Hardly for the first time in recent years the state budget’s draft, submitted by the government, can be called restrained and balanced. However, the reason is not that officials finally decided to tighten their belts and reduce appetites, it is the predicted shortage of funds next year. Unfortunately, the government’s restraint is not yet a guarantee that public finances finally will go only for the vital things, because during the consideration of the draft budget in the parliament, its expenditure part usually increases substantially. Considering that next year parliamentary and presidential elections will take place, the risks of increasing government spending are doubled, because not all MPs share the restraint of the Ministry of Finance.
According to the forecasts of the Ministry of Finance, Ukraine’s GDP will grow by 3% in 2019, that is, growth will slow down if we take into account that in the second quarter of this year the GDP growth rate was 3.8%, and according to the expectations of international organizations our trade partners’ economy will continue to grow next year. According to the restrained GDP growth, the revenues of the State Budget in 2019 won’t increase too much ‒ up to 1.2 trillion UAH (by 130 billion UAH). Expenses will increase by 8.5% in comparison with the current year, slightly exceeding 1 trillion UAH. It is expected that the inflation also will decrease ‒ up to 7.4%. However, this indicator will largely depend on what the national currency rate will be and how much utility tariffs will grow next year. Given that both of these indicators are still unknown, it is difficult to argue that the forecast of the Ministry of Finance on the level of inflation will be sustained.
The main expenses are debts and pensions
The most expendable item of the draft state budget is the payment of debts and its servicing. According to the calculations of the Ministry of Finance, the total amount of public debt, calculated in national currency, will reach over 2 trillion UAH and will amount to 52.2% of GDP. The state-guaranteed debt in the national currency will amount to 388.6 billion UAH. Together, the state and publicly guaranteed debt will amount to 62% of GDP. This is a significant debt burden, which is usually bearable for countries with developed economies, rather than for developing ones. At the same time, taking into account the structure of state borrowings in 2018 and forecasted borrowings in 2019 – by the end of 2019 the share of domestic debt will be 38.8% of the national debt, and the share of external debt ‒ 61.2%.
Total payments on the public debt in 2019 at the expense of the state budget are estimated at 417.4 billion UAH, of which 57.3% or 239.2 billion UAH are payments on domestic debt and 42.7% or 178.2 billion UAH ‒ on the external. This part of payments is the riskiest, because the external debt is nominated in foreign currency and in order to return it, the state needs to have this currency in its reserves. And most importantly, that any exchange rate fluctuations, directly affect the growth or decrease in our debt obligations.
The draft budget for the next year is calculated from the assumption that the exchange rate of the national currency at the end of 2019 will be 29.4 UAH/USD. Given the actual currency trends and taking into account the planned exchange rate losses related to the payment of debts and the “seasonality” in the work of exporters and importers, we can say that according to the hopes of the Ministry of Finance, hryvnia will continue to strengthen next year. This is a good period for giving back debts, however, if suddenly, revaluation changes to devaluation, our obligations will grow on the contrary.
A separate item of expenditure is the servicing of the national debt, it also requires considerable funds. In 2019, it is projected to spend 145.2 billion UAH, which is 15 billion UAH more than in 2018.
In order to pay such significant amounts, we will have to get into the new debts. The Ministry of Finance expects to borrow slightly more than 109 billion UAH next year, over 31.5 billion UAH in foreign markets and more than 78 billion UAH in domestic markets. Given that Ukraine’s cooperation with the IMF has not fully recovered, the interest on which the government can borrow this money cannot be called small ‒ the average rate for domestic debt instruments is about 15.7% per annum, for external debt instruments it is about 9% per annum. This is a very “expensive” money, for comparison, the IMF provides loans to Ukraine at about 2% per annum.
The second largest expenditure component of the draft state budget is pension expenditures, for which 166.5 billion UAH are provided. Despite the growth of wages, the government was unable to get rid of the problem of the Pension Fund deficit, on the contrary, next year the deficit of the PFU (Pension Fund of Ukraine) will grow by another 40%. In addition, the government plans to adhere to the promise and continue the planned modernizing of pensions next year, as well as to continue raising pensions for retired military personnel.
In order to have enough money for all this, they planned to save on housing and communal subsidies, which in the draft state budget are reduced by more than 20% or 55 billion UAH. Obviously, the government expects that the verification of subsidies will significantly reduce the number of recipients of subsidies, however, it is not clear whether they take into account that the increase in gas tariffs, can automatically increase the number of those, who will need government assistance for heating bills. The experience of recent years shows that the predicted expenditure on subsidies by the end of the year, on the contrary, is growing, not decreasing. This year, for example, from 71 billion UAH, allocated for the subsidies, more than 57 billion UAH was spent before the beginning of the heating season.
Expenses of ministries and departments, according to the draft budget, will not increase significantly. Only the expenditures for security will increase ‒ the Ministry of Internal Affairs (up to 82.3 billion UAH), the Ministry of Defense (up to 101 billion UAH) and the Security Service (up to 9.4 billion).
However, the expenses of the Ministry of Education, which actively implements reforms, will grow only by 6 billion UAH. However, the “educational” subvention from the state budget next year will reach 70.9 billion UAH. A little bit luckier is the Ministry of Health, its expenditure part will increase by 26% to 37.3 billion UAH. “Medical” subvention will be ‒ 55.5 billion UAH. Also, local budgets will receive almost 15 billion UAH from the state budget for the maintenance of medical and educational institutions. And traditionally, if these funds are not enough, part of the expenses could be covered from their own sources.
Main revenues ‒ import
Traditionally, the government is guided by the fact that the main sources of revenues to the state budget next year will be VAT on goods imported into Ukraine and excises. These are quite stable sources, for a stable exchange rate, but the experience of this year has shown that as soon as the hryvnia begins to strengthen, the income from these items decrease, creating problems with budget execution. However, you have to take risks, if there is nothing else left.
The forecasted amount of VAT revenues to the state budget for 2019 is 434 billion UAH, of which 94.6 billion UAH comes from VAT created by goods produced in Ukraine (including budget refunds), and 339.4 billion UAH ‒ VAT on goods, imported into Ukraine.
Income from excises should reach 133.6 billion UAH. The forecast rate of excise tax revenues from goods, produced in Ukraine, is 89.4 billion UAH, and excise revenues from imported excisable goods to Ukraine are 44.2 billion UAH. Another 30.5 billion should be made up of the proceeds from the import duty. This is not a very optimistic strategy for the formation of the state budget, since it only strengthens the dependence of the Ukrainian economy on imports, worsens the balance of payments of Ukraine, and, in the long term, helps to reduce the rates of economic growth, which are far from exemplary.
Thanks to the growth of wages, an increase in the minimum wage to 4,173 UAH and other social standards, income from the personal income tax will increase next year, partly it will go to the local treasury, and the other part to the state budget. In 2019, according to the forecasts of the Ministry of Finance, the state budget will receive 106.1 billion UAH of personal income tax, and local budgets ‒ 161.2million UAH of personal income tax.
The National Bank of Ukraine should transfer to the state treasury 45.6 billion UAH next year, and state enterprises in the form of dividends ‒ another 44.5 billion UAH.
The corporate profit tax will give the state budget more than 102 billion UAH next year. However, let’s not forget that the President submitted a bill to the parliament to replace this tax with a tax on the withdrawn capital, if it is adopted, then the shortage of funds under this revenue item is going to amount to 38-45 billion UAH by different estimates. And the Ministry of Finance did not name clear sources of compensation for this shortage until now.
No less risky is the hope of the Ministry of Finance to get next year 17 billion UAH from privatization. Experience shows that these ambitious governmental plans are not implemented systematically by State Property Fund. In particular, this year, with projected revenues of 21.3 billion UAH, in seven months of 2018, only 50 million hryvnias have been transferred to the state treasury.
The greatest risk for the profit part of the state budget is still its consideration in the parliament. An unjustified increase in expenses of deputies, who before elections will be more active than usual, will require an unjustified increase in income forecasts because the budget should be balanced. A restrained inflation forecast for the next year is another additional risk that the shortfall will be covered by the so-called “inflation VAT”. Because, if the price of the goods is growing, VAT revenues from their sales are also growing, but citizens are unlikely to benefit from this. Moreover, in accordance with the provisions of the state budget, they also have to tighten their belts next year.
Minimal social payments
The minimum subsistence income in 2019, compared with 2018, will increase at a rate that is only 2 percentage points higher than the predicted consumer price index for 2019 and will grow by 9.4%. That is, if inflation grows faster than by the forecast of the Ministry of Finance, it will “eat” this increase instantly. The subsistence minimum per person per month will be from January 1, 2019 ‒ 1,853 UAH, from July 1 ‒ 1,936 UAH, from December 1 ‒ 2,027 UAH.
The level of provision of the living wage as a percentage for the basic social and demographic groups of the population will be: for able-bodied people ‒ 21%, for children ‒ 85%, for disabled and persons with disabilities ‒ 100% of the corresponding subsistence minimum.
Taking into account that the subsistence minimum is the basic state social standard, on the basis of which the size of the basic state social guarantees is determined, in 2019, the state benefits will also grow weakly.
The amount of the child’s birth allowance will be 41,280 UAH. Like usually, parents will receive 10,320 UAH at a time, and the rest of the amount will be paid within the next 36 months equal to 860 UAH. “Baby package” that young mothers will receive immediately after childbirth, will supplement this assistance, the estimated cost of goods in it is about 5 thousand UAH. However, the “gifts” from the government are over here, the rest of the payments grows at a minimum.
The minimum amount of maternity benefit for an uninsured person will increase from 2,017 UAH to 2,207 UAH only in December 2019. Similarly, the amount of child allowance for care or welfare increases from 3,252 UAH and 4,054 UAH (depending on the child’s age) in December 2018 to 3,558 UAH and 4,436 UAH in December 2019.
The maximum amount of child allowances for single mothers increases from 1,626 UAH (for children under 6 years) to 1,779 UAH and from 2,027 UAH (for children from 6 to 18 years) to 2,218 UAH.
The amount of state social assistance to low-income families will increase for each child aged 0 to 13 years ‒ 250 UAH, and for each child aged 13 to 18 years ‒ 500 hryvnias in the next year.
And it is clear that while discussing the draft budget in the parliament, deputies will remember the increase in social payments in the last place, because traditionally, they fight for tax breaks for certain enterprises and industries, an increases in the so-called “deputy” subvention, the financing of various state funds, and so on. It is good that this year the IMF decided to postpone taking decisions on future cooperation with Ukraine until the adoption of the new state budget, this will restrain the deputy’s appetites. It’s bad that so far, not all MPs realize the importance of Ukraine’s cooperation with the fund, and for most of them, their own interests always prevail over the interests of the state.
By Valentyna Yushchenko