National budget deficit will be reduced by freezing pensions and cutting preferences

Photo: PHL

Having started to work on the draft of the national budget, the Ministry of Finance has compiled a list of measures that would allow for saving over UAH 27.1 bn next year and resolving the problem of finding UAH 496 bn to cover expenditures, the sources for the coverage of which are not stipulated by the budget. Such economy should be mainly achieved by reduction of all possible preferences, freezing of the size of social benefits and mass downsizing of employees of organizations and institutions that are on the budget payroll.

Post-election syndrome

On Friday, December 5, the government Committee for Socio-economic Development reviewed the groundwork of the Ministry of Finance. The initiatives of the ministry were made public after journalists and bloggers posted them on social networks. The government hasn’t officially published the documents. At the same time, a source of Capital in the Cabinet of Ministers confirmed that the resonant package of proposals has been drafted by the Ministry of Finance when Oleksandr Shlapak was still the minister. Many of the initiatives were drafted prior to the parliamentary elections, explained the source. However, clearly due to the unpopular nature of the reforms they were postponed. Taking into account the state of the economy, the dissatisfactory collection of taxes and impending major payments to cover the national debt in 2015, the government has no other choice, members of the Cabinet assure.

Salvaging the treasury

The government plans to economize on everything, including medicine and education, according to the list of reforms of the Ministry of Finance. For instance, the ministry proposes to cancel the legislative norms under which the government must direct at least 10% of national revenues to these two spheres. As a justification, the Ministry of Finance argues that this provision is not being fulfilled anyway. Due to this, the ministry proposes introducing amendments to the Constitution by withdrawing the provisions on free of charge education and medicine. According to the calculations of the ministry, this way the government will no longer have to seek funding of approximately UAH 211 bn for these spheres annually.

The government also proposes cutting expenditures on a smaller scale, for instance by cancelling free food in hospitals for in-house patients. The economy in this case could amount to UAH 956 mn per year. The government wants to save another UAH 1.2 bn by cancelling study allowances in higher learning institutions starting from September 2015. Exceptions will be made only for children with special privileges, for instance orphans or the disabled.

There is an unpleasant surprise for servicemen and employees of law enforcement bodies. The initiatives of the Ministry of Finance envisage downsizing of the number of policemen in the country from 245,000 to 135,000. This will save around UAH 2 bn a year for the budget. Also, compensations for the purchase of housing and repayment of home mortgage loans at the expense of the national budget may be cancelled for servicemen. In this way the government will save over UAH 7 bn.

In addition, a 3% downsizing of employees on the budget payroll could save more than UAH 6.3 bn. The same provision is envisaged in the memorandum between Ukraine and the IMF. The provision specified that the payroll of the budget sector should not exceed 10.2% of the GDP of Ukraine, which is why the staff of budget employees must be reduced by 3%.

Dignified old age

Substantial changes may be introduced to the pension system. The Ministry of Finance has proposed to freeze readjustment of pensions until the economic situation in the country stabilizes, though it did not specify exactly when this may happen. Freezing pensions will help save over UAH 2.8 bn. At the same time, the government is proposing to limit special pensions for civil servants and parliamentarians.

Recently appointed Minister of Social Policy Pavlo Rozenko indirectly confirmed that the government is indeed considering such measures. «We will propose transition to common principles of calculation of pensions. I hope there will never again be three dozen pension systems in Ukraine. We will try to eradicate the system of special pensions,» Rozenko wrote on Saturday on his Facebook page. He also says that the government is considering a possibility of developing non-government pension insurance. This is about preparations for transition to the accumulative level of pension provisions.

The government is also ready to return to the initiative of introducing targeted preferences. This possibility has been discussed for several years now. Rozenko noted that there will be three directions of reforms: cancellation of preferences, strict connection to earnings of a specific individual and monetization of certain types of preferences.

The new government does not have very much time for the approval of the budget initiatives as the draft budget must be submitted to the parliament in the next couple of weeks. Therefore, one probably should not expect public discussion of the reforms.

It is unlikely that public discussions of the proposed changes will be held, agrees Director of the Institute of Economic Studies and Political Consultations Ihor Burakovskiy. Indeed, by putting up for public debate the issue about increasing the pension age the government cannot count on a positive reaction of the people. On the other hand, innovations in the social sphere must be preceded by a public awareness campaign about the impending changes, he said.

Moreover, the cutting of budget expenditures given the current state of the economy is inevitable, the expert assured. «Besides the visible things, such as cutting of budget expenditures, the government should not forget about such a source of economizing as the targeted spending of funds,» reminded Burakovskiy.