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Cautious optimism: Key trends of Ukraine's draft state budget for 2020

Author : Mykyta Sinitsyn

Source : 112 Ukraine

The state budget for next year is an important marker of how Ukraine’s new government sees the development of the economy and society
19:14, 18 September 2019

Open source

The state budget for next year is an important marker of how Ukraine’s new government sees the development of the economy and society since the document contains key socio-economic indicators.

Analyzing the initial version of the state budget for 2020, we could say that its drafters are not promoting some radical changes, but rather proceed from real financial indicators.

Related: Ukrainian Railways asks $269,6 million from state budget

Record deficit, but that's a norm

Traditionally, the drafters of the state budget put in it the growth of income and expenses. On September 14, 2018, the previous government of Volodymyr Groysman proposed the main financial scheme of the country with revenues of 1.008 trillion UAH (40,885 billion USD) and expenses at the level of 1.094 trillion UAH (44,373 billion USD). New Cabinet of PM Oleksiy Honcharuk so far offers Ukraine to have 1.079 trillion UAH (43,765 billion USD) of income and 1.17 trillion UAH (47,456 billion USD) of expenses.

The proposed budget amounts are not record for Ukraine. Last year, the Cabinet of Groysman proposed a budget with revenues of 1.119 trillion UAH (45,382 billion USD) and 1.198 trillion UAH (48,582 billion USD) of expenses, however, by the second reading the amount was significantly “withered out.” However, the 2020 budget still clearly sets one record: in absolute terms, it contains the largest deficit in the history of domestic budget plans - 95.1 billion UAH, or almost 4 billion USD.

However, given the growth in gross domestic product for 14 consecutive quarters, the 2020 budget deficit will be only 2.09% of GDP, while the budget for 2019 assumed a budget deficit to GDP ratio of 2.2%That is, in this sense, the financial estimates for the next year will remain a reflection of the current trend to reduce the pressure of the budget deficit on the financial condition of the state against the backdrop of GDP growth.

Related: U.S. defence budget provides $100 million for Ukraine

Ukrainian economic miracle would not happen

Ukrainian economic miracle - a 40% GDP growth over the next 5 years, as Ukrainian Prime Minister Honcharuk told – would not happen. It is easy to calculate that the average annual economic growth should be 8%, but the 2020 draft budget predicts GDP growth at 3.3%.

The question of how the Cabinet plans to achieve growth in labor productivity remains unclear, but the draft budget contains expectations of an increase in foreign direct investment (FDI) of 4-4,5 billion USD. The declared amount is rather optimistic, given that in 2018 FDI amounted to 2,355 billion USD, and for the first quarter of 2019, Ukraine received only 484 million USD of foreign investment.

As for stimulating consumer growth, the Cabinet is trying to ensure it by raising the minimum wage, which will allow achieving a GDP growth of 3.3%.

The state will not leave its functions

The bulk of state expenditures will be spent on performing its direct functions, primarily on social items, for example, on raising the minimum wage, which will amount to 4723 UAH (190 USD). As a result, only 376.9 billion UAH or 15, billion USD (32.2% of the total) level of expenses will be spent on the payment of wages and cash support from the budget, which is more than in the budget for 2019.

The main function of the state, security, would remain in priority – 245.8 billion UAH or 9,968 billion USD (21% of expenses), or 1,370 billion USD more than in 2019.

Expenditures on humanitarian items will increase:

- health care – 4,380 billion USD (an increase of 400 million USD);

- education – 5,531 billion USD (an increase of 312 million USD);

- road facilities – 3,09 billion USD (an increase of 770 million USD);

- culture and the information sphere – 351 million USD.

Related: Servant of the People head reveals party's position on Donbas issue, coalition, state budget 2020

Priority No. 1 - debt recovery

The payment of loans and interest are the largest expense item of the Ukrainian 2020 budget  –  17,776 billion USD. However, according to the draft budget, as a result of the return and growth of GDP, it will be possible to reduce the ratio of public debt to gross domestic product from the current 62% to 54.1%.

Thus, by December 31, 2020, the maximum amount of government debt will amount to 2.127 trillion UAH (86 billion USD) and 335.567 billion UAH or 13 billion USD of guaranteed state debt.

Nevertheless, the Ministry of Finance is not going to abandon the practice of borrowing, and, according to Minister of Finance Oksana Markarova, the government plans to borrow 15 billion USD in 2020.

Cautious optimism vs. disappointment

Danylo Monin, an economic expert at the Ukrainian Institute of the Future, said he would treat the 2020 budget with "cautious optimism."

Related: Draft state budget 2020 to be presented in parliament on September 20

“Earlier, Prime Minister Honcharuk announced plans to reduce the share of redistribution, and the draft budget partially confirms this. According to my calculations, as a result of the reduction in part of non-tax revenues and expenditure items, budget revenues and expenses will be reduced by about 1.5 % Of GDP. The Institute of the Future submitted its proposals to reduce state budget expenditures by 3 billion USD," the expert says.

Monin underlines a favorable hryvnia exchange rate, which could positively affect the dollar growth and welfare of citizens. He believes that Ukraine should redistribute income from power in favor of business.

Economic expert Oleksandr Okhrimenko estimates the 2020 budget much tougher and considers it a “copy of the budgets of past years,” the hallmark of which is the desire to adjust income to a certain predetermined level of expenses instead of normal economic planning.

The key element of the budget, according to the expert, is the absurd social indicator in the form of a living wage of 80 USD, to which social payments are tied.

"An increase in the cost of living to real indicators will lead to an increase in salaries, pensions, stimulate consumer demand and the market, and therefore production and the economy. There are two ways to achieve this – the first, to significantly reduce other articles: the defense industry, some items from MPs’ wish list in order to find money to increase the cost of living. To be honest, we can’t achieve this now, but we need to set such a goal," the expert believes.

Related: Ukrainian Parliament registers draft state budget for 2020

Economist Oleksiy Kushch called the 2020 year draft budget a "last year's budget clone."

“The budget is an important marker of how the new team would act, and he showed that only the rhetoric has changed, and the content has remained the same. As before, the main budget item will be the return of debts, so that it could be compared with the work of the liquidation commission, which collects funds to pay debts. After fulfilling this main function, all other articles are funded according to the residual principle," Kusch summed up the key challenges of the Ukrainian budget.

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