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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

Political Economy 

22 December, 1998 - 00:00

Our National Specifics of Budget Manipulations


Speaking of bread and circuses, there will be plenty of circus for the
next month, if not longer, courtesy of the Swiss authorities and Pavlo
Lazarenko.

It would be interesting to know precisely when Mr. Lazarenko became,
as his lawyer describes him, a successful businessman. Considering that
until March 1998 he had an uninterrupted record of public service, alternating
between appointive and elective posts, later getting a full-time job as
a People's Deputy. When could he have found the time to launch and make
his spectacular career in private business? Perhaps the case will turn
up not only two passports, but also two different work histories?

Now this is just an observation for general discussion. The point I
want to make is different. Since there is going to be enough circus in
Ukraine, at least in the immediate future, it seems worth concentrating
on the bread, namely the 1999 state budget. There is a tendency for the
goal to get lost in the budget process.

Historically our nation's budget is anything but our fundamental financial
instrument an perhaps not even a determinant of national economic development.
Traditionally, through the budget process our "progressive" government
demonstrates to international financial institutions the complexity of
its relationship with the "leftist" Parliament, just as the latter convinces
the electorate that the existing regime is against the people. In the end,
the approved macroeconomic indices usually do little to satisfy either
of the opposing sides. Courtesy of the IMF, the budget show's key intrigue
has for the past several years remained approving the deficit. There is
a standing procedure of guessing what it will be: the Cabinet proposes
reductions and the Verkhovna Rada resolves bullishly to increase spending.
This year, however, saw a new twist when Yuliya Tymoshenko, Chair of the
Budget Committee, fancifully came out with the idea of a balanced budget,
embarrassing even our battle-hardened government. The best the Cabinet's
adventurous economists came up with was 0.6% budget deficit. But a deficit-free
budget! Yet all Ms. Tymoshenko really did was to take the government's
own economic policy guidelines to the absurd.

After all, was it not the Cabinet that constantly stressed the need
to increase budget revenues? Of course, one can fantasize all one wants,
but against the backdrop of GDP decline this strategy means over 35% gross
product redistribution via the 1997 consolidated budget, about 30% via
the 1998 budget, and further increase to 35-36% in the Cabinet's draft
budget program. To the man in the street and various business entities
this means a much heavier tax burden. So why blame the Budget Committee?
Ms. Tymoshenko proposed to redistribute 48.3% of GDP through the budget.
So what? Maybe she did it because she has deeper insight into the executive's
logic. Actually - and some government officials admit as much - the budget
has been receiving 27% GDP year in and year out. This is roughly the tax
burden brought to bear. Everything over and above this percentage is being
squeezed out of the taxpayer without any use for the economy.

The Budget Committee demonstrated as keen insight when determining future
budget expenses. The Cabinet's proposed Hr 33.4 billion was easily transformed
into Hr 45,058,000,000. Most likely this unprecedented generosity is explained
by method of drawing up the budget dating from early Soviet times: determining
needs first and then looking for ways to supply them. Suppose the Budget
Committee intuitively determined precisely the level of spending that will
be finally bulldozed from the government by various pressure groups in
1999, perhaps at the expense of a hidden budget deficit, in which case
the government will not be able to lower the amount to be spent according
to Ms. Tymoshenko. Years of budget approvals show that planned and desirable
budget expenditures can be spared Parliament's encroachments only by holding
the fort and hoping for the best. If the amount in the draft budget program
is increased, Verkhovna Rada will never reduce it, and the result will
always be the same: the revenues required will never be received, expenses
will be met by borrowing, and the traditional nonpayment problem will remain.

People's Deputy Viktor Suslov believes that the Cabinet and Budget Committee
still have a chance to save face. Last week Valery Pustovoitenko declared
the possibility of fixing foreseeable inflation for 1999 up to 24%. If
the government adjusts the budget parameters accordingly, it will be able
to receive nominally something close to the figures proposed by the Budget
Committee. This will not increase the book value, but will allow both the
Cabinet and Ms. Tymoshenko to demonstrate their unswerving principles.

In general, the government should be thankful to Ms. Tymoshenko for
manipulating the figures so elegantly, neutralizing the entire Left in
Parliament. Only recently the Cabinet's slightest mention of reducing the
deficit would be taken by the Left almost like a threat to world progress.
Now even the Communists, dazed by the Budget Committee Chairperson's personal
charisma, believe in the possibility of social justice and a balanced budget.
Provided Ms. Tymoshenko and Mr. Mitiukov can continue playing good-cop-bad-cop,
the 1999 budget could actually be passed before New Year's. Artfulness
can work miracles in Ukraine, and even Parliament can be made to trust
a document based on pure fantasy. However, the international financial
institutions are a different story, and they might have some doubts about
the 1999 budget's sincerity.

I don't know about anyone else, but my feeling is that real budget reductions
in Ukraine are needed only by the IMF. Of course, year in and year out
the Cabinet reports on spectacular attainments in this sphere, but it does
not sound absolutely convincing that such self-imposed restrictions are
actually needed. In actuality, however, there is no self-regulation. It
is true that the stated 1997 budget deficit (6.2% GDP) is a bit lower than
in 1995 (6.6%). In 1998, the government hopes to keep it at 2.5%, yet experts
point to a tangible increment in 1995-97 accounts payable at state enterprises
(including arrears on wages and outstanding loans): from 2.16% to 6.97%
GDP. In other words, the true dynamism of the public debt looks as follows:
1995: 8.43% GDP; 1996: 8.08%; 1997: 10.69% (courtesy of Kvartalni peredbachennia
{Quarterly Forecasts}, July 1998), meaning that what we really have
is not a lowering but a rising deficit, and this can also be predicted
for 1998, proceeding from staggering domestic debts. Thus, the official
budget deficit (0.6% of GDP) is as unrealistic as Parliament's balanced
budget project.

In fact, a budget deficit something like 5% in a developing economy
does not spell disaster. On the contrary, such a level is often the case
and in Ukraine, whose economy is in a reform phase, a limited budget deficit
could well serve as a source of economic investment. This is precisely
what our industrial and agrarian managers have in mind in demanding increased
subsidies. Their intentions might be good, but the results are worse than
dubious. We already have a bloated budget deficit, and one can only wonder
exactly what creative purpose its authors had in mind working on the document:
infrastructure growth, hi-tech output, modernizing agriculture, or maybe
expanding people's buying power. It remains anyone's guess, so why all
the fuss about preserving high budget spending, let alone further increasing
it, when nobody has the slightest idea about how to put this money to good
use? Pumping up the state budget to further raise the top level bureaucracy's
living standards can hardly be described as effective use utilization of
resources.

It is also true that a balanced budget is possible in principle, but
only when irrational budget spending is rigidly controlled. In the case
of an "unpopular" budget, this unpopularity must imply not only the victims
of government social protection programs or those struggling to survive
below the poverty line, but also infringe on the economic ambitions of
the government bureaucracy. The situation actually looks quite funny: the
IMF insists on deficit reduction, just curbing bureaucratic appetites,
and Ukraine resists this with all the government machine's might. And the
funniest thing is that those watching the process cannot but feel that
those in power cannot quite keep their own grasping reflex under control.
If so, maybe it is time Ukraine and its leadership were subjected to outside
supervision.

By Olha LEN

 

 

 

 

 

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