Ukraine's draft budget 2019: Beautiful figures and despressive reality

Author : Oleksiy Kushch

The government has presented the major ideas of the 2019 draft budget. Its title is capacious and memorable: "The budget of the country’s development"
16:35, 19 September 2018

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The government has presented the major ideas of the 2019 draft budget. Its title is capacious and memorable: "The budget of the country’s development." The beautiful word "development" has become commonplace for state policy and bureaucratic slang. For 27 years, the politicians have been talking about the building of the country, while an average Ukrainian cannot simply build a house, and no one even knows how many Ukrainians are left. Before the elections, no one in the government was concerned about the need to conduct a census of the population and lay the necessary amount of budget expenditures for its implementation. Presenting the future budget of the country, the prime minister has noted that his caravan marches on, despite the envious and ill-wishers.

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In general, politics is perishable, and budgets are eternal... Next year, GDP growth is set at 3%. This indicator corresponds to this year forecast. However, in 2018, the budget had a "little" handicap. It was about a segment of GDP accounted for the enterprises located in uncontrolled territories but registered in the fiscal system of Ukraine. Last year, as a result of the blockade, approximately 1% of GDP was lost. This has particularly affected the mining sector, primarily coal. This year, the factor of the economic blockade of the temporarily occupied territories does not work anymore - that is why the gross product formed a more favorable basis for comparison and, therefore, growth. In 2017, the GDP index was 2.1%. And only with the help of a manual revision of the NBU, which looked at additional informal transfers of labor migrants for a couple of billions of dollars, the State Statistics Committee managed to increase GDP by raising the bar of GDP growth to 2.5%.

Speaking about the exchange rate, after UAH 30.1 / USD, the next year they decided to please the population with just 29.4 UAH / USD. And this is despite the fact that 2019 is the year of the president and parliament elections and political and economic turbulence. And most importantly, we should return the external debts. Although with regard to the repayment of external debt, the government is very optimistic: in 2018 it is planned to reduce the level of external debt to GDP to 60%, in 2019 to 52.2%, and in 2020 to 49%. Thus, skeptics and retrogrades, who think that Ukraine's future is two alternatives (default or refinancing of debts, that is, replacing old ones with new ones), are finally embarrassed. Debts will be repaid, as evidenced by a decrease in their ratio to the gross product. However, there is another option that the proportion will be improved due to rapid economic growth, but there is little chance of such a development of events. Controversy to exchange rate optimism, the trade deficit was estimated: it is planned to expand from the current $ 10.4 billion to -11.7 billion dollars.

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In terms of the absence of foreign direct investment, this loop can be blocked only by borrowing or by increasing the transfers from labor migrants. It is planned to increase subsistence wage to 149 USD. In general, the government intends to raise solvent demand by squeezing out of the business a greater proportion of "official wages."

Next year inflation might reach 7.4%, and for the current year, it is 9.9%. The last figure is generally amusing: the government needs to reduce the price dynamics to a single number before the election. This is well used in advertising political ads.

Related: Minimal salary to make USD 149, - draft of Ukraine's 2019 state budget

As for revenues of the consolidated budget, they are planned to be 46 billion USD (an increase of 4,6 billion USD). At the same time, GDP in actual prices should grow from 123 billion USD this year to 139 billion USD in 2019. And here we come to the most interesting place - the adequacy of the budget to the real state of the economy and its impact on it. The level of redistribution of the budget for 2019 will be at least 33% of GDP. In the modern world, this indicator is the key to determining the tax burden in a particular country. Developed countries, whose economic growth is 1-2%, can afford to distribute through the budget 40-45% of GDP. Effective state institutions allow them to use a significant part of the national gross product rather quickly and transparently through the articles of budget expenditures. This is facilitated by the high quality of public administration. The distribution is carried out mainly in favor of social articles. Countries like China can afford increasing public investment in the economy and conduct an independent domestic industrial policy. In turn, those countries that are seeking a way out of the crisis and a set of high turnover of economic development, the redistribution of the budget through GDP. For example, in order to overcome the postwar crisis in the period 1945-1960, Japan has cut budget expenditures from 30 to 19% of GDP. And this was in the period of post-war devastation when people suffered from hunger and total lack of money. Russia has recently reduced budget expenditures in relation to GDP (up to 20%) and plans to cut back to 14% in the face of sanctions, keeping in mind the fate of the former Soviet Union, which distributed up to 70% of GDP through the budget before its collapse. Poland distributes only 19% of GDP with the help of budgetary mechanisms.

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All this shows that our government does not realize that the national economy would not work without removing the budget blow-off from its throat. We cannot spend almost a third of GDP per year. With such an indicator of macroeconomic redistribution, we will never reach a sustainable growth dynamics of 7-8%. Japan, which was six times behind the United States in terms of GDP per capita in the 1980s, almost equaled the gap by the 1980s, and only after reaching the qualitative indicators of key world economies began to gradually increase the level of budget expenditures - up to 32% in the 1990 year.

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The optimal level of budgetary burden for Ukraine is not more than 25% of GDP, that is, if the gross product is planned at the level of 139 billion USD for the next year, budget expenditures should be set at no more than 35 billion USD. Given the planned deficit, consolidated budget revenues cannot exceed 32 billion USD. Thus, next year almost 14,2 billion USD would be withdrawn from the economy, which could give about 1-2% of additional GDP growth. These are the precious percentages in the dynamics of development, which we lack to reach a more dynamic level of growth (from 5% per year). The absence of a package of economic reforms, especially with regard to structural adjustment of the economy, forces the government to postpone the reduction in the monetization of the state (the distribution of GDP through the budget).

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The government in pursuit of a new billion "for social programs and roads" became a victim of a simple "budget trap:" it is possible to increase the absolute value of the deficit (in 2019 it is planned at 3,2 billion USD) and at the same time declare its relative reduction (in relation to GDP). Next year, the budget deficit will not be more than 2.3% of the gross product. It all looks very presentable; however, we should not forget about the inflationary mechanism of inflation of GDP, which simultaneously allows raising budget revenues and meeting the IMF demand for the budget deficit indicator. Obviously, this scenario does not combine with the strict monetary policy of the NBU in the form of a high discount rate and low rates of monetary base growth. This means that the NBU will continue to play the role of "an instrument of compelling the government to obey" in the hands of the president. You can increase the budget with the help of inflation or the real growth of the economy, you can combine the first and second, which was done by almost all Ukrainian governments. But in 2014, Ukraine’s Cabinet has clearly lost its sense of balance. Since then, ministers have entered into the spirit of the thing, paying depreciated salaries and pensions due to inflation, and now they cannot stop. Next year, the nominal increase in budget revenues will amount to 11%, which means that three out of four hryvnias of revenues to the budget will be provided due to the price increase, and not the real economy.

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