The state budget of Ukraine: mechanisms for its balancing. Part 1

  • 28.03.2014
  • Author: Viktor Maziarchuk

Part 1. Determination of the actual indicators of the State Budget for 2014

On the motion of Prime Minister of Ukraine Mykola Azarov, the Verkhovna Rada of Ukraine adopted the State Budget for 2014 on 16 January, 2014. The main macroeconomic indicators, on the basis of which it was devised, were populist and highly overstated. It could be described as a budget:

1. of the social orientation before the presidential election in 2015 (an increase in social standards: the subsistence minimum per person and the minimum wage – by 6.8%, bringing about preferential conditions for certain segments of the population at the expense of credit funds from the Russian Federation and the domestic capital market);

2. inefficient use of funds for activities which are of secondary importance to the economy of Ukraine, which is in a recessionary and pre-default state (debt payments in 2014 amount to 95.5 billion UAH or 24.1 % of the planned revenues to the state budget).

On 27 February, 2014, the Verkhovna Rada of Ukraine appointed a new Cabinet of Ministers, headed by the Prime Minister of Ukraine, Arseniy Yatsenyuk, who on the same day announced a new programme of activities for the government. In order to stabilise the budget process and obtain financial aid funds from international financial organisations and countries, the government had developed amendments to the State Budget, which were subsequently adopted by the Ukrainian Parliament on 27 March, 2014 (228 members of the parliament of Ukraine from the faction ‘Batkivshchina’ [‘Fatherland’], the party ‘UDAR’ [‘BLOW’], the groups ‘Suverennaya Europeyskaya Ukraina’ [‘Sovereign European Ukraine’] as well as ‘Ekonomicheskoye Razvitiye’ [‘Economic development’], the faction ‘Svoboda’ [‘Freedom’] and nonpartisan members voted for the changes).

The basic macroeconomic indicators, which served as a basis for the calculation of the State Budget for the Government of Nikolay Azarov, are unrealistic, and hence, must be revised. Many independent domestic and foreign experts, including experts of the International Monetary Fund, pointed to this problem. In particular, the IMF projected a nominal GDP in 2014 in the amount of 1,503 billion UAH (the government overstated this figure by 150 bln UAH), which led to the overstatement of the indicators of income and expenditures in the state budget by approximately 30 billion UAH (or 7.6% of the revenues of the State Budget). A table comparing the main macroeconomic indicators of the State Budget of the Governments of Yatsenuk and Azarov is presented below.

Based on the analysis of the current economic and political situation in the country, the Government of Arseniy Yatsenyuk forecasts a future decline in gross domestic index by -3.0% (while the government of Nikolay Azarov, by overstating indicators, forecasted an increase of +3.0%), primarily due to the reduction in exports from Ukraine by -3.1 % in the annual quantities.  A decrease in exports will lead to a drop in industrial production predominantly in export-oriented industries: metallurgy, machinery, chemical industry, and a decrease of production is expected in the food industry as a result of the imminent trade war, which will be initiated by the Russian Federation (an additional 1% decline).

A comparison of macroeconomic indicators and the indicators of the State Budget of Ukraine for 2014, introduced by the old and new governments  

However, given the Russian military intervention in the Crimea, the destabilisation of the situation in the east of Ukraine and the start of a trade war with the Russian Federation, the corrected macroeconomic indicators, used by the Government of Arseniy Yatseniuk appear realistic, yet still more optimistic than one might expect, since a fall in GDP and industrial production may become greater.

The government of Arseniy Yatsenyuk announced an unpopular decision to decrease the expenditure of the state budget by $ 25.5 billion UAH (or by 5.8% of the revenues indicator of the state budget), decrease revenues by $ 22.4 billion UAH (or 6.0 % of the revenues indicator of the state budget) and reduce the budget deficit by 3.0 billion UAH (up to 68.5 bln UAH).

At the same time, the indicator of the state debt ceiling was increased by 78.6 billion UAH (up to 664 bln UAH or 43.5% of GDP), due to:

  • the provision  of loans in the amount of 38.1 billion UAH for the year 2014 by international financial institutions/countries in order to stabilise the economy.
  • the granting of the right of the government to exercise the issuance of sovereign bonds exceeding the volumes defined in Annex 2 of the budget (with their subsequent acquisition by the state in exchange for shares of the additional issue of shares by state-owned banks);
  • reimbursement of value added tax to taxpayers (declared as recoverable until January 1, 2014 and confirmed by checks) by forming a liability with the use of sovereign bonds.

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Viktor Mazyarchuk 
Expert in public administration
Education:

  • Lviv Academy of Commerce – Master of International Economic Relations
  • J.F. Kennedy School of Government, Harvard University – Executive Education

He has held various positions in commercial organisations operating in fields of investment consultancy and project management. From 2010 to 2013 he worked in the public service as an Advisor to the Minister of the Economy of Ukraine, Deputy Director of the Financial Security Department of the Ministry of Emergency Situations of Ukraine, and Deputy Director of the State Agency for Investment and National Projects of Ukraine.

Volodymyr Panchenko
Education:

  • MBA from the International Management Institute (IMI-Kyiv)
  • National Academy of Public Administration
  • PhD in History of Economics

Work Experience:

  • 2011-2013: Director/Member of Board of the International Centre for policy Studies, advisor to the Minister of Ministry of Economic Development and Trade of Ukraine.
  • 2010-2011: Director of the Department of Investment and Innovation Policy of the Ministry of Economic Development and Trade of Ukraine.
  • 2009-2010: Director of the Investment Department at the National Space Agency of Ukraine.
  • 1991-2009: CEO (trade, photofinishing, PVC profiles manufacturer). 

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