Budget Risks
Next year will be extremely difficult for the budgetary process, opines Vadym Pishcheyko, chief of the Macroeconomic Forecasts Department at the Ministry of the Economy, during the public hearings on the 2004 draft budget. According to him, in drafting the 2004 budget the deputies followed a conservative scenario in order to offset the possible economic risks. “The budget should not unbalance the country’s financial system,” Mr. Pishcheyko stressed. Among the main risks for next year’s budget the government cites lower prices for metal products, higher oil prices, economic recession in the countries that are Ukraine’s major trade partners, and unfavorable weather conditions (beforehand? — Ed.) for agriculture. Mr. Pishcheyko also pointed to the high growth rate of monetary aggregates (cash on hand, monetary base, and money supply — Ed.), which means long-term inflation risks.
According to Mr. Pishcheyko, the main risks are due to the fact that the government expects Ukraine’s economy along with budget receipts to grow above all as a result of businesses leaving the shadows. However, the Ministry of the Economy is not quite sure that businesses will demonstrate their trust in the government in quite this way. Foreign investors are not likely to put more money into the country’s economy either, since the government expects foreign investors to mark time until the presidential elections.
The 2004 budget is different from all previous ones in that it will be fulfilled under the tax reform. Above all this applies to the reduction of the income tax to 25% for enterprises and a flat tax rate of 13% for individuals. The reduction of the tax pressure (with the resulting curtailment of budget receipts) will be accompanied by an increase in the minimum wage in the public sector to UAH 237, for which purpose an additional UAH 5 billion is needed. However, despite all the complications the top priority of the 2004 budget, according to Deputy Finance Minister Anatoly Shapovalov, is increasing its social orientation. In particular, the draft budget envisions an additional UAH 1.5 billion for social payments, up 12% from 2003.
The government plans to balance the budget by introducing so-called compensators, some of which, according to Mr. Shapovalov, are unpopular. The Association of Ukraine’s Taxpayers has already voiced concern over certain budgetary innovations. Such measures as returning VAT in the form of bonds, removal of 15% of after-tax profits, limitations on amortization of costs, and so forth, according to Association Chairman of the Board Volodymyr Pustovoitovsky, will adversely affect the financial standing of enterprises. Moreover, he believes “a major offensive on small business is underway.” To illustrate, the draft budget envisions increasing the minimum rates of fixed taxes five to ten times and the maximum rates up to three times. Such a move, according to Mr. Pustovoytovsky, could cause many businesses to fold. This could lead to higher unemployment, dwindling budget receipts, and growing social tensions.
