Government budget–2018. What the Rada has voted for?

On December 9 in the evening the Verkhovna Rada supported the Government Budget of Ukraine for 2018 in the second reading and as a whole. 273 MPs voted for its draft.
The revenue of the government budget was approved at the rate of 913 billion UAH (in the first reading – 877 bln. UAH), which by 18.4 % exceeds the revenue expected in the budget for 2017 (770.9 bln. UAH). This figure does not correlate with macroeconomic economic growth scenarios.
In dollar equivalent, with due account of the exchange rate targeted by the CMU, the government budget revenue must correspond to $ 31 bln. (2017 – $ 28.3 bln., 2013 – $ 32.8 bln.).
Thus, economic growth (according to the CMU’s data) is expected to reach 3 %, inflation and devaluation factors influencing taxation base increase – 9 %, which in total presupposes possible revenue growth by 12 %.
Thus, at the end of 2016 the CMU expected the growth of real GDP at the rate of 3%, that of inflation – 8 %, and unemployment – 8.7 %. However, de facto no macroeconomic indicator corresponds to the forecast (real GDP – 1.4–1.8 %; inflation – 14 %; unemployment – 10 %).
Besides that, under the conditions of industrial production fall (January–December 2017 a 3%-decrease), the consequences of the blockade of Donbas, unfavourable investment climate, fall in the global prices of primary commodities, domestic market contraction, reduced economy crediting there arise additional risks of continued real GDP fall in 2018.
Attention should also be paid to the fact that so far no fundamental signs of possible inflation reduction in 2018 by 9 % can be traced. The Ministry of Finance predicted inflation rate of 8.1% as based on the results of 2017. However, according to the data of the State Statistics Service, its rate finally reached 13.7 %.
The main inflation rise accelerator was minimum salary rise arranged twice. At the same time this year it will keep rising, which will respectively affect inflation intensification.
Currency exchange rate increase from 26.49 for dollar to average 29.3, expected in 2018, will make up 10 % as the minimum (at the end of 2018 30.1/$ is expected); due to a high import component, inflation cannot be slower than national currency devaluation.
The CMU intends to compensate for the increase of the revenue part by 143 bln. UAH (as compared to 2017), besides economy growth, out of additional revenues.
Thus, 6.3 bln. UAH were included by the Cabinet of Ministers as revenue from sales of licenses for 4 G; 4.7 bln. UAH more will go there for the sales of seized property of corrupt officials. Also, MPs intend to increase the revenue of the treasury out of state monopolies; in particular, it is intended to increase deductions to the budget from the profit of NJSC Naftohaz Ukrayiny for dividend payment from 50 % to 75 %. 22.5 bln. UAH are intended to be obtained from privatization.
However, performance of the above income items, according to the forecast of Public Audit is rather doubtful.
For instance, revenue from sales of seized property is expected to make up 4.7 bln. UAH. And the state platform for the sales of the arrested property of СЕТАМ for three years has sold property for the amount of 5 bln. UAH. According to the results of 2017, 29.6 bln. UAH were enrolled under this item. Since the main part of seized money was nominated in domestic government bonds ($ 1 bln.), enrolment of these amounts to the single treasury account testifies to actual repayment (issue) of money instead of government debt deduction.
Increase in deductions of the profit of NJSC Naftohaz Ukrayiny to the budget for dividend payment from 50 % to 75 % cannot make up for revenue growth either, since according to the approved amendments in the Tax Code the mining rent is intended to be reduced from 29 % to 12 %, this causing reduced Natfohaz tax transfer.
Under the conditions of economic instability investors are not interested in Ukrainian assets, due to which fact it will hardly be possible to implement the declared privatization and license sales plans. Thus, in the 2017 budget the revenues from privatization were expected to reach 17.1 bln. UAH, while de facto for 9 months only 3 bln. UAH were received.
Definitely, the stated macroeconomic indicators are not supported by any sufficient fundamental factors that would confirm the realistic nature of those scenarios.
Therefore, mistakes in calculations of macroeconomic indicators will lead to unbalanced budget, and as the result of that budget deficit may become critically large.
165 bln. UAH will be allocated to defending the country: in particular, the army will get 86.5 bln. UAH; the Ministry of Internal Affairs (by the way, the department has received 700 mln. UAH for procurement of unknown aviation technology for the needs of the National Police), the State Border Guard Service and the State Emergency Service – 65.9 bln.; Administration of the State Border Guard Service may expect over 9 bln. UAH; the Security Service of Ukraine – 8.1 bln. UAH; the Main Tax Office – 7.1 bln. UAH; 2.7 bln. UAH were additionally given to the Ministry of Defense for it to ‘take steps to raise defense capacity and security of the state’; the State Investigation Bureau will receive 651.5 mln. UAH; the scandalous project ‘Stina’ – 200 mln. UAH; the National Guard – over 200 mln. UAH.
The costs of authorities maintenance next year will rise by 17 %.

 

Table 1

Comparison of budget expenditure in 2013-2018
2013 2017 2018
bln. UAH bln. $ bln. UAH bln. $ bln. UAH bln. $
Total expenditure part: 419.8 53.139 841.2 30.926 988.4 32.358
Verkhovna Rada of Ukraine 0.935 0.118 1.2 0.044 1.7 0.058
State Administrative Office 1.3 0.165 2.4 0.088 2.7 0.093
Department of Economy and Finance of the Secretariat of the Cabinet of Ministers of Ukraine 0.334 0.042 1.2 0.044 1.7 0.06
Ministry of Defense of Ukraine 15.3 1.937 68.8 2.529 86.5 2.95
Ministry of Internal Affairs of Ukraine 16.06 2.033 53.1 1.952 65.9 2.24
National Guard of Ukraine (2013-ВВ) 1.48 0.187 10.4 0.382 10.9 0.372
National Police of Ukraine 0 0.000 19.1 0.702 24.4 0.833
Security Service of Ukraine 3.45 0.437 6.7 0.246 8.1 0.276
General Prosecutor’s Office of Ukraine 3.2 0.405 5.8 0.213 7.1 0.242
Main Intelligence Office of the Ministry of Defense of Ukraine 0.464 0.059 1.5 0.055 2.5 0.085
National Anti-Corruption Bureau of Ukraine 0 0.000 0.8 0.029 0.9 0.031
Council of National Security and Defense of Ukraine 0.124 0.016 0.1 0.004 0.156 0.005
Ministry of Finance of Ukraine 2.3 0.28 11.5 0.42 15.1 0.51
–          subvention from the state budget to local budgets (housing and utility management unit subsidies) 7.3 0.91 68.7 2.52 71 2.42
Ministry of Education and Science of Ukraine 24.3 3.076 32.5 1.19 31.7 1.08
–          subvention from the state budget to local budgets 0 0 52.8 1.94 63.6 2.17
Ministry of Health of Ukraine 10 1.266 16.4 0.62 26.5 0.9
–          subvention from the state budget to local budgets 0.8 0.1 58.7 2.15 60.4 2.06

 

In general, under the conditions of absence of fundamental factors, real strategies, mathematical models of economic development, the main estimate of expenditure of the country will be not the development budget, but rather the survival budget. The performance of the revenue part is doubtful – as the result, there may possibly take place uncontrolled growth of the budget deficit and there may arise respective negative consequences in case of monetary financing of the budget deficit.

Table 2

2017 2018 %
Budget revenue (bln. UAH) 770.9 913 +18.4%
Budget expenditure (bln. UAH) 841 988 +17.5%
Deficit (bln. UAH) 77.6 81.8 +5.4%

Table 3

  from 1.01.2017 from 1.01.18 %
Minimum subsistence wage 1,544 1,700 +10.1%
Minimum salary 3,200 3,723 +16.3%
Minimum pension 1,247 1,373 +10.1%
Single social fee 704 820 +16.5%
  1. Nominal GDP forecast stated in the budget (3,332.3 bln. UAH, or + 17.1 %) is not performable under the conditions of the current negative macroeconomic situation in Ukraine:
– cumulative industrial production fall (for January–December 2017) recorded at the rate of -3 %;
– deficit of foreign trade in commodities and services (according to the results of 2017, the trade balance deficit made up $ 6.8 bln., or 6.1 % of GDP; NBU’s forcast for 2017 – $ 4.5 bln.);
– retail commodity turnover decrease (for 2017 it made up 587.7 bln. UAH – a fall by 7 % against 2016);
– decreased foreign investment volume (for 2017 рік – $ 2.3 bln., which is by 28% less than in 2016 – $ 3.2 bln.);
– banking sector crisis and absence of crediting (in the corporate portfolio of ‘live’ banks the volume of unserved credits makes up 595 bln. UAH, or 54.5%; high profitability under domestic government bonds).
Outcome: inflated expectations of GDP growth will affect real reduction of the revenue part at year-end.
  1. Inflation forecast (9 %) is considerably understated.
According to the results of 2017, inflation went up much higher than under the forecasts (initial figure – 9.1 %) and reached 13.7 %. There are no fundamental factors reducing inflation in 2018. Besides that, its rise will be affected by the following:
– increased average pensions as of the IVth quarter of 2017 will lead to increased monetary supply and intensified inflation processes;
– increased minimum salary since 2018 up to 3,723 UAH will also lead to the upwards inflation dynamics over next year;
– increased bank rate of the NBU reaching 17 % will cause the rising costs of profitability under domestic government bonds, this causing additional attractiveness of domestic government bonds (the source of funding for the expenditure part of the budget).
Outcome: high inflation will lead to the rising costs of the expenditure part of the budget, and budget deficit will therefore increase.
  1. The exchange rate forecasted by the Ministry of Finance (30 UAH/$) is underestimated.
Ukraine must pay $ 11 bln. for 2018 under its foreign commitments, and this will cause a great demand for currency in the domestic market. And net international reserves of the NBU as of the end of 2017 made up in total $ 6 bln. (as of the end of 2013 – $ 15.2 bln.). Total government debt is $ 76.3 bln., or 73 % of the GDP predicted for 2017.
Outcome: devaluation of national currency, on the one hand, will help increase the revenue part of the budget (due to increased customs payments), while, on the other hand, will increase the country’s debt load and will lead to the rising costs of the expenditure part of the budget, intensified inflation processes.
  1. The revenue part of the budget does not meet the allocated economic parametres.
The aggregate budget revenue will not rise by 15 %, as the draft law has it, since economic growth (real GDP, quantitative) is expected in the amount of 3 %. Therefore, to reach the above figure the Government will have to use the inflation stimulation mechanism. Due to significant inflation growth tax revenues will increase, but the expenditure part will also grow.
Outcome: nonperformance of the revenue part of the budget will lead to absence of money to finance the allocated costs or to increased budget deficit, as the result of which the printing press may be put into operation.
  1. Assets allocated for subsidies (55 bln. UAH) do not cover the real need of residents for them.
Today the citizens have already accumulated debts in the amount of 10 bln. UAH for the services provided. As a minimum, 20 bln. UAH more are needed in order to pay subsidies for two following months. All in all, there is shortage of about 30 bln. UAH by the end of the year. Thus, in total 25 bln. out of the expected 55 bln. UAH will be left in the budget for the future year – thus, the above sum will be enough till spring at best.
Outcome: the state will be looking for new mechanisms of refusing to grant subsidies to people, and as the result of that Ukrainians will accumulate even more debts and will face the risk of restricted access to energy resources.
PO Public Audit