27 October 2016

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Budget a la Groysman

Traditions are changing in Ukraine - after many years of adopting the state budget on New Year’s eve, the country can actually do it within the required terms and pass the main financial document before the end of autumn. Experts assess the project positively, while legislators get ready for a heated debate. Meanwhile, Prime Minister Volodymyr Groysman has vowed not to let the budget process be turned into some "Pokemon show".

Photo from UNIAN
Photo from UNIAN

The Verkhovna Rada of Ukraine on September 21, two days after the promulgation of a draft state budget for 2017, accepted it for consideration. Prime Minister Volodymyr Groysman has called it "the budget of economic development" because the economic growth laid down in the paper is estimated at 3% at the very least.

"The draft budget is completely honest, with real revenues, which can be directed to Ukraine’s development," Groysman said while presenting the draft budget.

The draft provides for the growth of public revenues by 17% compared to 2016, to UAH 706.3 billion, while expenditures are expected to rise by 15%, to UAH 775.3 billion. The deficit should not exceed UAH 77.6 billion, or 3% of GDP, which is in line with the terms of the memorandum with Ukraine’s key creditor, the International Monetary Fund. The ceiling of the public and publicly guaranteed debt is set at UAH 2.3 trillion, or 88.8% of GDP.

Main indicators of the 2017 Budget were calculated based on the macroeconomic outlook, envisaging real GDP growth of 3%, growth of nominal GDP to UAH 2.585 trillion, consumer inflation by end the year at 8.1% - that’s compared to a 1 % GDP growth and a 12% inflation expected this year.

UNIAN experts figured out, how realistic these figures are, will the new prime minister’s first budget see support in Parliament and whether the country is ready to perform as expected in 2017.

Tough development

Principal Analyst at Alfa-Bank (Ukraine) Oleksiy Blinov gave the draft budget a positive assessment. "The macroeconomic forecast for 2017 proposed looks a bit optimistic, yet acceptable. The increase in key social standards (a minimum wage and a living wage) by 10.1% Dec-to-Dec is rather modest, but this increase in the annual average basis is 15,6-15,7%, which is commensurate with the overall expected growth of budget revenues," he said.

According to the expert, it is clear that many ministries and other government agencies will remain dissatisfied with a volume of budget financing proposed, but other resources are missing to further increase spending without increasing the deficit. "The increase in the planned deficit threatens Ukraine with a loss of access to funding from international financial institutions, so any discussion about increasing certain expenditures should start with a search compensators," he added.

Blinov has also noted that since the budget is formed based on a number of significant tax innovations, including the abolition of the special VAT regime for agribusiness and an increase in excise tax rates, as well as on a probability of the recovery of assets of "Team Yanukovych", the budget will have to be adjusted in case of failure to implement these changes.

At the same time, the expert said that a primary surplus is laid in the 2017 Budget at UAH 34 billion, or 1.3% of GDP, which is very important for the sustainability of public finances in an environment where in reality, Ukraine spends on servicing its debt every sixth hryvnia of public revenues.

According to Blinov, the main sources of financing of the budget deficit in 2017 will be foreign borrowings, the net growth of which is expected at $2 billion. Therefore, it is extremely important to secure the positive dynamics of cooperation with international financial organizations.

"The second most important source of financing of the deficit is a scheduled privatization that can bring UAH 17 billion. At the moment, Ukraine cannot boast of any success in this area, making it one of the main threats to the implementation of the state budget 2017," said Blinov.

The primary balance of the state budget of Ukraine,% of GDP

 Sources: State Statistics Service, Ministry of Finance, State Budget 2016 and draft State Budget 2017, Alfa-Bank (Ukraine)
Sources: State Statistics Service, Ministry of Finance, State Budget 2016 and draft State Budget 2017, Alfa-Bank (Ukraine)

Head of analytical department at Concorde Capital Oleksandr Parashchiy believes that the draft budget is quite realistic, while the growth of the revenue part by 17% is achievable given the implementation of the announced forecast of nominal GDP growth by 14% and the implementation of the tax changes planned, including the abolition of concessions for agribusinesses, the revision of excise tax and rent payments.

"The growth of nominal GDP by 14% in 2017 does not look as fiction, either. If the real GDP growth is not as fast as expected (by 3%, which is a quite optimistic forecast) it’s the inflation that can traditionally help us out. Its forecast is optimistically low as well – at 8%," he said.

According to expert, the fundamental difference between the draft budget in question from those in previous years is the absence of quasi-fiscal expenditures.

"There is no support Naftogaz, no recapitalization of banks or lending to a Deposit Guarantee Fund. The only thing that remains is support for the coal industry," he explained, noting that this is a positive factor for the stability of public finances.

At the same time, Parashchiy said that financing the budget deficit does not seem realistic at the moment, since, for example, the receipts from the National Bank estimated at UAH 41 billion are conditional, as the NBU will be able to transfer as much money as it actually earns. Besides, the expert recalled that a question of NBU income transfer in 2016 still remains open.

Just as his colleague, the expert doubts that privatization can bring UAH 17 billion, assuming that the plan will be greatly underperformed.

"Probably, the "development budget" should involve significant investment or tax incentives with a view to growth in the coming years, which means a temporary increase in the deficit and/or debt. Obviously, Ukraine cannot afford such a luxury at the moment," said Parashchiy, predicting that the budget process this year will traditionally term into a long bargaining over minor things.

According to the head of the Independent Association of Ukrainian Banks, a former Minister of Economy Roman Shpek, the Budget 2017 does not give reasons to expect that the coming year will be a year of economic growth or a year of decisive and structural reforms aimed at improving the efficiency and attractiveness of the Ukrainian State.

"Instead, we have a budget that is a reflection of the previous one, while probably the biggest innovation is the plan for the asset recovery. The complexity of the situation requires decisive action to improve the effectiveness of public finance and a thorough revision of expenditures. I’m glad that there are no proposals for monetary financing in the budget. But we need to pay more attention to what our priorities are in the field of public finances," said the expert.

The Battle of generous and prudent

Having burst into a flurry of criticism in the very day the draft budget was presented, the MPs made it clear in such fashion that the process of its adoption in Parliament will be long and painful.

For example, a representative of the parliamentary budget committee, Ivan Krulko, while commenting on the outcome of the committee meeting, opined that the draft had the right to life, however, it raised questions about the feasibility of obtaining the revenue planned and expenditure balance.

In particular, according to him, there are questions regarding the ability of local budgets to service their spending, the abolition of a special tax regime for agribusiness, and the ability to receive certain types of revenue, including UAH 10 billion from Team Yanukovych asset recovery and UAH 17 from privatization. In this regard, according to the deputy, the project will surely undergo changes after the MPs work out the proposals and it gets rebalanced.

MP Viktor Pynzenyk, who also sits on the parliament’s budget committee and earlier served as finance minister, criticized the draft.

"The draft is built up on inflated revenues. And it's not even that it takes into account funds that are expected to come from the not-yet-adopted amendments to tax legislation and other changes, which is more than UAH 25 billion. It is hard to understand, what can ensure the planned revenue growth, given the loss of UAH 10 billion of income from rent payments for natural gas produced. Is it the hopes for a miracle of economic growth or inflation?" he wrote on a social network.

The MP estimates that a shortfall next year may exceed UAH 100 billion, or 4% of GDP, instead of 3%, as the government expects.

The way the legislators were reacting to the draft budget’s presentation confirms their willingness to fight for their own vision.

"The Ministry of Finance has predicted revenues from VAT in 2017 at the level of UAH 280 billion, taking into account the elimination of benefits for the agricultural enterprises. If we calculate this, it is 11% of GDP. In European countries, in view of the EU Directive No.112 on the use of reduced rates, an average rate is 7% of GDP. The question arises, what will help Ukraine collect 4 pp above that average?" MP Tetiana Ostrikova, the member of the parliamentary committee for tax and customs policy, said during the debate.

She also noted that the government allocated UAH 5.5 billion to support agribusiness but at the same time, through the abolition of VAT special regime, takes away UAH 28 billion worth of resources, while the draft budget does not explain, where this money goes after all. According to Ostrikova, she found no answers to the questions, what was the effect of verification of social payments and the use of public procurement system ProZorro, and where the savings are directed.

Judging by the speech of the head of the Rada’s budget committee, Andriy Pavelko, the draft has sparked a debate in the committee itself. In particular, regarding the transfer to the local level of the additional responsibility on the financing of budget expenditures of education and healthcare institutions, as well as individual preferences.

"Debatable were the questions about the adequacy of the volume of direct budget support for agricultural industry in 2017 in connection with the abolition of a special regime of taxation of added value for agribusiness," he said.

The MP urged his colleagues to support proposals to increase budget expenditures, which the committee expects to be submitted before October 1, with real, rather than fictional, sources of income.

"As a rule, they all want to increase spending. But we should not forget that in order to do this, it is necessary to find real, rather than fictional, sources of income," said Pavelko.

Summarizing the presentation and discussion of the project, Prime Minister Volodymyr Groysman said that he heard a lot of good ideas that should be used for further joint work on the draft.

"I want to stress that we will support all professional proposals that will not be populist and not push our country into an economic abyss, but instead provide for economic growth," he said.

The prime minister emphasized that the planned increase in the revenue part of the budget by 17% is an absolutely realistic figure, while the whole budget is also realistic and honest, and can be the base for further discussions. Also Volodymyr Groysman, in his usual manner of a strict father in a large family, called on the deputies to speculate no longer on social issues but rather focus on constructive work with the document, which should only become better in parliament walls.

"For me and for our government, the priority is an honest budget, through honest dialogue, an absolutely professional approach rather than the approach that we see from certain politicians who are trying to turn an honest budget, this honest approach and opportunities for discussion into some ‘Pokemon show’,"said the prime minister, assuring that will not allow such a scenario.

Following the debate, the Parliament accepted the draft budget for consideration, to continue the work on finalizing the document. Traditional hot battles between populists and realists are now expected.

But this year, unlike the previous ones, the deputies have enough time on coordination of their many wishlists. According to the rules, they can submit their proposals to the profile committee before October 1, while the whole budget should have been approved by December 1. Again, bearing in mind the experience of past years, participants in the budget process may not listen to the prime minister’s words and organize a multi-week traditional pre-New Year "Pokemon show", which will end up with the adoption of the law accompanied by a chorus of dissatisfied parties.

The Ukrainians, too, have their own "wishlists". In particular, many want the Parliament to surprise them just as the Cabinet has this year, so that the taxpayers see no nightmares on New Year’s eve. And so that there are presents under the Christmas tree, rather than a pile of unread tax innovations and budget tables.

Olha Hordienko (UNIAN)

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