

Experts are engaged in discussions about how to resolve the current situation. The most popular suggestion remains reducing expenditures, particularly social ones. However, this could lead to a deterioration in the quality of social infrastructure and a decline in the quality of life for the majority of citizens, which is especially concerning given the ongoing population growth.

Simultaneously, experts have started to discuss how Kazakhstan can increase the revenues of the republican budget under the current political and economic conditions.

For instance, the Applied Economics Research Center (AERC) has suggested focusing on improving the administration of the value-added tax (VAT) and eliminating tax exemptions. This could potentially bring the budget an additional 5-6 trillion tenge annually.

Experts interviewed by "Vlast" agreed that these two measures could be seen as an anti-crisis solution. However, some experts pointed out that their potential is limited.

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Proposal 1: Improving Tax Administration and Reducing Exemptions

Financial consultant Rasul Rysmambetov believes that enhancing tax administration is an appropriate response to the deficit issue, capable of bringing more than 2 trillion tenge to the budget. However, it is crucial to combine this measure with reducing the ability to fragment large businesses into smaller enterprises.

Regarding tax exemptions, this tool should be focused on state development programs. According to Rysmambetov, Kazakhstan needs to clearly define what kind of economy it wants to see in five years and carefully plan all conditions and exemptions from the start to achieve the desired goals without changing policies every year.

Additionally, Rysmambetov suggests that "increasing the economic value of enterprises in the mining and oil sectors through a higher state share" could complement these measures, but this would alter the policy towards the largest projects in the country.

Advisor to the Chairman of Halyk Finance, Murat Temirkhanov, estimates the potential of reducing tax exemptions at 4-5 trillion tenge. This measure should primarily affect investment contracts of large companies. The state is missing out on substantial tax revenues from these contracts, and the public lacks information on who receives these exemptions and how much they cost the budget annually.

"Previously, all tax exemptions were justified as measures for diversifying the economy, bringing businesses out of the 'shadows,' and increasing Kazakhstan's investment attractiveness. However, there has been no real progress in these areas, and non-oil budget revenues have sharply declined due to these measures," Temirkhanov noted.

At the same time, improving tax administration is considered a rather ineffective measure by Halyk Finance. Kazakhstan has already made significant strides in the digitalization of VAT and electronic invoices, so a sudden increase in tax collection is unlikely.

The only promising avenue remains the fight against smuggling and gray imports. Just in 2023, Temirkhanov states, the discrepancy in data regarding imports from China to Kazakhstan amounted to $9.3 billion, a record figure in the last 20 years. As a result, due to smuggling and undervaluation of imports, the budget is missing out on a substantial amount of VAT.

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Proposal 2: Increasing Taxes

Economist Almas Chukin is convinced that these two measures will only cover 20-30% of the existing deficit. And with the current low tax rates, this problem will not be resolved.

Currently, he says, the ratio of collected taxes to GDP is 13%, while in Western countries, it is 30% or more. If Kazakhstan maintains its current policies, it will not be able to increase budget revenues proportionally to the growth of its expenditures, which will rise by 2.5 trillion tenge in 2025.

Therefore, Chukin sees tax increases as a key step towards overcoming the state financial crisis: "If we do not raise rates, the country will not develop. This will be particularly painful for socially vulnerable groups because the budget will not be able to fulfill its role as a buffer against social inequality."

Other experts agree with him. Temirkhanov, referring to government calculations, states that raising the VAT rate from 12% to 16% would bring an additional 2.5 trillion tenge to the budget. A proper configuration of a progressive individual income tax scale, where the wealthiest pay higher taxes, could add another 1-1.5 trillion tenge to the budget.

Rysmambetov also pointed out the tax burden on subsoil users: "Not all subsoil users pay well. Some pay poorly. A low tax burden for subsoil users is the government's gratitude for entering our market. But we need to look at European countries in this regard."

Overall, European countries apply higher tax rates and offer fewer VAT discounts to companies in the mining sectors.

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Proposal 3: Rethinking the Economic Development Model

Economist Kuat Akizhanov believes it is essential to rethink how Kazakhstan approaches the budget deficit. Kazakhstan has had a budget deficit for many years, and this is normal since otherwise, the economic and social spheres would not receive the necessary development.

"Look at global practices: the USA, EU, Japan, and other developed countries live with significant deficits. But they are not scared of bankruptcy, while developing countries like Kazakhstan are. Therefore, we need to stop playing by such rules," he argues.

In this context, the National Fund also needs to be rethought, Akizhanov insists. It was created to extract excess money from the economy to prevent overheating. However, oil revenues continue to be injected into the economy, fueling inflation without yielding the expected outcomes in terms of higher taxes and improved quality of life for citizens.

Thus, it is crucial for Kazakhstan to reinvent its economic development model to direct the still-existing assets of the National Fund towards creating industries that can significantly enhance citizens' lives.

Currently, according to Akizhanov, the development of the country is hindered by the ruling groups' fixation on their own enrichment. As a result, since gaining independence, Kazakhstan's industry has been in decline, and the economic system struggles to cope with crises. To maintain the current order, it is often necessary to resort to the National Fund.

Frequently, this occurs at the president's request, who can allocate the National Fund's resources at his discretion and without societal oversight. "When needed, the president saves a bank, then organizes a program for children. But how effective is all this? It requires limitations. Any public funds should be under citizens' control; otherwise, the crisis will never be overcome," Akizhanov concluded.