STATEMENT OF ISER ON ADOPTION OF THE LAW ON THE STATE BUDGET OF UKRAINE FOR 2017

The Verkhovna Rada of Ukraine early in the morning on December 21 adopted the Law of Ukraine “On the State Budget of Ukraine for 2017” and related draft laws, establishing a kind of a “record” on the timing of its adoption. For example, if the budget for 2015 was adopted on 28/12/2014, the budget for 2016, respectively, - on 25/12/2015, the budget for 2017 – on 21/12/2016 (with procedural and timely submission in September and its consideration in the first reading in October). The adoption of the Law on State Budget of Ukraine for 2017 by the Verkhovna Rada of Ukraine laid the foundation to ensure proper and uninterrupted government expenditures. The presence of the approved budget is the foundation for the improvement of business expectations, budgeting public institutions, support of sustainable budget process in local communities. But, the procedure of adoption of this important document causes concern.

The Budget-2017 is “a pig in a poke”. The night adoption of the budget offset once again requirements of the Regulation of the Verkhovna Rada of Ukraine and the Budget Code of Ukraine, which clearly define terms and procedure for adoption of the budget and laws that have an impact on its formation. In one night, the Parliament issued a document in which the tax matters substantially revised and the proposals received by the Budget Committee took into account, actually without having a possibility to work out the text and calculations thoroughly. So, we have an uncertain document that could lead to its soon additional review.

The Budget-2017 did not solve, and could not solve, the systemic, strategic issues of the national budgetary system, including low efficiency of the impact of public spending on economic development, under-reforms in the social sphere, leading to the loss and inappropriate use of a significant proportion of the funds in this area.

Macroeconomic indicators, on which the draft budget built, do not include the effect of a “tax reform”, which took place at night, and of the effect of an increase in the minimum wage to 3,200 UAH. The draft budget for 2017 based on macroeconomic indicators, which the Government approved on July 1. In our view, the effect of raising the minimum wage on employment and payroll, “saving” money on subsidies and dotation for pensions, expected by the Government, hasn’t a sufficient justification. Therefore, funding for enlarged expenditure to increase wages in the public sector, which is based on the calculation of the additional revenue from taxes and Single Contribution is under threat.

The Draft Law of Ukraine “On the State Budget of Ukraine for 2017” plans to define special confiscations incomes (confiscated assets and funds derived from the sale of property confiscated by the court for corruption and corruption related offenses) as one of the essential sources of revenue side – for the estimates, these revenues could rise to 11.6 billion UAH. Such funds will be channelled to support agricultural producers, regional development programs and more. Even with the adoption of the relevant draft law in the near future, we shouldn’t expect for “fast” money flow.

The practice of the existence of a “hidden” budget deficit prolonged. Although it is expected, that the budget deficit will remain unchanged at 3% of GDP, which meets the criteria laid down in the Memorandum of Economic and Financial Policies. The risk of the “hidden” deficit increases due to the procedure of “Privatbank” nationalisation. Consequently, by the end of 2017, depending on how the situation develops, the amount of public and publicly guaranteed debt could reach 94%-100% of GDP.

In the draft budget for 2017 once again laid a quite high rate of revenues from privatisation. However, in practice, there is a risk of failure. Unfortunately, during the last years, in the case of underperformance of privatisation plans, their lack is replaced by the additional issue of government securities. And this is the growth of public debt.

The Budget-2017 in the part of social policy formed on the current regulatory and legal framework, and therefore does not provide for reforms that promised by governments since 2014: pension reform (achieving justice in solidarity level and introduction of mandatory accumulative level, “modernizing” of pensions etc.), education reform (except of raising teachers' salaries), health care reform (autonomization of institutions, the transition to financing for services, introduction of medical insurance), reform of benefits and subsidies provision (monetization, verification, linking to the level of household incomes), improvement the situation of the most vulnerable population (IDPs protection, refuse boarding schools, etc.).

Therefore, with the adoption of the Budget-2017 the budget theme cannot and must not disappear of sight of authorities, experts, and media.

Firstly, the need to control the execution of decisions taken in the public sector and support budget expenditure is not weakening. It is about a public and expert control over the use of spending allocations relating to the social sphere, including in the implementation of healthcare reforms regulated by the Government. A modern control of public procurement can play a significant role in rationalising expenditures. An expansion of public control mechanisms over the spending of funds in budget institutions is necessary. It is reasonable to submit clear criteria to orientation on the development of state support funds, which are placed at the disposal of ministries and agencies, in particular – Ministry of Agrarian Policy, Ministry of Regional Development or “Ukravtodor”. Defence procurement funds should also not be out of control. Equally important is to strengthen the capacity of local communities on the influence and control over the spending of local budgets.

Second, the time that remains before the start of the budget process 2018 should be used for generalisations of accumulated and identified problems in the current year and the development of conceptual solutions that will make the new budget process and fiscal policy more efficient.

In our view, this would require:

  • a full implementation of medium-term budget planning;
  • changes in approaches to the “General directions of budget policy” and transform this document into strategically-oriented effective management tool, appropriate amendments to the Budget Code of Ukraine;
  • ensuring compliance with procedures and time limits within the budget process 2018, specified by the Verkhovna Rada of Ukraine and the Budget and Tax Code of Ukraine on the draft budget and draft laws that will impact on the budget;
  • forming mechanisms of public discussion of revenue and expenditure parts of the state and local budgets;
  • systemic processing of reforms’ components of the public sector: healthcare, education, social protection and social security, cultural organisations, government bodies, etc.;
  • ordering in an appropriate timeframe (up to July 15) changes to the Tax Code, which will affect revenues of the Budget-2018;
  • creation of institutions, on which may be imposed a selection and support of budget investments in 2018.

We appeal to the experts and civil society organisations with the proposal for an active public discussion conduction on issues that important for the country's effective, adequate, and pragmatic fiscal policy.