By AFP and Kontur | 2025-10-01

Russia has proposed hiking sales taxes to raise funds for its military offensive on Ukraine amid a slowing economy and widening budget deficit.

After two years of robust growth, spurred by a massive ramp-up in spending on its army, Russia's economy is now slowing, putting pressure on tax revenue, and authorities are looking to tap the pockets of citizens and businesses to plug the budget gap.

On September 24, Russia's Finance Ministry proposed raising the value-added tax, a national sales tax, from 20% to 22% next year to help cover a $50 billion budget deficit.

The ministry called the move "aimed first of all at funding defense and security."

After the announcement, pro-government bots posted nearly 1,000 comments on VKontakte, Russia's largest social media platform, in support of the increase, according to Verstka. But the proposal got a mixed reaction on the streets of Moscow.

"It's horrible. In my opinion, this rate increase is madness," Svetlana Vasilenko, an accountant, told AFP.

"I have many acquaintances who own businesses, and even at 20 percent, it is already very difficult for them," the 68-year-old added.

But some were ready to tighten their belts.

"If the state has nowhere else to get money, then there is no other option. What even to discuss?" Fyodor, a Russian soldier who fought in Ukraine in 2023, told AFP. "If it has to be done, it has to be done."

Oleg, a 33-year old lawyer, said he didn't mind the proposal, but warned: "people are unlikely to be in favor of it."

Russian government spending has jumped more than two-thirds since the start of the Ukraine offensive, with military expenditure accounting for 7.1 percent of gross domestic product (GDP), levels unseen since the Cold War.

That has helped Moscow avoid predictions that Western sanctions would collapse its economy, but led to a spike in inflation.

The $50-billion deficit in the first eight months of the year -- equivalent to roughly two percent of GDP -- is three times more than at the same stage of 2024.

While its deficit is low by international standards, Russia has been cut off from international capital markets and has had to rely on domestic bond investors and running down its sovereign wealth fund.

A similar hole is expected next year, according to the budget proposals published earlier in September.

Moscow is yet to unveil how much it plans to spend on its military and security next year.

Economic strain

This slowdown follows a pattern highlighted at the Saint Petersburg International Economic Forum in June, where officials warned of an impending recession.

Russia's GDP grew just 1.4% in the first quarter of 2025, while inflation hovered near 8.8%. Economists said the numbers show the limits of "military Keynesianism," a strategy in which governments spend heavily on the armed forces to stimulate growth. The approach can spark short-term booms but often leaves economies unbalanced and vulnerable.

Defense spending exceeded 6% of GDP in 2024, but sanctions, labor shortages and falling industrial output are now straining the system, raising fears of a financial collapse reminiscent of the Soviet era.

As government corruption rises, many Russians are focused on personal financial survival.

On average, Russians have enough savings to last just four months without a paycheck, a SuperJob survey conducted from June 30 to July 8 found.

Almost 38% of respondents reported having no savings at all. Among those with some financial cushion, 13% could manage for less than a month, 24% for one to two months, 12% for three to six months, 7% for six months to a year and only 6% said they could get by for more than a year.

Despite these concerns, 78% said they track their spending and 80% reported following a budget. Almost half said they plan their finances six months in advance.