Full text of the analysis of the Budget Resolution for 2018-2020

COMMENTS AND PROPOSALS
to the Draft General Directions of the Budget Policy for 2018-2020

The Draft General Directions of the Budget Policy for 2018-2020 (hereinafter – draft General Directions), which for the first time lay the foundations of the medium-term fiscal policy in Ukraine, is inherently ambiguous.

On the one hand, it is a welcome and long-awaited document. It favourably differs from similar ones in previous years, first of all by much better structuring and setting of targets in the directions of state policy. Among the undoubted positive achievements of the document and the provisions shared by the Institute, in particular in the Policy of Budget Pragmatism, developed in 2016: for the early implementation of medium-term budget planning; Structuring the document in areas and priorities; Transferring the weight of financing the deficit to domestic borrowing, including through simplifying access to T-bills on the domestic market; Target allocation of funds from borrowing to finance investment projects; The introduction of a system for managing the extended spectrum of fiscal risks in order to determine their impact on the state budget and the like.

On the other hand, it is a document that creates additional risks for the image of the authorities and requires steps to prevent them, including:
Political component – there is a political challenge regarding the possibility of ensuring the adoption of the document in general;
Economic component – the ability to correctly forecast revenues and expenses for three years in an unstable macroeconomic situation: the unrealistic nature of the forecast can nullify attempts to form a document and determine the directions and quantitative indicators of expenditures;
Administrative component – there is no statutory regulation of the timing, procedure for considering this document, nor the responsibility of the managers of budgetary funds for the consequences of non-compliance with the established indicators or monitoring the effectiveness of the implementation of the provisions of the document;
Management component – uncertain about the willingness of the chief managers to effectively organise medium-term planning remains, especially since the main directions do not provide for the stage-by-stage implementation of most of the tasks, and only in certain areas are regulated what policies are implemented in certain years. According to the standard practice of medium-term planning, such documents usually make a cost projection based on the basic policy conditions (where decisions have already been made, and they need to be financed) and in the context of policy changes (adoption of new laws, reforms) that are laid in the calculation of expenditure ceilings. Then it is obvious how many funds for the implementation of the "old" policy are provided for each chief administrator, and how much will be spent on reforms. This difference is called fiscal space.

Macroeconomic indicators to 2020 are quite pessimistic, even for an optimistic forecast. So, the government does not expect a tangible effect from its reforms for economic growth by 2020. It can be assumed that low growth rates are a fee for reducing the CPI to 5% in 2020 (the IMF's target is 5+1%). Among the main principles of the budget is "the acceleration of economic growth through the creation of a favourable investment climate and the maintenance of macroeconomic stability, in particular, the continuation of fiscal consolidation." De facto, such a phrase means the government's refusal to promote growth consistently. Summarising three scenarios of economic and social development, the government calls "expectations for adapting the business to changing economic conditions" as the main factor that will lead to a particular scenario. The government does not plan to influence the ability to adapt to this.

The use of a conservative scenario for calculations makes it possible to obtain higher planned budget revenues in the case of accelerated economic growth. However, there are no rules for distributing "excess" budget revenues.

The forecast is naturally reoriented to the primacy of internal factors of economic dynamics, primarily investment demand. However, this is not a reason to ignore the export factor. Meanwhile, the policy of supporting exports (which, among other things, should envisage the creation of an Export Credit Agency with the formation of a budget of its statutory fund – UAH 200 million by law) is ignored (the word "export" itself is mentioned only twice). Indirectly, exports (as well as imports) can stimulate the reform of customs and the integration of Ukrainian business into the world system of safe supply chains by introducing an institution of authorised economic operators in Ukraine.

Consumer demand has more than a moderate role as a growth factor: if the average wage should grow in real terms in 2018 by 13.5%, in 2019. The rate of its growth is sharply slowed down to 4.3%, in 2020 it will amount to 5.2%. It is expected to increase the financing of vocational education by reducing the state order for training specialists with higher education, improve the employment situation, but there will be no unequivocal impact on the level of wages.

Meanwhile, in the text, there is no mention of investment promotion tools. Turning to the issue of ensuring the effective management and operation of state-owned banks, the government declares the minimization of political influence on decision-making, the primacy of considerations of commercial efficiency. There are no planned steps to improve the management of the implementation of public investment (at least UAH 1.7 billion annually) and consortium investment. As direct internal stimulants, it is possible to consider the costs for the development of the agro-industrial complex from the general fund (UAH 6-7-8 billion in 2018-2019-2020 in 2020 the expenditures of the Ministry of Agrarian Policy may increase in comparison with 2017 in 2.5 Times) and increasing energy efficiency, ensuring the economical use of energy resources by the population by financing activities to stimulate the population to implement energy-saving measures, including through co-financing from the state budget of the Energy Efficiency Fund.

The debt policy of the state remains one of the risky elements in the policy of public finances. Influence will be broadcast through exchange rate fluctuations, set by determining risks in the implementation of debt policy. In addition, according to calculations, even in 2020 Ukraine will not be able to achieve the limit set by the Budget Code of the state and publicly guaranteed debt at 60% of GDP – this figure will drop only to 73%. It should be recalled that the strategy of public debt management or the plan of measures to bring the total amount of public debt and state-guaranteed debt with established requirements, as established by Article 18 of the Budget Code, is currently not available.

In addition, ensuring the reorientation from external to domestic borrowing (this is declared from year to year), although it is a positive factor (if we exclude high-interest rates on them (in May, on average, 14.45%) and domestic currency borrowing), have two risks, which are still mentioned in the text: 1) declaring that the external debt is refinanced, that is, it is carried out external borrowing (since it is likely that the domestic market will not be sufficient volume of free non-shadow resource in the form of currency), and for this it is really important to restore confidence in the country as a reliable borrower; 2) increasing pressure on the gold and foreign exchange reserves of the National Bank.

On the other hand, this also indicates the incompatibility of intentions. Thus, the document specifies that the Ukrainian economy will become strong and will not depend on external support, will have a stable position in the external borrowing markets, and on the other hand, it is a risk of "washing away" the NBU's currency reserves to pay off debts.

Tax policy. The section dealing with tax policy issues does not differ much from similar sections in the previous documents of the General Directions of Budget Policy. In this section, the same lines of work are repeated year after year, although reforming the tax sphere is one of the priorities of economic policy in general, and every year in the country there is another "tax reform", which for some reason is not declared in the basic document. The government does not provide for innovations in tax policy, focusing on simplifying administration. The question remains open regarding the implementation of obligations to the IMF to improve VAT refunds and to look at a simplified system of taxation.

It is also insufficiently effective and justified to formally declare the indicator of preservation, taking into account the tax legislation, the share of the redistribution of GDP through the consolidated budget at a level not higher than that taken into consideration when approving the State Budget of Ukraine for 2017. For example, the medium-term plan of government priority actions until 2020, approved by the Cabinet of Ministers of Ukraine on April 3, 2017, No. 275-r, declares the content in the medium term of the share of the redistribution of GDP through the consolidated budget in 2018 – 33% of GDP, in 2019 – 31% GDP, in 2020 – 30% of GDP. And the possible introduction of a tax on the withdrawn capital can affect its value.

In addition, there is a practical disregard for possible income and expenditure in a special fund of the state budget, also makes a negative impression during the processing of the document (for comparison, in the total revenue of the state budget in 2017, the share of special fund income is almost 8%).

There are questions about reforming state-owned banks. The text of the document mentions a reduction in the state's participation in the banking sector within three years and a complete exit of the state from at least one bank. Reduction of participation can be ensured by entering into the capital of an external investor, in which the state's share in the bank's capital decreases. On the other hand, the full exit of the state is privatisation. However, proceeding from the planned indicators of the proceeds from privatization (according to the promulgated presentation, this is UAH 17.1 billion in 2018 and 2019 and UAH 0.5 billion in 2020), the state or does not even plan to return those amounts of money that were invested in banks with the purpose of their support, or plans to "sell" for a pittance, or the indicators of privatization receipts do not take into account the banking sector at all.

Some misunderstanding is caused by the issue of how to ensure the independence of financing of national regulators. That is, there are questions, which regulators? Due to what? The volume of funding for the NKREKP for 2018-2020 is not defined, although the text follows its funding solely from the proceeds to the special fund. At the same time, there are already legally defined approaches to changing its financing through the introduction of a new payment. It is unclear; it is planned to change the funding of other regulators and to what extent since this will determine the income/expenses to/from the state budget as a whole. For information: the draft General Directions is expected to consistently increase the volume of financing of individual national regulators (the National Financial Service, the National Commission for the Securities Market, the National Commissariat of Finance, etc.) at the expense of the general fund of the state budget.

The goals of regional development are supposed to be realised primarily through promoting the formation of capable territorial communities and supporting their development, while financing for a nation-wide regional policy is not defined. The "ceiling" of expenses of the Ministry of Regional Development in 2020 will be 2.2 times higher than in 2017. However, the document does not specify how the effectiveness of their distribution and implementation of the state's regional policies will be achieved, nor does the share of the State Regional Development Fund in the Ministry of Regional Development.

When processing a document and presentation to it (not an official document), there is a sense of formality of the draft document itself, and its presentation is seen more informative and concrete. For example, this concerns issues related to spending on land reform – UAH 0.88 billion for three years (although, on the other hand, there is no vision of positive results for both the budget and the economy). It is indicated that the costs of supporting the agro-industrial complex from the general fund of the state budget will amount to UAH 21 billion (although in the General Directions they are "hidden" in the structure of the general indicator of expenses of the Ministry of Agrarian Policy); privatization – UAH 34.7 billion (actually "hidden" in the modest indicator "deficit/surplus"); the Road Fund – almost UAH 154 billion, which in general in digital terms does not appear in the document, because they are accounted for by a special budget fund; the possible resource of local budgets, hidden behind the phrases about the positive dynamics of the share of local budgets in the consolidated budget.

Regarding the social and humanitarian spheres, when declaring pension reform, there is no mention of the introduction of a funded pension system. With regard to the creation of an equitable social protection system, a number of control and punitive measures are envisaged, but we are not talking about preventive measures to prevent the onset and/or deepening of abuses, the restoration of the institution of a specialist in social work, etc.

One of the important directions of reforms, which are reflected in the draft document, is the need to reform health care and education. A significant part of the document determines how these principles of reforms will be implemented. Unfortunately, there are also common maxims that do not contain concrete ways for implementation, like the financing of a service, rather than beds, or the slogan of providing better opportunities for children.

In our opinion, such ways should be written out with the linkage to the budgetary process, namely:

  • Determination of the optimal balance between financing through subventions, direct purchases and local budgets;
  • Introduction of health insurance and the payment of insurance claims assessment;
  • The definition of a set of educational standards, their valuation and application of the principle of "standard at the expense of the budget, and everything outside the standard – paid services";
  • Expansion of the right to conduct economic activities and receive appropriate incomes for out-of-school, professional and higher education institutions, etc.

It is positive that among the priorities of the direction of public capital investments for the implementation of state investment projects (the amount is determined not less than UAH 1.7 billion annually) is the social and cultural sphere and the health sector. At the same time, "raking" in one heap of everything that relates to the socio-cultural sphere is not correct. After all, this sphere, apart from health care, includes social services, social assistance, education, science, culture and the like. What will be the priority one among them? Such a document should set certain guidelines. In addition, the social sphere is financed largely through the system of local budgets. It is unclear whether the capital investments declared in the General Directions are an investment subvention from the state budget to the local budget, or is it only a relatively small number of social facilities that are on the state budget?

As a positive example, it is worth mentioning the directions of reforming the system of public funding for higher education, where clearly and specifically are prescribed such tasks as:

  • Introduction of a formula distribution of costs for higher education on the principle of "money follows the student", taking into account the number of applicants for higher education in specialities and educational levels and the ratio of the cost of educational services, indicators of the quality of educational and scientific activities of the university;
  • Ensuring the compliance of higher education with the needs of the labour market and demographic trends in the reduction of the state order for training specialists with higher education and increasing the share of training qualified personnel;
  • Change of sources of financing of state higher educational institutions of I-II levels of accreditation taking into account their organisational and legal form;
  • Transfer of state institutions of higher learning to the status of subjects of non-commercial (unprofitable) economic activity;
  • Granting the right to receive academic scholarships to students studying in state and municipal higher education institutions at the expense of individuals and legal entities on a full-time basis;
  • Improvement of approaches to payment of academic scholarships to applicants for higher education to provide support to the best students by increasing the amount of scholarships and bringing the proportion of students eligible for an academic scholarship to the average in the countries of the European Union;
  • The increase in the number of students in higher education from low-income families covered by social scholarships.

But such a section on secondary education, in addition to important specific areas such as expanding the network of inclusive classes, the distribution of educational subvention between local budgets on the basis of a new formula that will take into account the normative content of classes, which will introduce a stimulating mechanism for optimizing the network of general educational institutions, In the educational achievements of students from rural and urban areas through the creation of supporting schools, associations of small schools, changes of their type and/or stage, reorganization, etc., contains many general provisions such as:

  • Vocational training of primary school teachers for the implementation of the new State Standard of Primary Education;
  • Providing schools with modern educational equipment;
  • Creation of a national electronic platform for the allocation of educational resources, the introduction of electronic textbooks.

In addition, the tasks and priorities in financing preschool education, out-of-school education, vocational education, higher education of I and II levels are practically not defined.

It can be noted as positive that much attention is paid to the issue of reforming the scientific sphere, where specific financing tasks are defined, in particular, increasing the share of grant financing in the total amount of state support for research and development, changing the structure of budgetary funding for scientific research by increasing the share of budget funds, that are being directed to finance applied research related to the production of competitive products and the creation of innovative technologies, the development of structural reforms of the National Academy of Sciences and national branch academies of sciences through their unification and the creation of one national academy of sciences and a number of others.

Concerning the reform of the financing of the health system, there are specific tasks, in particular:

  • Transition to funding medical care by paying for the services included in the guaranteed package;
  • Payment of primary health care under a single national tariff (capital rate: 2018 – UAH 370, 2019 – UAH 450);
  • Gradual introduction of payment for stationary secondary (specialised) and tertiary (highly specialised) medical care for the treated case on the basis of diagnostically similar groups;
  • Expansion of the national system for reimbursement of medicines;
  • Decrease in the cost of medicines due to reference pricing;
  • Transition to payment for highly specialised medical care services provided in clinics of scientific research institutions of the National Academy of Medical Sciences:
    • Continuation of the implementation in 2018 of a pilot project for the introduction of a new mechanism for the financial provision of medical care, extending it to no less than 50 percent of the institutions of the National Academy of Medical Sciences;
    • Transition in 2019 to a new mechanism for the financial provision of highly specialised medical care in all subordinate institutions of the National Academy of Medical Sciences.

At the same time, the document does not even mention the cornerstone of the new medical reform – the introduction of co-payment of medical services, which will have a significant impact on financing. Also, there is no new principle for allocating budgetary funds – the conclusion of contracts between the new structure that has the allocation of funds, and medical institutions for the procurement of medical services. This is not clear because of both mechanisms – co-payment and centralised procurement – are the basis for changes in legislation in the framework of medical reform, which should be coordinated with the General Directions.

It is surprising that there are no specific features of the relationship between the state budget and local budgets in the areas of financing health care and education. Meanwhile, it is in these sectors that there are more problematic issues in intergovernmental relations, in particular, in the lists of expenditures financed by subventions and local budgets. The redistribution of these expenses is a "hot" topic for each budgetary period in September-December of each year.

Summarising, we can identify 5 main positive characteristics of the submitted document and 5 hopes, did not come true.

"Achievements" in the General Directions are:

  1. For the first time, a budget planning framework for the medium-term (year+2) period has been created, which will contribute to the predictability and transparency of the budget.
  2. State priorities, directions of reforms, macroeconomic indicators and budget indicators are agreed in a single document.
  3. Fiscal risks for the medium-term period have been identified, and the main countermeasures have been identified. Although the intention to reduce public debt and budget deficit in the context of costly reforms and the need to refinance previous debts is unrealistic, the attempt itself is positive and in time can yield positive results in the improvement and sustainability of public finances.
  4. The document contains the marginal cost indicators of the chief fund administrators for three years, which should serve as a guide for the development of the strategies of ministries and the basis for planning budget programs and long-term investments in infrastructure.
  5. The draft contains many specific numerical indicators and measures related to the macroeconomic forecast, the state budget and debt, state social standards, revenue and expenditure parts of the budget. This not only gives an idea of the intentions of the government but also allows the public to follow the implementation of these intentions in the draft budgets and their actual implementation in the future.

Expectations that have not come true are related to the following:

  1. The practice of non-compliance with deadlines and procedures is continuing. Despite the fact that the Verkhovna Rada of Ukraine has postponed the submission of the document from April 1 to June 15 of this year, the document was considered at a meeting of the Cabinet of Ministers of Ukraine on June 14. However, the public was able to get acquainted with it only by the evening of June 19. Whether the practice of delays will also continue in terms of the adoption of this important document?
  2. Lack of sufficient explanations and calculations causes distrust of the indicators and announced intentions. The presentation of the Ministry of Finance of Ukraine, disclosed at the Government meeting, proved to be more informative than the text of the General Directions of the Budget Policy together with an explanatory note to it, which gives the impression of the detachment of these documents. This also contradicts the practice of developed countries, where governments try not only to declare, but also to explain their policy to citizens not after making decisions, but long before they are adopted. Also, the draft amendments to the State Budget of Ukraine for 2017, which provides for an increase in the revenue and expenditure part of the budget by almost UAH 26 billion, is introduced into the Parliament, which significantly changes the base that is laid in the draft document.
  3. Declarative nature of medium-term budget planning. The draft General Directions of the Budget Policy for 2018-2020 and the draft resolution of the Verkhovna Rada of Ukraine that are proposed to adopt them, do not have any provisions that would guarantee compliance with the "ceilings" of expenditures and other indicators in budgeting for 2018 and subsequent years. On the other hand, the Government notes in the document that in the case of a change in the assessment of the forecasts laid down in the calculations of these indicators, all parameters for the medium-term period can be changed. In many European countries, the "ceilings" are unchanged or change only if new laws or if government changes, which prepares a new program and a new policy. Therefore, the question arises: is Ukraine ready for the medium-term budget planning? Recall that the government had previously drafted income and expenditure budget for three years, but it was forgotten immediately after adoption. Does not this document expect the same thing?
  4. The lack of a phased implementation of medium-term goals. "Breakdown" by year is partially contained only directly in the tasks of budgetary and fiscal policy. Other areas of reform are mainly limited to general declarations.
  5. Fragmentary nature of the policy. The policy of economic growth is not coordinated with the policy of spending and tax policy. Instead of referring to the forecasts made by the Government and targeting the planned budget indicators for 2017, it would be necessary to provide the expected execution of the budget and macroeconomic forecasts, clearly, define mechanisms and instruments for stimulating economic growth and their impact on budget indicators. Accordingly, it is not clear how in 2019 the government is going to act without cooperation with the IMF and to enter foreign borrowing markets, having a significant deficit in the current account of the payments balance. Such fragmentation raises doubts and lack of confidence in the reality of the declared intentions.

The text was prepared by:

  • Anatolii Maksiuta – Chairman of the Board of the Institute for Social and Economic Research
  • Marianna Onufryk – Chief of Social Programs of the Institute for Social and Economic Research
  • Yaroslav Zhalilo – Chief of Economic Programs of the Institute for Social and Economic Research
  • Antonina Deshko – Expert on Financial Policy of the Institute for Social and Economic Research
  • Igor Yakovenko, Scientific Consultant of the Institute for Social and Economic Research