Ukraine will hold a second budget sequester this year

Prime Minister Arseniy Yatsenyuk reduce the cost of ministers and state agencies

Photo: Ivan Chernichkin

The Finance Ministry of Ukraine has prepared a new draft for cutting the national budget for 2014. This step has to be made based on the results of talks with the mission of the International Monetary Fund, which visited Kyiv on June 24 – July 12.

As Capital wrote previously, the IMF did not approve extension of the deficit of the state budget. Therefore, according to the proposals presented by the Ministry on July 14 at a meeting with Prime Minister Arseniy Yatsenyuk (at Capital’s disposal), it was decided to keep the deficit at the same level – UAH 68.6 bn through revision of the state budget.

Based on the joint estimates of the Finance Ministry and the IMF, currently the Ukrainian budget has a hole of UAH 14.4 bn. In order to fill it and at the same time enter the rate of the deficit laid down in the spring, the Finance Ministry proposes to increase budget revenues by UAH 12 bn while reducing its expenditures by UAH 2.7 bn. Finance Minister Oleksandr Shlapak said in a conversation with journalists that such calculations are based on the new macroeconomic forecast, namely a decrease in real GDP of 6–6.5% and an inflation rate of 19%. Despite this, the minister said the package of changes was not approved at the latest meeting of the government. The Cabinet will return to reviewing this matter on Friday, July 18.

Living off scraps

Revision of the expenditure side of the budget consists entirely of spending cuts. As the prime minister stated earlier the government intends to include in the new version of the budget an increase in defense spending. The office of Minister of Finance Oleksandr Shlapak proposes to allocate UAH 10.5 mn for reinforcement of defense, as well as restoration of the east of Ukraine after the ATO in a special contingency fund. If it was not for such an additional burden on the public purse, sequestration of the budget – cutting spending in other areas – would have been much more modest than the proposed UAH 13.2 bn.

Actually, sequestration of the budget consists of three parts. First – reduction of expenditures on the Social Insurance Fund for Unemployment and the Social Insurance Fund for Temporary Disability by UAH 1.4 bn and UAH 0.6 bn, respectively. The Ministry of Finance suggests that proceeds from such cuts will be redirected to cover the deficit of the Pension Fund.

The second part of the audit of the budget consists of a reduction in the costs of central authorities. With its help the Finance Ministry expects to save UAH 3.7 bn. First of all, it proposes to cut the costs of the Ministry of Revenue and Duties (it will save UAH 747 mn), prosecutors (UAH 504 mn) and the Ministry of Social Policy (UAH 404 mn, 94% of which are subsidies for pensions and allowances). Among other institutions and administrations that will have to tighten their belts are the Ministry of Agrarian Policy and Food (minus UAH 260 mn), the Ministry of Justice (UAH 212 mn), the Ministry of Economic Development and Trade (UAH 119 mn, most of which will be saved on statistics management), the Verkhovna Rada (UAH 110 mn) and the Ministry of Healthcare (UAH 109 mn, mainly at the expense of the sanitary and epidemiological service).

The third and most ambitious part of sequestering is aimed avoiding expenditures that the government underfinanced in the first six months of the year and would be financed after all others. In general, this part of sequestration should save the budget UAH 7.5 bn.

To the disadvantage of regions

Saving on local authorities is a classic of the genre during economic recession for the Ukrainian government. This time officials decided to resort to the same technique. Thus, within the framework of the third part of budget cutting the Ministry of Finance proposed to reduce additional subsidies to local budgets by UAH 0.7 bn. Also, the cost of maintaining all regional administrations was trimmed by 15%. This will help save an additional UAH 0.5 bn. Finally, the Regional Development Fund has completely lost its funding (UAH 1 bn). Therefore, it is due to the regions that officials propose to implement 14% of the second and 23% of the third stages of sequestration.

The attempt of the Ministry of Finance to skimp on the regions has caused a controversy among experts. “The Cabinet cannot do without savings on local budgets, since the most significant resource for saving – social spending – has already been drastically reduced this past spring,” says Director of CASE-Ukraine Dmytro Boyarchuk. He believes capital expenditures provided by the Regional Development Fund have to be cut first of all. Yet, expert on local budgets at the Association of Ukrainian Cities Oleksandr Slobozhan says it would be illogical to deny financing for the fund, whose investment projects were approved by the Cabinet a few days ago. Also, we cannot save on oblasts, because the government expects reconstruction of the infrastructures in the Donetsk and Luhansk oblasts, notes Slobozhan.

Hit list

The Finance Ministry proposes to make industry support another source of saving. Shlapak’s office plans to cut the state support of coal mining enterprises’ partial cover of the cost of finished coal products by 18%. This will save UAH 2.2 bn for the national budget. Another UAH 0.4 bn will be secured by a 43% reduction in funds allocated for restructuring of the coal and peat industry. In contrast to saving at the expense of regions, experts support such a measure. Boyarchuk says the government cannot afford to cut funding for salaries of miners, but that part of the support that is allocated for upgrading of equipment, which is a highly corrupt sphere, should be cut by all means. Moreover, according to Slobozhan, these de facto subsidies for the coal industry had to be cut back by UAH 6 bn, which was originally allocated for the second six months of the year for state support of the coal mining industry.

However, sequestration of the budget does not guarantee that its revised version will be fully implemented. According to calculations of the Ministry of Finance, potential savings due to underfunding of budget expenditures can achieve UAH 39.7 bn at year-end.