Increase in payments for newborns: How will 'economic passport' of Ukrainian work?

Author : Anna Peshkova

Source : 112 Ukraine

If you planned to have a baby this year, postpone your plans. Since 2021, the ‘Servant of the people’ party offers to open a deposit in the amount of 50 000 hryvnias (2 000 USD) for every newborn Ukrainian. Bill No. 2801 "On state assistance to families with children" was approved by the relevant committee on youth and sports
16:34, 2 March 2020

Open source

Even if the fate of the initiative is not brilliant, there is also a fallback - the bill “On the economic passport”. The idea, in essence, is the same, but it is suggested that newborns to receive money not once, but every year.

Which option is more profitable for Ukrainians, is it realistic to implement it and what amount can be obtained in 18 years?

Don't count your chickens before they hatch

According to the Constitution, lands, mineral resources, water and other natural resources within the territory of Ukraine are the property of the Ukrainian people. So, theoretically, Ukrainians really have a right to a share of finances from these. And Zelensky promised to introduce such a payment as a presidential candidate. The topic was hatched for more than 9 months - and finally it was born into the world.

Contrary to the names of the initiatives, authorities are not going to issue any additional passports to small Ukrainians. They want to open accounts for them that will become available upon reaching adulthood.

The first initiative involves deposits of the so-called children’s type, which are actively promoted by private banks. The second involves the accumulation of funds in a certain "Fund of the Future."

If we talk about specific amounts that can be withdrawn from the deposit at the end of the term, then it all depends on the interest that banks offer. For "children's" deposits, they are usually lower than for classic ones.

Let’s imagine that the initiative went through both readings. For calculation, we take the popular state Privat bank. Long-term deposits now offer a rate of 10%. In ten years, the deposit amount will double - up to 105 470 (4 000  USD). In another two years - up to 122 451 (4890 USD), and by the age of adulthood - up to 191 629 hryvnias (7665 USD). A very nice bonus from MPs for no reason.

This is still less than the state guaranteed deposit amount of 200 000, so theoretically it would be possible to place money in private banks. But, apparently, the MPs were afraid of criticism for trying to increase the wealth of the oligarchs.

True, in reality, the amount can be much less than on paper. The National Bank has already lowered the discount rate, and it is also pulling deposit rates. In addition, a substantial part of the money can simply be "eaten" by inflation. Since 2002, the hryvnia has devalued more than twice. In 2005, for 10 000 dollars it was possible to buy a two-room apartment in Kyiv. Now it will cost at least 60 000.

If the economy showed its cyclical nature and all the events of the past 18 years, including the Maidan, were repeated, then, according to our calculations, this deposit amount by 2039 would be equal to today's 95 000 hryvnias (3800 USD). Of course, parents could keep money in different currencies so as not to lose on exchange rate fluctuations. But whether the bill allows it is not clear.

In addition, since this is an irrevocable financial assistance, it is likely to be levied by 18% of taxes. Therefore, the amount will be even less.

The second initiative with the “Fund of the Future” is less profitable for Ukrainians. It is offered to pay newborns 1% of mining annually. According to our estimates, based on the amounts that the budget received last year, about 1 400 hryvnias (56 USD) would be assumed per child. For 18 years it is only 26 thousand hryvnias (1040 USD). It’s difficult to give an exact figure, because rental income is different each year.

Whether the government will increase this money is not clear. No initiative deposits are offered. But, if the fund decides to invest these finances, about 40 000 hryvnias (1600 USD) may be in the account in 18 years.

“When we talk about any funded systems, be it insurance or the pension system, they work well only in stable economies, and not in weak ones, where inflation was 42% per year and the hryvnia depreciated 3.5 times. There is no guarantee that low inflation will last a long time,” says economist Oleg Pendzin.

“The hryvnia has long been discredited as a tool of accumulation - let us recall the times of Stepan Kubiv and Natalya Yaresko. And in the Soviet Union there were precedents. My mother insured me for a thousand rubles, paid regularly for 18 years, and after the collapse of the Union I received compensation, which was only enough for a sausage stick,” says analyst Valentyn Zemlyansky.

Of course, State Insurance of the USSR is not Ukrainian banks. But the risks are still great. Experts unanimously say that it would be worth giving money earlier. They believe that we should start with the growth of family well-being: if parents have money left in their hands, they themselves will find options for how best to provide for their child.

"Raising children to their feet under the age of 18 is also a very expensive pleasure. Kindergarten is not free, and I'm not talking about how much the school costs," adds Pendzin.

Theoretically, you can withdraw money from the account in advance (if we are talking about 50 000 hryvnia – 2 000 USD payments). They are allowed to be used to raise a child, if the parents don’t have the finances for this, for housing, if there was a natural disaster, for higher education or for “other force majeure events”. True, this formulation raises some doubts from the legal side, because the concept of force majeure is extensible. The second initiative does not imply the option of early withdrawal.

You can also withdraw money if parents or guardians want to put them in an investment fund or in a funded life insurance program. Therefore, it cannot be ruled out that if the initiative is successful such funds will appear like mushrooms after rain, promising sky-high interest.

But what if the child dies? In the draft law itself, there are two different norms regarding where the money will go. One part says that they will be credited back to the state budget. In the second part - that parents still will have half the percent of the amount (that is, approximately 71 000  hryvnias – 2840 USD excluding inflation).

At whose expense the project to be implemented?

In 2019, 308 800 children were born in Ukraine. If in 2021 no less will be born and MPs will vote for the first initiative about 50 000 hryvnias – 2 000 USD per year, the country will need to find 15.5 billion hryvnias. These are almost two budgets of the Ministry of Culture for 2020 and more than all expected revenues from privatization.

In the “Servant of the people” they said that initially they would like to give out money not only to newborns, but to all minors in general. According to the State Statistics Service, this is about 8 million Ukrainians. Apparently, the party realized that they would not find 400 billion hryvnias (16 billion USD) a year, and decided to limit themselves to only newborns.

Related: How to implement state budget 2020 without IMF tranches and money for gas transit?

When it comes to such large amounts, the question of compensators arises sharply. Our creditor, the IMF, will certainly ask at whose expense the banquet is. In the explanatory note, these compensators are not indicated. There is only a footnote: the Cabinet of Ministers, when drawing up budgets for the next years, will have to take into account the allocation of this assistance.

Last year was a record in terms of non-fulfillment of the state budget revenue plan. The “hole” turned out to be almost 38 billion hryvnias (1,5 billion USD) in size, and all investment programs were called into question on New Year's Eve.

“The source for these 50 000 hryvnias is not clear. In essence, this is a budget, but the budget is also not dimensionless. This is a large amount comparable to all budgetary payments for social programs combined. And yet we must understand that this is an eternal commitment. After all, you cannot give money to those born in 2021, and not to give money in 2022,” says Oleg Pendzin.

The second bill, unlike the first, assumes a source - rent for the sale of minerals. This immediately raises questions. You might think that this 1% is simply deducted from existing rents. In 2018, the rent amounted to 45.3 billion UAH. In 2019, the state budget received three billion less. The amount is small, since the bulk of the rent is hidden and redistributed between financial and industrial groups. So there will be 422.5 million hryvnias (16,9 million USD) per year, which must be divided between all newborns.

This is 31 times cheaper than the first option, but it is still a blow to our treasury. Money will have to be withdrawn from other programs.

“Rent is a serious part of financing protected expense items. This includes pensions, benefits for the poor, scholarships and other payments. Is the state ready to share part of the money? Our budget deficit has been agreed upon with the IMF, which means we cannot go negative. And who will receive less money: investment programs, for example, or will these be pensioners? After all, we have 173 billion - a deficit of the Pension Fund,” says Pendzin.

Money, of course, can simply be printed, but in this case we will pay out of pocket with inflation.

There are also legal nuances. The rent relates to the extraction of natural resources, and the bill indicates a certain tax on the sale of minerals. If this is really a new tax, then the Tax Code should be amended, but there is nothing about it in the text.

How to levy this tax without violating the investment agreement if income from Ukrainian subsoil is distributed between enterprises of different ownership forms? And will coal enterprises do this if they already sell fuel at a loss and are subsidized by the state?

Thus, if they vote for the initiative, we will now pay for the future of our children and grandchildren. After all, we already pay ‘children's money’' from our own pocket with taxes, regardless of whether we have the children or not. In addition, absolutely all sectors of the population will receive assistance, including children of MPs.

Explanatory notes to the bills write that initiatives are necessary, as the population is declining, including for socio-economic reasons. The help will be not only material, but also psychological: people will see that the state is worried about them.

Kuwait, by comparison, pays its citizens from 50 to 200 000 dollars, depending on whether the boy or girl was born. Such are the particularities of religion. The amount in Ukraine will not cover training at Shevchenko National University of Kyiv: undergraduate studies now cost about 245 000 hryvnias (9 800 USD). In order to withdraw money in advance and pay for training, it is necessary that the amount covers half of the costs. Will it be enough after 18 years – this is a question.

So will there be a demographic boom in Ukraine?

“Fertility in Ukraine has been growing for 10 years in a row, and since 2013, a decline has begun. There are 1.3 children per woman, 30 years ago it was 2.08. In general terms, financial payment always stimulates child-bearing activity, but for the short term and not in all segments of the population equally. But in the long run there are doubts about the realism of this initiative. In addition, the problem is not so much in low birth rates as in high premature mortality,” says Irina Kurilo, head of the department at the Institute of Demography and Social Research.

It can be assumed that there will still be demand for the initiative. And one cannot exclude attempts to withdraw money from the account in advance. In the news, there are stories on tries to sell children for 100-150 000 hryvnias (6 000 USD), teenagers are given into labor slavery.

Today, state assistance at the birth of a child is 40 000 hryvnias (1 600 USD). Even with such amounts, abuses are observed. The official of the regional department of social protection in Odesa and an employee of one of the banks issued benefits for 190 non-existent children. Are we insured against this?

In both bills, it is not clear who is responsible for the use of these funds.

“If we talk about 2 000 USD, then who will manage this money: the trustee fund, some new structure, authority? The Cabinet has something to do. State Bank is a commercial structure, the purpose of which is to make a profit. State banks are not in good financial condition. Today the average rate is 12%, tomorrow - 5-6%. Who will take on such responsibility, who will choose the bank? There is the issue of subjective corruption decisions,” writes Pendzin.

Who will we hold accountable in 18 years? By that time, the statute of limitations would be irrelevant. Despite such seemingly obvious questions, the explanatory note writes that “there are no rules and procedures in the draft act that may have the risk of corruption offenses”.

The draft law with the “Fund for the Future” states that its representatives will independently decide what to invest in. Moreover, the responsibility of the management of the fund for misuse is not spelled out.

New Arab Emirates in the center of Europe

Zelensky was asked about the “economic passport” during the October 10 press marathon. Then he said that the issue was not in the competence of the Ministry of Economics, but in person of Ruslan Stefanchuk. But the name of Stefanchuk does not show off under the documents examined by us.

They were created by individual MPs - 26-year-old Dmytro Kostyuk, formerly an investigative journalist, and 34-year-old Serhiy Grivko, a member of the committee on social policy issues. Usually half-parliament is signed under the large-scale initiatives of the “Servant of the People”. The fact that there is one signature under both versions of the “economic passport”, speaks of the intermediate nature of the initiatives.

Obviously, both initiatives are not so positive for the Ukrainians, because you will have to pay for them today with taxes or tariffs, and after 18 years you can’t wait for the “goodies”. Judging by the quality of the bills, they only create the appearance of figuring this issue on the agenda, in reality being only informational noise.

But the fact that the realization of the idea is bad does not necessarily mean that it is bad in the whole. Let's figure out whether it is possible to introduce an “economic passport" by other methods.

The UAE, where such legislation is in force, is one of the world leaders in terms of oil production. In oil-rich American Alaska, they also pay $ 1,600 a year before taxes (2019) once a year. Ukraine is also among the main mineral resource states of the world. We mine sand, gravel, amber, nickel, and minerals from which ferroalloys are made. But the oil and gas that countries with an “economic passport” are proud of is not enough. The main reserves were depleted even under the Union, so we import them.

These are not all the differences. The population in the UAE is four times less than in Ukraine, the area is seven times less.

“The stupider the idea, the better it is perceived by the people. This will work only after we accept Islam. In the United Arab Emirates, there is a lot of money, there are a large number of migrants and a small number of locals, so they made this “trick” only for “their own citizens”. We have no oil, no migrants. And even if all this were present, no one would realize it. Even if authorities introduce it, then they will say that there is no money,” economist Oleksandr Okhrimenko is convinced.

Even if Ukraine had big amounts of oil and coal, it would not have to pay a percentage of them to its citizens. In Norway, money are accumulated in special funds and invested abroad, so as not to spur inflation in the country. The meaning of the funds is to ensure the welfare of the country after oil reserves run out. There, at first money is multiplied, it is directed to the restructuring of the economy, and then it is divided. Roughly speaking, you can give people fish, or you can sell it, buy fishing rods and then give people much more fish.

Such reserve funds are present in many commodity countries, but not in ours. Our state, on the contrary, annually compensates the exporters of VAT for $ 100 billion. If you reduce such refunds, introduce an export duty on raw materials, in a few years you can really get at least a billion dollars from the export of raw materials. One could also fight the black market for the extraction of natural resources in order to get more rent. Now they are doing this with amber, but the quality of the initiatives is not so high.

However, it is not surprising that instead of systematic actions to fill the budget, the government produces pleasant, but no less populist and impossible ideas. Let us recall how, instead of libertarianism declared before the elections, the parties started talking about socialist theories - "take away from everyone and divide for everyone." The party quickly realized that libertarian ideas did not work in Ukrainian realities. But the promises of social assistance work.

No need to reinvent the wheel. If you want to give people money that they can use for treatment and education, you need to make medicine available, expand the state order for universities graduates. If the quality of life in Ukraine continues to remain at the current level, children will receive their 50 000 hryvnias (2 000 USD) and simply go abroad. Therefore, before spending  money, we need to learn how to earn it.

Related: 292 million USD of state subsidies to Ukrainian farmers: Who's got this money?

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