Since the beginning of the year, arrears in payment of wages have increased by almost 23%, the Pension Fund systematically borrows money for pensions payment from the State Treasury funds, the program of housing and communal subsidies has already been financed by 77.5%, and the heating season hadn’t even started. Obviously, a number of problems have accumulated in the state’s finance sector, and the consequences of it are usually felt by ordinary Ukrainians.
In July, Ukrainian pensioners turned on the alarm – pension payments for the first time in a long period hadn’t come on time. Even the experts were surprised by this news because the main sources of revenues to the Pension Fund are money from the payment of a single social contribution (SSC) and funds of the State Budget that are covering the fund’s deficit. During the year, SSC was paid with overfulfillment of planned indicators; funding from the State Budget was also provided without delay and at 100%. So, why the PFU (Pension Fund of Ukraine) lacked funds?
Firstly, expenditures of PFU have increased over the year, as at the end of February the government decided to increase pensions to servicemen, which requires an additional monthly increase of the fund’s expenditures by almost 700 million UAH, or almost 8.5 billion per year.
Secondly, the traditional for the fund practice of borrowing from the State Treasury has “failed”. When the PFU doesn’t have enough funds, and this year the deficit was felt almost every month, it borrows it for a short period of time from the State Treasury. Thus, pensions are paid on time, and when there are regular SSCs, or budget financing, loans are returned to the treasury. However, in July, the Treasury responded with a delay of a few days to another PFU loan request. Apparently, it happened, because at the time of the first appeal it had no “free” money to help the fund. This was the first sign that the crisis in the public finance system is on the rise. And taking into account that much of public finances are so-called social expenditures, the consequences of this crisis will be felt by everyone.
Since the beginning of this year, the number of people who receive subsidies for housing and public services has decreased by almost 55% to 2.6 million families. The average amount of granted subsidies decreased by 28.8%, and now it is only 104 UAH. The government has begun to cut budget expenditures to help families who cannot afford to pay utility bills on their own, which looks rather dubious policy in anticipation of future gas tariff increases. If in January-July of last year the amount of subsidies already exceeded 3 billion UAH, then in 2018 during the same period it was only 734 million UAH.
The desire of the government to reduce subsidiary expenditures happens due to the fact that this item of expenditure increases the most rapidly. In the State Budget of 2016, for the subsidies were provided 40 billion UAH, but there were not enough funds and the budget of 2017 already provided for the allocation of 52 billion UAH of assistance, and this amount also was not enough. The budget for the current year provides for the allocation of 71 billion hryvnias, but the heating season has not begun yet, and more than 70% of this amount is already spent. The panic of the government is evident, but the economy should also be reasonable. We should start with consumption accounting, verification of those, who receive state assistance and, ultimately, the increase of welfare of the population. Instead, the Ministry of Social Policy has succeeded in strengthening the requirements for assistance applicants, thus emphasizing not the targeting of assistance, but for its inaccessibility. This will have several consequences, the main of which is the non-payment crisis.
At the end of July 2018, the population’s debt for the supply of natural gas was 16.7 billion hryvnias, for central heating and supply of hot water – 10.8 billion hryvnias, for the maintenance of buildings, constructions and adjoining territories – 4.0 billion UAH for centralized supply of cold water and drainage – 2.8 billion UAH, for household waste disposal – 0.5 billion UAH, for supply of electric energy – 3.9 billion UAH. In general, Ukrainians owed utility companies 38.7 billion UAH. Compared to last year, the debt grew by almost 11 billion UAH. Under such circumstances, government savings on subsidies will only get people into the debt swamp. Moreover, more and more Ukrainians face problems of non-payment of wages.
Arrears in payment of wages to employees of economically active enterprises at the beginning of August exceeded 1.5 billion UAH; therefore, they’ve increased from the beginning of the year by 22.9%. Moreover, more than 40% of these debts stay from 2017 and previous years, that is, the part of employees actually doesn’t receive a salary chronically. The biggest debtors were Donetsk, Zaporizhia, Luhansk and Sumy regions. However, statistics show that another disappointing tendency is the number of regions where wage arrears began to increase rapidly this year, in particular, in Zakarpattia, Ivano-Frankivsk, Ternopil, Khmelnytskyi regions. Traditionally, the largest debts are formed by the industry: mining and processing industries, engineering.
Of course, government policy that does not facilitate the attraction of investment in production, and the strict position of the NBU, which impedes thwart the progress of lending to the economy, do not contribute to solving this problem. But the ultimate responsibility for arrears in the industrial sector still falls on the owners of companies that cannot adapt to the current conditions of work and begin to save on salaries of employees.
But wage debts are increasing in other sectors – science, education and healthcare, that is, in those areas that are financed by the state budget. Debt to scholars at the beginning of August exceeded 100 million hryvnias, healthcare workers – 23.5 million, teachers – 10.5 million hryvnias. These debts did not accumulate in previous periods; they began to grow non-stop from January this year, which also eloquently testifies to certain problems with the implementation of the State Budget.
Really for January-August this year the general fund of the State Budget should have planned to receive 568.5 billion USD, but in fact, only 551.5 billion was collected. The special fund received 55.8 billion UAH with a plan of 57.9 billion. That is to date, according to the State Treasury; the planned budget deficit has increased by 19 billion hryvnias. And this is an improvement compared to August, but we reached it at an extremely heavy cost.
Failure to comply with this year’s budget hasn’t become a surprise for specialists. The fact is that the State Budget was formed on the basis of the average annual rate of 29.3 UAH / USD, but during the first half of the year hryvnia constantly strengthened, adding the government’s problems. Hryvnia’s rising cost has led to a reduction of so-called “import” revenues to the budget – VAT on imported goods and customs duties in Ukraine. These two articles stubbornly lagged behind the plan until the hryvnia began to devalue, at the end of August. Only a tax deficit and customs revenue stood at a deficit of 75 billion UAH. Taking into account that this year’s revenues of the state budget would have been 20% above the incomes of 2017, this had a significant impact on public finances, as nobody was going to cut the expenditure side. And the head of the Ministry of Finance was busy with another problem – this year Ukraine needs to return almost 228 billion UAH of domestic debt and 97.6 billion UAH of external borrowing, which should be given in dollars and euros.
In order to attract currency, the Ministry of Finance has started issuing not only external but also domestic currency governmental bonds, actually buying up free currency on the domestic market and putting pressure on the hryvnia. On the one hand, it allowed them to replenish stocks and fulfill their obligations to lenders; on the other hand, they approached the hryvnia rate to predicted rates, “plugging” the holes in tax revenues. But what is good for the Ministry of Finance is not always useful for a simple Ukrainian. The National Bank, tries as hard as possible, to keep hryvnia from a sharp fall, regularly selling currency on the market, but NBU sells less than the Ministry of Finance buys, devaluation continues, the dollar in the domestic market rise in price. This will necessarily affect the inflation rate, since most, even those manufactured in Ukraine, contain a significant import component. So life will rise in price along with the dollar. Ukrainians will continue being poorer.
The average nominal wage, according to the State Committee on Statistics, in July was 9170 UAH, two and a half times more than the minimum salary level of 3200 UAH. The government proudly reported that, compared to last year, the average salary of Ukrainians increased by almost a quarter. However, the nominal level of wages does not take into account inflation and does not give an objective picture of the income of citizens and the purchasing power of their money. The objective indicator used to measure the welfare of the population is the level of real wages, which, in addition to nominal payments, takes into account taxes paid from income and changes in the level of prices for goods and services. The index of real wages, up to the corresponding period last year, was only 14.7% and the rate of its growth last year’s figures, unfortunately, will not even catch up, not to mention the advance.
According to the State Committee on Statistics, nominal wages grew most in industry (+26.7%), construction and real estate (26.3% and 45.4% respectively), education (22%) and healthcare (16.9%) With the exception of construction works, in the same sectors, where the nominal wage is raised, it is actually delayed.
At the highest rates nominal wages increased in Luhansk (+ 31.7%), Lviv (+ 30.4%), Ternopil (+28%) and Poltava (+29.7%). And this does not mean that the welfare of the inhabitants of these regions is increasing. In fact, higher rates in most cases indicate the willingness of employers to catch up with neighbors, rather than win the competition for a workforce. None of these areas are leaders in terms of salaries among Ukrainian regions. If in the Dnipropetrovsk region employees are on average already receiving 9268 UAH, and in Donetsk – 9764, then in Ternopil only 7262, and in Lviv region – 8555 UAH. With the capital’s earnings, where the average employee is already paid over 13800 UAH, I do not even want to compare.
If hryvnia continues to depreciate, even a very restrained NBU prediction, that inflation by the end of this year will be 8.9% may be considered too optimistic. It is clear, that inflation will “ease” wages growth, making Ukrainians poorer rather than richer.
But most importantly, in an effort to keep rising inflation, the NBU will continue to hold tight monetary policy, which has actually stopped subsiding business in the country, due to too high interest rates. Without access to credits, the economy will continue to stagnate, the consequences of which will throw the government new and new challenges. And any business problems will definitely affect the welfare of ordinary employees.
All these happen because of the misguided forecast and the government’s refusal to acknowledge its own mistakes and cutting of budget expenditures that are not fulfilled by revenue.
The government has to introduce a draft state budget for 2019 within a week. We hope that the mistakes made during the formation of this year’s budget will be taken into account and the Ministry of Finance won’t fall into the same trap. In the end, if almost every Ukrainian family is forced to plan its expenditures in detail, first of all, taking into account actual, and not desirable earnings, then the government should look more realistically in the future.
By Valentyna Yushchenko