Economy

Public finance

The government has drafted a budget, but decided to not make it public

The government has drafted a budget, but decided to not make it public
Photo: Ivan Chernichkin

Yesterday, the deadline for the Cabinet of Ministers to submit the first draft of the 2015 budget expired. Capital has a copy of the draft prepared by Premier Arseniy Yatsenyuk, but the parliament did not accept the document, because its current version does not take into account tax reform or budget decentralization.

“The Cabinet of Ministers claims that on the basis of the current tax base and without the reforms of the tax system as well as the single social security tax and the budget, the government will not submit the budget (national draft budget – Capital) as this will be a budget of economic decline,” said Yatsenyuk, opening the session of the government this past Monday.

The premier also appealed to the people’s deputies requesting that they review the package of necessary reforms on September 16 without delay so that the government can on the same day submit to the parliament an alternative bill on the budget, which has already been drafted and factors in the reforms.

Inflation tax

Meanwhile, even without the latest reforms the main draft of the National Budget 2015 requires revision as it is now glaringly obvious that it is unrealistic. In late August the government approved two economic scenarios, envisaging real GDP growth at either 0.3% or 2%. In both cases, the end of the military conflict in the east of Ukraine and settlement of the gas problem by the end of this year and the continuation of cooperation with the IMF and the European Union were envisaged. Choosing between the two, the Cabinet of Ministers traditionally picked the more optimistic one, Minister of Finance Oleksander Shlapak stated. As a result, the government is counting on a significant increase in revenues and expenditures of the national budget. However, a 2% growth of the economy is highly unlikely. In August during the first review of the cooperation program the IMF forecast the growth of the Ukrainian economy at 1% even on conditions that the military operations in the east will end in the nearest months. This was prior to the forecasts of the IMF about which NBU Governor Valeriya Hontareva stated last week.

In the National budget 2015 the government increased revenues by 9.7% or UAH 46.8 bn to UAH 424.7 bn, including a 3.3% increase in tax proceeds to UAH 41.6 bn and a 7.1% increase in VAT to UAH 106.7 bn. Deputy Chair of the VR Budget Committee Oksana Kaletnyk said the growth in nominal GDP of 15.4% “is testimony to the moderate planning of budget revenues without fairy-tale increase in revenues that would exceed the growth of the economy”. In other words, it is not the revival of the economy that will ensure increase of revenues, but the inflation of 9.8% per annum on average and 13% by the end of this year.

Tax breaks

Although major tax innovations have so far not been factored into the national budget 2015, the increase in revenues should also be ensured by less major changes to the tax legislation adopted this year, says Kaletnyk. To be more specific, this applies to the introduction of a 15% tax on deposit interest earnings and other passive profits and a 1.5% military tax from people’s incomes, vacation pay, medical aid and bonuses.

In addition to that, the government is wagering on the de-shadowing of wages. Thanks to this the proceeds from taxes on the incomes of individuals will grow by 60.7% to UAH 22.8 bn. According to the memorandum that the Cabinet of Ministers submitted to the IMF in August, the government assumed the obligation to “improve the process of revealing not fully declared incomes by raising the risk appraisal of taxpayers”. One assistant director of every tax inspection bureau will have the task of exposing high-risk employer taxpayers on the basis of indicators in which the number of employees that are paid a minimum wage is too high. This information will then be passed on to the tax police. The government also plans to change internal procedures of financial servicing of taxpayers, which will give it the possibility to use tax declarations to identify non-declared wages.

In addition to that, from August until the year’s end the Verkhovna Rada raised the rate of gas usage during extraction that are not for the needs of the population to 55% and 28% and in the extraction of oil and gas condensate – to 45% and 21% depending on the depth of extraction.

Be that as it may, a decision was made to extend the effect of overpriced leasing rates throughout the next year in order to secure additional revenues to the budget, said Shlapak. Based on the draft budget for 2015, the government is hoping that extension of this norm will increase proceeds for paying for the use of oil and gas deposits by 46.7% to UAH 27.5 bn.

Generous alternative

The proposed draft of the national budget envisages a 5.1% growth in expenditures to UAH 464.1 bn and a deficit of UAH 49.5 bn or 2.8% of GDP. In comparison, this year the government forecast a budget deficit at 4.5% of GDP. However, if the parliament approves the tax and budget reform the discrepancy in the State Treasury may grow despite that such changes will bring in an additional UAH 63 bn to the budget. As Shlapak pointed out, the deficit of the national budget in this case will be 3.5-3.7% of GDP. This is due to the fact that the government plans to increase social standards that were frozen in 2014 by 6% simultaneously with reform, said Yatsenyuk. Without the approval of reform by the parliament the country will live for the second year according to the social standards of 2013.

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