The government of Ukraine is increasingly falling short of budget revenues

Photo: Eugeny Musienko

The Cabinet of Ministers is unable to implement the plan for budget expenditures due to problems with tax revenues. Based on information of the State Treasury Service, in January - August the Cabinet failed to finance 7.6% (UAH 19.1 bn) of expenditures stipulated in the general fund of the national budget, partially because it fell 2.4% (UAH 5 bn) short of the planned revenues. In September, the situation deteriorated further – the shortfall of the general fund reached 4.1% (UAH 11.1 bn). The combat actions in the Donbas regions created a hole in the revenue side of the budget. “There is a constant downward trend in the payment of taxes,” said Premier Arseniy Yatsenyuk, opening the Cabinet meeting yesterday.

Full-scale attack

Combat in the east of the country intensified in August, which led to destruction of the local infrastructure, the shutdown of companies and a soaring devaluation of the national currency. This undermined the ability of the budget to tax consumption and imports, which aggravated the shortfall in tax revenues every passing month. Back in January – August, the State Fiscal Service (SFS) failed to maintain 4.2% of the plan, falling short by UAH 8.6 bn. During the first month of autumn these figures increased to 4.8% (UAH 11.5 bn), including a UAH 2 bn shortfall in the Donetsk and Luhansk oblasts, said Yatsenyuk.

The problems with funding are observed in almost all categories of taxes. Due to the reduction in retail trade turnover by 4%, the revenues from the value-added tax (VAT) in the country over the first eight months of the year were UAH 53.6 bn, which is 8.5% less than the planned amount. Also, the 22% reduction of imports resulted in a 4.7% shortfall of VAT on imported goods and a 20% shortage of proceeds from import duties.

In general, the shortage of revenues from customs duties was UAH 4.4 bn over eight months. In September, the situation slightly improved – the plan was not fulfilled by only UAH 4.2 bn. Deputy Head of the State Fiscal Service Anatoliy Makarenko says due to the situation in the east of the country the loss of customs taxes and duties from foreign transactions of companies in the Donetsk and Luhansk oblasts was approximately UAH 800 mn.

Compensation of losses

Payments made by the NBU helped compensate for the loss of tax revenues in the first half of the year. After the NBU transferred the entire yearly amount of UAH 22.8 bn back in July as payment in advance, the IMF prohibited advance payments from the NBU to the national budget. Therefore, the government was left to hope only for advance payments of corporate profit tax. These were among one of the few tax proceeds that exceeded the planned amount. Over eight months the SFS collected from businesses 6.4% more taxes than it had planned, albeit only due to the fact that two-thirds of this tax is paid in advance on the basis of the previous year.

In the first half of the year the losses of medium and large companies skyrocketed fourfold from UAH 73.7 bn (UAH 71.6 bn excluding Crimea) to UAH 290 bn. At the same time, companies operating in the war zone account for three quarters of the losses – in the Donetsk and Luhansk oblasts, as well as in the Dnipropetrovsk oblast, where businesses depend on supplies from these two regions. The situation turned for the worse in the following months. The decline in industrial production in the Donetsk oblast reached 20% over eight months (59% in August) and in the Luhansk oblast – 23% and 85%, respectively.

New taxes and an increase in old taxes were also quite effective. Since August the tax authorities have been levying a 15% tax on deposit interests and other passive incomes. By its means, as of the last month of the summer the proceeds from the personal income tax (PIT) in terms of interest were UAH 4.2 mn, which is 55 times higher than over the previous seven months. The government continued to levy a 1.5% military tax, which brought UAH 289.8 mn to the treasury over eight months.

In August the Verkhovna Rada increased the tax for the use of mineral resources to 55% and for extraction of oil and gas condensate – to 45%. Payment for subsoil was one of the few sources of revenues in terms of which the plan was fully implemented. Due to this, the revenues from the mineral tax reached UAH 10.1 bn, including UAH 1.4 bn in August. The average monthly revenues in January – July were UAH 1.2 bn. However, such an amount is not sufficient to compensate for the lack of revenues from the main budget-setting taxes.

Military diet

The longer the military actions in the east of the country continue, the higher the losses of the state budget. Based on preliminary estimates made by Minister of Finance Oleksandr Shlapak, if the conflict is not resolved by the end of 2014, the national budget will receive less than UAH 18 bn in taxes, i.e. almost UAH 7 bn over the remaining three months of the year. This means the government will be unable to fulfill the budget and will be forced to reduce expenditures.

“It is unlikely that the Cabinet will introduce a full-fledged system of budget cuts, as it was this past spring. Most likely, it will upgrade the costs of certain sectors or individual managers of budgetary funds at the end of this year,” says expert on budget legislation at the Association of Cities of Ukraine Oleksandr Slobozhan. He believes that the government will use all available resources to fulfill the social expenditures and, possible, to finance local budgets for payout of salaries and energy sources. In return, the government will end up underfunding the national programs, including those in the Donbas region that are physically impossible to implement.