On June 23, 2017, at the Ukrainian crisis media centre, experts from the Institute for Social and Economic Research named five key advantages and five shortcomings of the "General Directions of the Budget Policy for 2018-2020". The experts analysed the document from the perspective of the world experience of medium-term budget planning and described its impact on further reforms in the country, in particular in the area of public finance.
Conclusions were 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
The formation of budgetary policy and budget planning for three years is an important component of the Public Finance Management Strategy for 2017-2020, approved by the Government. The first step was the draft General Directions of the Budget Policy for 2018-2020, submitted by the Government to the Verkhovna Rada of Ukraine.
According to the experts of ISER, the very fact of submitting such a document is a highly important event and testifies to the attempt of the Ministry of Finance of Ukraine and the Government as a whole to move from a policy of responding to current events to an attempt to assess future challenges and risks and to develop financial mechanisms for their prevention and elimination. At the same time, the practical implementation of this attempt shows that the system of public finances is not yet quite ready for such steps. Since even the annual planning contains numerous shortcomings, starting with the timing and procedure for adopting budget documents, completing with reporting and evaluating the effectiveness of fiscal programs. On the basis of the analysis, five achievements and five shortcomings of the draft General Directions of the Budget Policy for 2018-2020 have been identified.
What do we get in the new document in the sphere of budget policy?
5 JUSTIFIED EXPECTATIONS
For the first time:
1. An attempt to create a framework for budget planning for three years, which will contribute to the predictability and transparency of the budget.
2. An attempt to harmonise state priorities, macroeconomic and budget indicators in one document.
3. An attempt to identify fiscal risks for the medium-term period and determine the main countermeasures for mitigating and neutralising them. The intention to reduce public debt and budget deficit in the context of costly reforms and the need to refinance past debts is unrealistic, but also encouraging, and in time can yield positive results in the improvement and sustainability of public finances.
4. The document contains so-called "ceilings", or limit indicators of expenditures of the main fund administrators for three years, which should serve as a guide for the development of strategies for ministries and the basis for planning budget programs and long-term investments in infrastructure.
5. The Government's intentions are declared in the form of a sufficiently broad list of specific indicators (from a macroeconomic forecast to state social standards), which will allow the public to follow the implementation of these intentions in the future.
It remained, as in previous years:
1. The risk of non-compliance with deadlines and procedures. 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. We hope that the Parliament will make the necessary efforts to adopt it, and not leave it without consideration, as it was in the past and previous years.
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. In the medium-term planning, such documents usually make a forecast of expenditures 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 Calculation of expenditure ceilings. Then it is obvious how many funds for the implementation of the "old" policy are provided for each main administrator, and how much can be spent on new reforms. This difference is also called fiscal space. It is not yet clear how much money is needed for reform, how much is expected and how much is not enough. Moreover, the success of the reforms depends on this.
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.
For full briefing video click here – https://www.youtube.com/watch?v=jTwiZbvTR0o (Ukrainian)