Russia's Finance Ministry released its 2026 draft budget on Monday, revealing it will increase taxes on businesses and consumers to continue funding its war against Ukraine. The spending plans show defence spending next year would stay largely static, and would be funded through increased taxes. The ministry said this is an alternative to increased borrowing and a step towards reducing the budget deficit, which was forecast at 1.6% of GDP in 2026. Russia's federal budget deficit hit roughly £48 billion between January and July, surpassing the government's target for the entire year.

Most notably, government officials have outlined plans to raise VAT from 20% to 22%. At the same time, the turnover threshold at which small firms become liable for VAT would be cut significantly — from about £600,000 to £100,000. In addition, the ministry has put forward a proposal for a new 5% levy on gambling, CNBC has reported.

The preliminary budget needs to be approved by the Russian parliament, the State Duma.

Following the announcement, Russia's finance minister, Anton Siluanov, was grilled by state media outfit Tass. He told the agency that tax hikes were preferable to increased borrowing.

He said: "An uncontrolled increase in public debt would lead to accelerated inflation and, consequently, an increase in the key rate. Conversely, the decision to balance the budget through tax increases gives the Central Bank room to ease monetary policy. The key rate is crucial for investment growth and economic growth."

Consumers have been reassured by the Finance Ministry that the impact on prices will be "moderate and limited". The Moscow Times has reported that the ministry said a reduced 10% VAT rate will remain in place for essential goods like bread, dairy, meat, medicines and children's products.

The outlet added that VAT is Russia's single biggest source of tax income and is forecast to generate around 40% of state revenues this year. Should the latest proposals go ahead, it would represent the second significant tax rise within a year, following reforms introduced earlier in 2025 that brought in a progressive tax system and higher corporate payments to the budget.

"VAT is just a name. In reality, that's a military tax in Russia," Anton Gerashchenko, Ukraine's former Advisor to Internal Affairs Minister, wrote on X.

Alexander Kolyandr, Non-Resident Senior Fellow at the Center for European Policy Analysis (CEPA), said: "The [Russian] economy is now moving into a protracted low-speed regime where the state consumes more than it can afford, the military-industrial complex operates at the limit of its workforce and production capacity, and civilian production is constrained by higher taxes and suppressed demand.

"Tax increases confirm that the Kremlin is preparing for long-term military financing, for which consumers are beginning to pay, and on which the military-industrial complex continues to flourish."

The business newspaper Kommersant published and later deleted a Finance Ministry forecast showing Russia's GDP growth slowing to 1% this year, down from an earlier 2.5% estimate. Policymakers predict economic growth of just 0.5% in 2026, below previous projections of 3%.