At the time of this interview, the head of state, Kassym-Jomart Tokayev, noted during the kurultai that our state is social, therefore investments in education and healthcare are a priority and a constitutional obligation, and abuses in this area are unacceptable. In this regard, non-priority expenditures will be reduced, and the government has been instructed to develop specific mechanisms for optimizing these expenditures by the end of the year.
The day before the president's statement, economist Askar Kysykov shared his thoughts on this matter with a correspondent from inbusiness.kz. What solutions does the expert see? What is the potential for budget optimization? Which taxes should be reduced? The economist answered these and other questions in detail during the interview.
- Askar Baurzhanovich, in the context of the government's discussion on tax increases, there is an idea of reducing social spending under a noble pretext, claiming that the budget is already almost 99.9% social. You are one of the few experts who has your own view on the size of the social budget. Moreover, you see potential for optimization. Please elaborate on your point of view.
- If we look at the structure of Kazakhstan's state budget, it is undoubtedly social, and there is nothing surprising about that. In all countries, budgets are social, and social tasks – education, healthcare, pension payments, support for the poor – are the main basic functions of the state. To say that our budget in Kazakhstan is social and therefore taxes need to be raised is an incorrect argument.
Last year, the volume of state budget expenditures was about 31 trillion tenge, of which 53% were social expenditures. What do we understand by social expenditures? These are expenditures on social security, including pensions, benefits, various payments, targeted social assistance, expenditures on education, healthcare, culture, and sports.
But there is also another part of expenditures, 47% – these are non-social expenditures. They are related to other state tasks, including infrastructure development, support for the real sector of the economy, such as agriculture, maintenance of the state apparatus, and the fulfillment of other state functions related to security and defense. However, the figure of 99.9% claiming that our budget is social is incorrect.
- Is it correct to understand that the government includes indirect costs for building schools, infrastructure, and so on as social spending? What other items are embedded in the so-called social expenditures by the government?
- There is another classification of budget expenditures – economic. According to this classification, direct payments to the population, which include salaries, pensions, and benefits received directly from the budget in cash form, account for only 35% of the budget. The remaining 65% of the budget consists of purchases of goods and services (5.5 trillion), budget subsidies (1.6 trillion), capital expenditures, repairs, and construction (5.4 trillion), as well as budget loans and acquisition of financial assets. This means that a significant portion of the budget is spent through various procurement procedures, tenders, financing through the quasi-state sector, and so on.
And I believe that it is these expenditures that have serious potential for optimization. When we talk about the social nature of our budget, we mean the relative share of expenditures. But it cannot be said that our citizens receive excessively large support from the state. For example, targeted social assistance. Last year, targeted social assistance was received by 400,000 people, and only 40 billion tenge was allocated for this purpose.
40 billion tenge out of 31 trillion tenge is catastrophically little. Our poverty line in Kazakhstan last year was 30,000 tenge, while the average amount of targeted social assistance was 8,000 tenge. So yes, the budget is social, but the level of social support for the population is not excessive. In my opinion, on the contrary, the social orientation of the budget needs to be strengthened even more.
It is precisely social expenditures related to direct support for the population, families with low incomes, that should become a key priority, especially in the context of rising prices, increasing tariffs, and falling real incomes of the population.
It is worth adding that social expenditures encompass a wide range of expenses. For example, when we take education or healthcare – it is not only the payment of salaries to teachers and doctors.
There are also purchases of goods, various contracts, and the construction of schools and hospitals. For instance, a lot is spent on purchasing medicines in healthcare. Accordingly, even within social expenditures, there is potential for optimization, especially in procurement and construction. And this is a matter of proper planning and execution of the budget.
And these social expenditures – social security, education, healthcare – need to be algorithmized, digitized, made transparent and targeted first and foremost.
- What is the potential for optimization if we follow your logic?
- It is difficult to say exactly how much expenditure can be cut. But even if the expenditure part cannot be significantly reduced, I think there are opportunities to at least limit the further growth of expenditures so that the growth rate of expenditures does not exceed the growth rate of our revenues.
A large potential for optimization lies in financing the real sector of the economy and various investment projects. For example, when the government discusses tax increases, they propose a new program to support sectors of the economy, including through the holding 'Baiterek', amounting to about 8 trillion tenge.
A national project for the modernization of the energy and utility sectors has also been adopted. Very large sums are allocated. It is necessary to carefully examine these expenditures, the projects that are laid out. If we talk about infrastructure development, and this is directly related to the tariff policy we are implementing, considering that we are aiming for a transition to market tariffs, then infrastructure, especially in energy and utilities, should be self-sustaining. That is, the investments made in the development of the energy and utility sector should be returnable. If they are returnable and imply profitability, then private investments can be attracted for this, rather than state funds. The state should make it a rule not to spend money on projects that can be financed by the private sector.
And we need to abandon this habit of financing, trying to pour state money into the economy and some priority sectors, since the key goal of the budget should be to fulfill the basic functions of the state: security, defense, education, healthcare, social support for the population, and important non-revenue infrastructure projects that cannot be financed by the private sector, which are public goods, such as roads, bridges, and so on.
- At one time, we talked about benefits and support, but the real recipient of such state assistance is actually business. Let's take school meals, where parents do not actually choose the supplier, and children mostly do not eat this free food. Perhaps we should monetize benefits through payments to people, and they can then decide which service providers to turn to? Have you evaluated this aspect?
- If we talk about benefits and support for the population, then in Kazakhstan there is a lot of hidden subsidization, where people use preferential tariffs and prices, and in the end, the state pays for it. All citizens benefit from subsidies, and there is no distinction between low-income and high-income individuals. And, of course, monetization of benefits was invented for this, where all subsidies are distributed not to the service and goods providers, but to specific recipients. That is, those who really need it, have low incomes, and are socially vulnerable. This allows for a significant reduction in the total amount of support and to distribute it directly to those in need.
And in this aspect, digitalization can help – the creation of a social wallet, where each needy person according to the registry, by IIN, will receive: housing assistance, assistance for children's nutrition, and so on. That is, in a targeted manner to a wallet that can be used for payments.
Accordingly, this will also improve the quality of services received, because there will be competition among service providers, and they will work according to market principles with this demand, which is formed due to state subsidies.
- According to the Ministry of Finance, there are about 40 types of taxes and other mandatory payments to the budget in the country. The lion's share of them is provided by five types of taxes. Perhaps it is worth simplifying the administration of the other less productive taxes, where the costs of collection exceed the revenues, what do you think?
- Indeed, there are a large number of taxes and other mandatory payments in Kazakhstan. Some of them are not specified in the Tax Code but exist in other laws. For example, these are pension contributions, mandatory health insurance, social insurance. And, of course, there are many of them. Each has its own purpose: taxes, fees, charges, duties.
I do not think this is a serious problem because they do not affect all taxpayers. But, of course, there is potential for their reduction. This primarily concerns the transport tax. It would probably be more fair to include this tax in the excise duties on gasoline. And those who drive more, use the roads, and pollute the environment more should pay more.
So the linkage to engine displacement seems incorrect to me.
Another tax, or rather the system of payments that needs to be reviewed first, is the payments from the wage fund. These are personal income tax, social tax, pension contributions, which are divided between the employer and the employee, mandatory social health insurance is also divided between the employer and the employee, social contributions. There are many payments from the wage fund and a very high burden. To pay an employee 200-300 thousand tenge net, you need to pay about 42-43% on top of all payments. This is a very serious burden, which is why we have widespread salaries in envelopes. We need to introduce a single payment from the wage fund, reducing its overall burden. And the social tax can be combined with personal income tax. As for the pension contributions of employers, I believe they should be abolished.
It is necessary to analyze the effectiveness of mandatory social health insurance and critically examine the principles of its financing. There are many different models of healthcare financing, and we need to discuss with experts and specialists how our healthcare system should develop, particularly in terms of financing.
- It is also important to mention in the context of the budget deficit that, despite the deficit in the republican budget, local budgets are doing well in terms of revenues and are closing with a surplus. This was done as part of the budget decentralization of regions from the center. How effective are the expenditures of regional authorities, and has this aspect been analyzed? Perhaps it is advisable to roll back or adjust this reform?
- Indeed, in the context of the budget deficit, a situation has arisen where, in implementing the decentralization policy, we transferred part of the taxes to local budgets. This primarily concerns corporate income tax. Now, corporate income tax from small and medium-sized businesses is credited to local budgets. But these taxes are volatile – they depend heavily on the economic situation in the country. Therefore, the tax base of local budgets has become unstable, which leads, firstly, to the over-fulfillment of the revenue plan by local authorities, and secondly, if a crisis situation arises, these revenues can also drop sharply.
Last year, the approved plan for local budgets was about 13.4 trillion tenge, while the actual execution was 15.4 trillion tenge. That is, the over-fulfillment of the revenue plan exceeded 2 trillion tenge. This money, which was additionally received by regional authorities, is being utilized by local authorities. As a result, we have come to a contradictory situation: at the republican level, there is a budget deficit and a lack of funds, which has led the government to devise a tax reform, while at the local level, there is a serious over-fulfillment of revenues, including personal income tax and corporate tax.
And there are no effective compensatory mechanisms. I think we need to reconsider the system of inter-budgetary relations. It is good when local authorities have their own revenues, but there is a theoretical principle that the lower the level of the budget, the less volatile their revenues should be.
In simple terms, it is not possible to transfer to the local level those types of taxes that are very volatile.
- The tax system should become the basis for the country's competitiveness, not by increasing the burden, but by expanding the number of taxpayers. Do you have your own conceptual proposals on this matter and can you outline them in broad strokes?
- As for tax reform in general, it is very painful for the population and for business. Increasing the VAT rate has a direct impact on inflation, rising prices, decreasing purchasing power, and falling real incomes of the population.
But there is another initiative related to lowering the VAT threshold and abolishing the simplified declaration. These two measures can seriously undermine our business activity. There are alternative methods to increase revenue collection, primarily through improving the quality of administration.
The key problem that the government talks about is the fragmentation of business and underreporting of income. This is indeed the case; fragmentation is widespread, and underreporting of turnover is also common, which is why the State Revenue Committee constantly sends entrepreneurs 'letters of happiness' with desk audits and additional assessments. And this has become a topic of discussion when these notifications regarding desk audits were received by bloggers, but in fact, for many years, tens of thousands of individual entrepreneurs have been receiving these notifications and working with them, and they constantly receive additional assessments.
There are two ways to deal with this. The first is to tighten administration, lower the VAT threshold as the government suggests, and try to force everyone to pay taxes through repressive means. The second is to create incentives for people engaged in business, micro and small businesses, to pay taxes voluntarily. That is, the administration system should allow for very easy and unobtrusive tax payments with minimal burden, so that people become involved in this taxation process, learn to pay taxes, and keep track of their income and expenses.
And this is a long evolutionary path related to digitalization. In Kazakhstan, digitalization is at a high level, banking platforms work effectively, and cashless payments are widespread. This is a good basis to increase tax collection through the digitalization of tax administration. For example, in Estonia, there is a tax regime for business accounts: you open an account in a second-tier bank, check a box that you are now a business owner, and for this business account, you have automatic accounting of your income and expenses, and once a month, a draft declaration comes to you, you just agree to it and pay tax on turnover from that income.
Of course, the turnover tax, as we currently have it, under the simplified declaration, is very convenient for micro and small businesses. Regarding rates, we can think about gradually increasing them. But the principle and concept that there should be a turnover tax for micro and small businesses should be preserved; it is more convenient and will allow businesses to come out of the shadows. If we try to push everyone into VAT now, it will be difficult and unproductive, and many entrepreneurs will not withstand such pressure. I am sure that in a couple of years we will come to the point where we will again reconsider these regimes and create more favorable conditions for micro and small businesses, and at the same time, we will not achieve any fiscal effect.
- Thank you for the interview!