It is a bold gamble to raise more revenue despite a looming budget deficit that the IMF says amounts to 8% of the country's total GDP.

But critics say it is bound to trigger a further inflationary spiral in Russia as the gap between tax receipts and spending grows ever larger.

Popular tax cuts

Prime Minister Yevgeny Primakov said value-added tax would be cut from 20% to 14% in 1999 and to 10% in 2000.

Profit tax will be cut from 35% to 30%.

Mr Primakov said: "These measures will help expand the base for taxation."

Premier Yevgeny Primakov kickstarting the economy

He added that the VAT cut should be especially popular since it will lower the cost of electricity and other consumer expenses.

The prime minister added that VAT would be cut to 10% in 2000.

High tax rates

Tax collection has been a major problem for the government, and critics have accused the government of encouraging tax cheating by setting rates too high.

As a result, the government has lacked money to pay wages, provide services and repay its debts.

But the radical measures have infuriated Finance Minister Mikhail Zadornov.

A finance ministry official said the VAT cut would lead to a drop in revenues of 77bn roubles, which he said was an optimistic forecast.

Analysts were sceptical about how much of a solution any clampdown on tax can be.

Tom Adshead, co-head of research at United Financial group, said: "In Russia, they don't enforce taxation and that is the problem.

"This really throws into sharp relief the need to enforce taxes and that means bankrupting companies which don't pay."

Growing deficit

The Russian government's own forecast for 1999 suggests that the government will spend 600bn roubles ($33bn) while only taking in 480bn roubles ($26bn) in taxes.

They claim that stripping out debt payments to foreigners leaves the budget with a 2% surplus.

But that assumes that the IMF and other lenders come up with some $15bn (268bn roubles) in debt relief.

The IMF has expressed scepticism about this accounting.

Without Western assistance, tax receipts would only amount to around one-third of total spending.

The budget deficit has been soaring since the financial crisis began.

Central Bank chairman Viktor Gerashchenko said that the federal budget deficit will total 17.5bn roubles (just over $1bn) in October through to this December. Banking on reconstruction

Mr Gerashchenko will also head a fledgling agency for restructuring the country's ailing banks.

The state-controlled Agency for Restructuring Credit Organizations will take over stakes in viable commercial banks that are scheduled for restructuring.

It will also oversee liquidation of troubled banks that won't qualify for restructuring.

Mr Primakov has grown into one of Russia's most popular politicians since his appointment and several key insiders have rallied around him as a potential successor to the ailing Yeltsin.