Russia raises VAT by 2% to lower budget deficit

Russia’s Finance Minister, Anton Siluanov, has announced a 2 percent increase in the country’s value‑added tax (VAT) to reduce the budget deficit and curb inflation. The standard VAT rate will rise from 20 percent to 22 percent, while essential goods such as food and medicines will remain taxed at a flat 10 percent to protect low‑income households.

The decision was taken instead of government borrowing, which would have spurred further inflation and forced a subsequent interest‑rate hike. The move is part of a draft budget for 2026‑2028 that has been submitted to the Russian parliament. Siluanov stressed that a balanced budget is essential for economic growth because it provides a foundation for slowing inflation, achieving macro‑economic stability, and easing monetary policy.

The additional revenue will be directed toward defence against emerging threats, including Ukrainian drones and cyber‑attacks, as well as the protection of key infrastructure. The Bank of Russia recently lowered its key interest rate to 17 percent in an effort to curb inflation, which has been affected by Western sanctions over the Ukraine conflict. Despite this, Russia’s economic growth has slowed, with a projected expansion of just over 1.5 percent of GDP—significantly lower than the 4.3 percent growth recorded last year.

The Russian parliament is set to review the proposed national budget next month. Siluanov emphasized that balancing the budget through tax increases will give the central bank room to ease monetary policy. He also briefed President Vladimir Putin on the state of the economy, noting that the “fairly tough” monetary policy has contributed to the slowdown in growth. The higher VAT rate is expected to have a less negative impact on the economy than alternative measures such as government borrowing.