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Where there is no law, but every man does what is right in his own eyes, there is the least of real liberty
Henry M. Robert

BUDGET BILL: Accountant’s Myth

10 October, 2000 - 00:00

Every year we discover that this time we have a budget bill better than the previous year’s. Of late, it has started being described as “the best,” “balanced,” “submitted on time,” and one allowing for practically every requirement set forth in Parliament’s budget resolution.

And so this year’s budget bill is the best ever. Even the IMF agrees that it is very good, the Cabinet claims. Does this mean there are no problems?

Perhaps. Our recent history shows there is no sense discussing budget bills. Life dictates its own terms and conditions, and every budget is invariably never fully implemented, with the Cabinet always coming up with convincing stories explaining its nonfufillment, while cadre changes make it impossible to determine who is to be held responsible for budget failures.

Even now we can see budget nonfulfillment arrangements being made and that its indices will reach far outside the permissible limits (e.g., the inflation rate). Even the whipping boys have been appointed and there is a planned campaign to prepare public opinion. The scenario is like this: the IMF (holding back credits), adverse weather conditions (an omnipresent factor), gasoline crisis (a fatal reason), governors ducking Cabinet directives, all those secret enemies (e.g., wheeling and dealing oligarchs refusing to pay with live money), and suchlike.

WHY DO WE NEED IT?

12 pages of the Cabinet budget bill are dedicated to an analysis of tax liabilities and the whole thing looks very convincing. Reading this section leaves one with the impression that, despite all its tremendous hardships, the government is aware of the reasons for these debts and is resolved to correct the situation. Eventually it will. True, despite the 2000 budget program’s allegedly balanced nature, budget payment shortages have increased by another UAH 3.3 billion — or by 28% — totaling 37% of budget revenue items at all levels (the document reads). And this with the inflation rate reaching above the annual mark over the past seven months!

Who can guarantee that all these and countless other negative factors will not manifest themselves in 2001? Likewise, it is clearly apparent that no one will be held responsible for budget implementation in the future.

There must be something, which neither this nor any other Cabinet can control left out of the analysis section, but which is constantly at play, going full speed ahead, and which is likely to remain active ad infinitum.

To understand what this factor, verging on a supernatural force, constantly upsetting budget performance, is all about, this author proposes approaching the bill at a different angle. Why do we need it in the first place? To prove just how reform oriented is the current Cabinet? To get money from the IMF? To show that we are almost as good as the West, having our own budget submitted on time?

Or maybe it has a different meaning? Maybe it is designed to optimize the finance-and-resource currents to create a maximum favorable environment for the citizenry? Does our budget discharge this uppermost function?

Let us see what we have, viewing the budget from this angle.

Suppose we start by analyzing the budget-planned average pay in the industrial sector: 280 hryvnias, as laid down in the Cabinet’s macroeconomic and social guidelines for 2001. Is it a lot or a little? The answer lies only in the amount of the living wage. The law of Ukraine On Establishment of the Living Wage for the Year 2000, approved in the first reading, sets it at 270.10 hryvnias. In 2001, allowing for the predicted inflation rate, it is expected to reach 311 hryvnias. In other words, owing to the so-called reform budget, average pay will be lower than the living wage. In family budget terms, allowing for children and nonworking members of the family, the average income (considered an extremely important index in civilized countries) will lag far behind the living wage.

WHAT WILL HAPPEN?

1. The irreversible process of ruining economic contacts will be stepped up in Ukraine, because it will be impossible to replenish manpower resources.

2. Due to the government’s “constant care” for the “well- being” of the population, most of the latter will drop below the poverty line (one is reminded of “Reform for the Sake of Well- Being”). At this level people will abide only by physiological instincts and one way or another will breach generally accepted moral and ethical dictates. This will boost the crime rate and tax evasion (the latter turning into an ethical standard of sorts).

3. Domestic consumption, that is, aggregate demand, will continue to decline, thus speeding the market on its downward curve, aggravating the domestic production crisis.

The result will be a body politic unable to secure for its working communal members a living wage, thus becoming totally meaningless.

Second, the budget is the tool shaping the country’s economic space and its citizens’ living environment.

The budget analysis points to increasing disbursements to sustain fiscal bodies, which, in the consolidated budget, are expected to reach UAH 1.231 billion (0.64% of GDP). We can compare this index to that what is meant to finance culture and the arts: UAH 462 million (0.24% GDP).

A great many policemen, tax inspectors, and comptrollers are a sure sign of moral decline and general social regression. Moreover, increasing their number causes a decline in culture and morals, thus requiring an even larger number of penal institutions. This is clearly reflected in the budget. If retained, the current taxation system will continue to produce a destructive effect on the Ukrainian economy, since excessive tax pressure on profitable firms and a reallocation of funds to keep an ineffective economy afloat cause all types of debts to increase. This and consumer demand reductions will step up the ruin of the economy, causing an adequate response in terms of enhancing the role and increasing the number of fiscal authorities.

Third, the experience of the affluent countries makes the importance attached to the development of science and research programs perfectly clear. Our budget should reflect such world trends, laying the foundations of this country’s future. Thus the budget clause financing fundamental studies and stimulating scientific and technological progress must be regarded as a number one priority in the first year of the new century. What we see in the stated document is a mere UAH 687 million (0.36% GDP). Far from sufficient, and it will have irremediable consequences. Instead, there is UAH 2.912 billion allocated for state administration in 2001, 620 million more. Such yearly reductions in financing Ukraine’s science are already destructive. National Academy staffers are currently paid an average of 226 hryvnias a month (with 270 hryvnias being the established living wage). Science- production ties are being severed and there is an exodus of research personnel, emigration included. The generation-gap problem is manifest in the scientific domain; we are losing a number of research schools and projects that could secure this country’s progress. In addition, the budget bill expressly transgresses the President’s edict, stipulating additional measures to support the National Academy, and the law On Scientific, Research, and Technological Activities, whereby science should receive 1.7% GDP by way of subsidies, this being strikingly in contrast with the bill’s 0.36%.

Fourth, the budget should stipulate measures to replenish fixed assets. This would be especially important in 2001, since the 2001–02 period will be crucial for a global problem facing Ukraine: mass depreciation of fixed assets that were “activated” under the Soviets. We all know that this problem has been generally neglected during the years of independence. The Ukrainian economy is being drained of investment. Another problem omitted in the budget bill, although no reform verbiage will help us replenish our fixed assets. The document leaves it utterly unclear how Ukraine is to surmount this obstacle, which can be so dangerous for its future, without suffering devastating economic and ecological losses.

Fifth, the budget is supposed to help increase citizens’ incomes, thus raising the living standard and stimulating capitalization to secure future well-being. What we see in the bill means that the stated budget is a self-consuming one. Mass sales of fixed assets are planned and the money involved is included in the budget, which is wrong in principle. Selling fixed assets has nothing to do with current production (even less so with regard to such assets inherited from the Soviet Union). By including in budget revenues the sales of Ukrainian public property, the government embellishes budget indices, thus camouflaging its own incompetence. Living off one’s legacy without investing any revenues in the economy is evidence that whatever reform supposedly underway can only drive us up against the wall. Also, it should be noted that this budget bill, like all previous ones, relies on the old Soviet proceeding-from-what-has- been-achieved tradition. Considering that all our previous achievements are actually failures, every next such “achievement” can only augment our losses. Evidence of this is found in the stated budget’s rather objective index, the average payliving wage ratio. It should be 4–5 to secure a stable nationwide advance. This year, while implementing the “reformist” and “balanced” 2000 budget program, it is 0.93, proceeding from adjusted estimated (250.50 hryvnias divided by 270.10 hryvnias, giving us precisely 93 kopiykas).

MACROECONOMIC ENIGMA

The first year of the “reform” Cabinet’s performance shows very disheartening results. Ukraine’s average pay is lower than the living wage, while the average-old-age-pension-living-wage ratio is best left unmentioned. Due to inflation and no pension and wage-and-salary adjustment, what revenues we have are being reallocated to the government’s benefit, an ineffective government, it should be added. In 2001, this ratio will register 0.9 (280/311). Is this why Premier Yushchenko wants to be allowed another chance? The reader is bound to wonder about GDP increment. There are undeniable attainments, but the thing is that this index is anything but objective, good perhaps only for yet another Cabinet report addressed to the IMF. In reality, the methods used in computing it allow vast room for maneuver.

First, it is computed in terms of the hryvnia, leaving out the hryvnia’s more than conspicuous downfall compared to the inflation rate.

Second, GDP is computed relying on the products made, still to be paid for, thus leaving out the accounts payable and receivable that keep piling up.

Third, GDP, thus computed, allowing for products made but unpaid, causes enterprises, especially ones owned by the state, to increase expenses without saving their own resources.

Fourth, GDP is computed proceeding from accrued, rather than paid wages and salaries.

Fifth (as has been mentioned above), public property sales all add to GDP, creating the illusion of economic growth.

Sixth, there are a host of opportunities to improve the GDP indices secreted in he method of computing the GDP deflator, depending as it is on a subjective selection of tangible coefficients and measurement units relating to various commodity groups and sectors.

To show you how GDP growth is actually taking place, here is a typical example. Over seven months of the year 2000, the Cabinet is proud to point out, there has been a degree of export increment with regard to certain commodity groups, including gas (sic). Indeed, we are told that Ukraine’s gas exports have gone up 4.4 times (now aren’t we all clapping our hands and running happy tears!). This is the equivalent of $131.2 million US! Of course, it is reflected in GDP, demonstrating its growth. At the same time, we are told that unauthorized pumping Russian natural gas in Ukraine amounts to $700 million US. It is not debited to any accounts. Of course not. It is unauthorized, is it not? This is what our “reform” approach is all about. Enough to make a top-notch con- artist somewhere in the West blush with envy!

The same is true of other indices being so actively utilized by the government.

In fact, we are all witness to a large-scale hoax, when thoroughly biased indices are compiled and presented in a special manner, when Soviet approaches are used in applying computation methods, when the entire show is staged to convince the audience that there is indeed some growth, somewhere, even where it is really nonexistent. When a commodity group is selected, where a single production sector is at last revived after a long depression, and presented as a conspicuous output increment (in percentage, of course, never in absolute values).

Similar methods are employed in all 2001-budget-promoton campaigns, focusing on the 25% pay increase in the healthcare sector.

Meanwhile, there is 19% inflation, also planned but being carefully kept away from the public eye, along with the fact that heath-care personnel’s wages have been kept the same for the past three years, with inflation climbing very high.

This is a pure bookkeeping. A professional bookkeeper is never interested in an analysis of his books and records. That is not his concern. He is responsible for entering the right figures in the right columns of the accounting report. His expertise is relied upon when trying to make a firm in the red look quite promising, or vice versa, as the case may be, so double-entries can be applied in a special way to produce the expected result. This is precisely the case with IMF loans accounted for by the National Bank. It is a special kind of mentality. It can be useful, even necessary in certain cases, but it is absolutely unacceptable in running a country. Striking the balance [balancing all accounts] is every accountants end. Every accountant operates on nothing but dead figures. When running a country, one has to remember that there are fellow humans, many of them behind every figure.

And figures can be very easily manipulated using this bookkeeper’s approach along with huge gaps in the official statistics.

Thus, quite a few experts studying the budget bill are surprised at the nominal GDP value rising so easily over such a short period, without altering the budget contents: UAH 175 billion of GDP originally, going up 185 and finally 190 billion hryvnias, with the UAH exchange rate changing from 6.7 to 6.3! Perhaps because a critically low GDP per capita value in US$ has been increasingly often applied of late (some $600 a year by 1999 estimates). The first budget bill read 175:50:6.7=522 US$. Such an obvious change in the GDP per capita value for the worse would, of course, cause an unwelcome public response, especially in view of the Cabinet’s stated concern for the well-being of the man in the street in Ukraine. Corrections had to be made, resulting in UAH 185 billion and 6.30 UAH exchange rate. Even so, $587 was all they got. Another correction was in order: UAH 190 billion. End result: $603. Not worse than previously anyway. The Cabinet seemed to be working hard. Also, one had to realize the complexity of the tasks assigned the government. The Premier had to have another chance, it seemed. Other options? There is Poland and its per capita GDP reaching above $4,000, steadily moving upward, which means that our budget is way behind, no matter how hard they try to juggle figures and approaches.

COMPETENT DEMAGOGUERY

This budget bill is an example showing that we are faced with a more important national problem. Which is the greater priority in terms of national security? Oligarchs causing financial losses in some sector or another? Incompetence of those in high offices causing the entire economy to verge on total collapse? Maybe all those oligarchs are the result of such incompetence? Hence all incompetents, wishing to keep atop the executive pyramid, must provide conditions to support all those oligarchs?

Why are our accounts payable and receivable keep piling up? Is it because of Viktor Yushchenko’s monetarist policy started in 1996, with Ukraine’s level of monetarization being so low? Securing valid cash payments at that level was impossible in principle. Just as it was impossible to organize a domestic market and get the better of the oligarchs. And the paradox: the man at the head of the National Bank of Ukraine, author of the financial policy ruining the domestic market, is nominated and then appointed Prime Minister. And what did he do after taking office? He banned offset transactions (December 30, 1999). But this actually marks his weak spot — as NBU Governor, when he failed to secure a normal monetary turnover and credit policy, and as Premier who is inexplicably unaware of the need to keep the economy sated with money, this being a key market economy element, given an appropriate degree of market operators’ confidence.

In fact, as Prime Minister, Viktor Yushchenko persists with his offset-banning policy (rather than carrying out monetary turnover reform), enhancing administrative regulation (rather the liberalizing the market), and lowering the average wage/salary. All this turns Ukraine into a country inhabited by slaves — but even slaveholders would secure their slaves what was then the living wage, while in this country it is due to the “working citizens,” not just citizens!

Hard facts and figures, harsh regional realities would seem to suffice as evidence that the living standard is plummeting in Ukraine, which is especially true of the past couple of years. Yet Mr. Yushchenko’s popularity remains high. Why? Is it because the country is inhabited by masochists?

An analysis of such facts, figures, and processes underway in Ukraine makes one wonder. Do we really have an operational bank system and a creditworthy monetary policy?

The new head of NBU appears at first to have embarked on a policy which is really expected from the National Bank. He wants Ukraine’s loans repaid and their servicing remunerated at market rates. There must be no first-rate market agents (foreign creditors) and third-rate agents (Ukrainian people). All must be equal before the market. However, the Cabinet does not want to repay such loans, because they were given by NBU Governor Viktor Yushchenko, without any clear redemption clauses. Naturally, Premier Yushchenko is loath to see them returned.

Did we really have a 1999 budget program? Another truth dawned on us after the Finance Minister delivered his last year’s budget progress report. In 1999, it seems, the same people were in office. Remember how confidently they predicted that GDP growth? In reality, that growth became a 0.4% decline, even using their time-tested computation techniques. This author can only hope that the stated budget program will be another cold shower. Most likely, the full impact of truth will be felt this winter when the people will have to part with their average pay to finance the boosted central heating and other utility bills. Perhaps then all those patriots of Ukraine backing Viktor Yushchenko will have second thoughts about the economy of Ukraine being the price paid for that “conscientious approach” actually rooted in incompetence and pie-in-the-sky promises.

FREE FOR ALL, WITH OR WITHOUT OLIGARCHS

Hence I do not think lances should be broken over this budget bill. No one really needs it, except perhaps the IMF. What we are offered is a virtual budget program, far from what is actually happening in this country and its economy. In any case, all the economic processes will be manually operated. We might as well spare our breath discussing it and approve it the way it is drafted by the Cabinet, for the latter is supposed to carry it out. Better to use the time and effort thus saved to deal with bills meant to secure a market-favorable environment: the tax and land codes, and those dealing with mortgage, pledges, et al.

We should finally implement the monetary reform by instituting a multicurrency system, because progress here is out of the question at the current monetarization level, by definition, with or without oligarchs, although the problem reaches even deeper. Even if the next Ukrainian Premier is a brilliant and completely competent, an honest, perfectly decent citizen, patriot to the core, the show will go on unless we have a law on economic development evaluation criteria. Without it, any Cabinet membership will yield to the black magic of paper figures, received using methods inherited from the Soviet Union. And these methods are rooted in long decades of experience in getting any indices, so long as they are okayed by the Politburo — now by the IMF. After that no problem! But we need real facts and figures. We need truly effective criteria to see what is actually happening to our economy. Otherwise we will be fed virtual realities, showing growth where, actually, there are plummeting living standards. This is the most effective means of combating populism. Acknowledging objective indices means admitting to the fallacy of the monetary reform and the entire “reformist” course.

Analyzing indices that must be introduced in economic practice rates a separate article, but the following could be singled out as absolutely indispensable:

1. Monetarization level.

2. One cleansed of all GDP “admixtures” and adjusted to all changes in accounts payable and receivable.

3. The average monthly family budget income-living wage ratio.

4. Production efficiency (an extremely important index which is “overlooked” in Ukraine for reasons best known to the parties concerned).

5. Energy-output ratio.

6. Banking system capitalization level.

7. National stock index.

8. GDP-banking-system-equity-capital ratio.

9. Industrial structure and energy-output share therein.

10. Crop yields. Actual trends in the economy can be detected, studied, and adequately responded to — even in an emergency — only by instituting an unbiased evaluation system. Soviet approaches, juggling facts and figures, high-level hot-air sessions, populism, and mentality originating from what this author describes as Homo Soveticus , are leading Ukraine into a virtual world, thus providing opportunities not only for massive hoaxes, but also paving the way for so- called oligarchs. Virtual realities are good on one’s PC screen. If we want to live in a prosperous country, we should first of all turn off such virtual images.

By Serhiy UDOVYK
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