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The state budget of Ukraine: mechanisms for its balancing. Part 2

Part 2. Reducing the State budget expenditures (sequester)

On 27 September, 2014, on the motion of the government, the Verkhovna Rada of Ukraine adopted amendments to the State Budget of Ukraine for 2014. The main aim of the introduction of amendments to the state budget is to ensure its feasibility (bringing macroeconomic indicators into line with the current economic situation), reducing inefficient and secondary expenditures, as well as revision of the sources of supplementing the budget (in January and February, arrears on taxes and fees paid into the state budget after the supplementation amounted to 5 bn UAH (0.330 billion euros).

At the meeting with representatives of European business, organised by the European Business Association on March 3, 2014, Ukraine’s Prime Minister Yatsenyuk stated that it is expected that the state budget will be reduced by 60-85 billion UAH (4-4.6 billion euros).

Based on the results of the works of the Government (Ministry of Finance) on the revision of the expenditures of the state budget for 2014, expenditures have been reduced in the general fund of the state budget by 30.5 billion UAH (2.0 billion euros) and increased in the special fund of the state budget by 4.2 billion UAH (0.28 billion euros).

Thus, the reduction of the state budget can be divided into several main groups:

  1. Reduction of expenditures for the state apparatus (the President, the Government, the ministries and government departments, regional administrations);
  2. Reduction in capital expenditure and support of individual sectors of the economy;
  3. Reduction of centralised social spending (cancellation of the raise of the minimum wage, the minimum subsistence level and others);
  4. Optimisation of intergovernmental transfers and partial cancellation of additional state budget subsidies.

Reduction of expenditures for the state apparatus – 1.5 bn UAH (0.1 bn euros):

  1. Reducing expenditure for salaries of employees of the Verkhovna Rada, the Presidential Administration, the National Security and Defence Council, the State Administration, the Cabinet Office, the central executive authorities and other bodies as a result of reducing the number of their employees and the level of premiums – 0.48 billion UAH (0.032 billion euros); 
  2. Reducing the expenditure for the maintenance of passenger cars of the Verkhovna Rada apparatus, the State Administration and the Cabinet Office in connection with a reduction of the number of passenger cars by 50 per cent – 19.5 m UAH (1.3m) euros;
  3. Other expenditures of the state apparatus (including the reduction of expenses for presidential elections) – 1.0 billion UAH (0.07 billion euros);

Reduction in capital expenditure and support of individual branches of the economy – 12.5 bn UAH (0.833 billion euros):

It should be noted that the sequester of the expenditures of the state budget, proposed by the Government of Arseniy Yatsenyuk, is systemic, which provides for a reduction of almost all inefficient and secondary expenditures of the State budget. The expenditures of 17 central executive bodies were reduced. It is necessary to distinguish the following groups of expenditure:

1. Reduction of centralised capital expenditures of the state budget by 3.7 billion UAH (0.25 billion euros).

 Other capital expenditures will be used in the following spheres:

  • centralised capital investments – 3.7 billion UAH (0.16 billion euros);
  • through the Regional Development Fund – 1.0 billion UAH (0.06 billion euros);
  • subsidies for the socio-economic development of local budgets – 0.5 billion UAH (0.03 billion euros).

The distribution of the aforementioned funds will be based on transparent competition for contracts based on their attractiveness, economic effects and social impact on the development of a particular branch of industry or territory.

2. Reduction of expenditures for the support of individual sectors, regions, and individual projects – 11.7 bn UAH (0.78 billion euros). The most significant measures include:

  • reduction in state support for the construction of coal and peat extraction companies and their technical re-equipment – 2.3 billion UAH (0.157 billion euros);
  • cancellation of the increase of the share capital of the state enterprise ‘National Nuclear Energy Generating Company Energoatom’ – 1.6 billion UAH (0.107 billion euros);
  • reduction in state support for coal mining enterprises to partially cover the cost of the self-cost of finished marketable coal production – 1.1 billion UAH (0.075 billion euros);
  • implementation of measures for socio-economic development of territories through the Regional Development Fund – 0.9 billion UAH (0.06 billion euros);
  • other activities related to the financing of individual projects and programmes – 5.8 billion UAH (0.2 billion euros).

Reduction in social spending – 7.72 bn. UAH (0,514 bn euros):

  1. Minimum subsistence level – cancellation of the increase in the minimum subsistence level for the main social and demographic groups, savings in funds for the payment of social benefits – 0.42 bn. UAH (0.028 billion euros);
  2. Child birth benefit- a single rate of child birth benefit is established, regardless of which child in the family it relates to  – 41 280  UAH and it’s consolidation with the assistance for childcare up to the age of three benefit – it shall result in savings in the amount of 3.8 billion UAH (0.253 billion euros);
  3. Pension Fund – the budget of the Pension Fund is expected to be reduced by 3.5 billion UAH (0.237 billion euros). The change of indicators of the Pension Fund budget increase is connected with the cancellation of the increase in salaries, the minimum subsistence level for the unemployed and the revision of the inflation index.

Optimisation of intergovernmental transfers and partial cancellation of additional state budget subsidies – 5,9 bn UAH (0,395 bn. euros):

Given the tough regime of cuts to the funds, the list of intergovernmental transfers, provided from the state budget to local budgets, has been optimised, and their volume has been reduced to 124.3 bn UAH (8.3 billion euros). At the same time, the following subsidies have been reduced:

  1. The subsidy for reimbursement from the state budget to local budgets in the case of excessive expenditure in local budgets over their income, in the amount of 0.291 bn UAH (0.01 billion euros). The amount of subsidy is calculated in accordance with the procedure defined by the Government according to the formula;
  2. Additional subsidies – 0.47 bn UAH (0.031 billion euros). Almost all of the additional subsidies, which had been allocated to finance individual projects pertaining to infrastructure, have been cancelled (the Government of Nikolay Azarov appointed Dnepropetrovsk, Donetsk and Lugansk regions as main recipients of these subsidies);
  3. Subsidies from the general fund – by 2.7 billion UAH (0.179 billion euros). Primarily, social measures, which were financed from the state budget through local budgets. Reducing subsidies is a consequence of the revision of the basic social standards and the cancellation of certain social programmes which should be funded from internal funds of ministries, departments or local authorities.
  4. Expenditures of the State Regional Development Fund by 2.5 billion UAH (0.165 billion euros).

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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 Economic

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).]

For more detailed information, please contact:
Viktor Maziarchuk [email protected]
Volodymyr Panchenko –  [email protected]