“A Straight Talk”

Joining the presidential race, the now ex-prime minister Viktor Yanukovych put emphasis on social commitments of his government and generously used budgetary funds to meet these. Accordingly, the other candidate, Viktor Yushchenko, elected president in a rerun vote, tried to keep abreast and was making equally lavish promises. Moreover, the winner cannot renege on these promises because they helped him enlist the required votes. But will the social programs hyped during the election campaign be too onerous a burden on Ukraine’s economy? This seems to be the main question that worries today the economically active individuals and business people. As the parliamentary elections are coming on, all the parties that strive to win seats in this country’s top legislative body and be able to form a government will be, naturally, focusing on social programs. Will a wave of populism sweep across Ukraine?

This may well happen. Later last week the Verkhovna Rada managed to override by a wide margin (417 out the 365 present) the President’s veto on the law that sets a subsistence level of 423 hryvnias for 2005. Was it a well-considered and sensible decision? Commenting on this, Petro Poroshenko, chair of the parliament’s budgetary committee and a likely candidate for prime minister in the new cabinet, noted that raising the subsistence level in Ukraine to UAH 423 a month would entail additional public spending of about UAH 1.5 billion in 2005. At the same time, he thinks it is quite realistic for the state to meet its social commitments in spite of an increased subsistence level, “We voted for it, this was our position, and we insist that the state should look people squarely in the eyes and say honestly: yes, indeed, we are not going to persuade anybody that 250-280 hryvnias is enough to live in this state,” Mr. Poroshenko said. In his words, the new subsistence level proves that the state is determined to bring public incomes closer to this figure. “This is the example of a straight talk with the state,” he added.

The budgetary committee head is sure that it is possible to raise the modified 2005 budget’s revenues by UAH 10 billion, without changing the level of deficit and borrowings. Mr. Poroshenko intends to do this “by way of expanding the taxation basis, canceling privileges for economic entities, abolishing free economic zones or canceling partial exemptions of the latter from paying basic taxes.” He hopes that the adoption of a new tax code will make it possible to essentially broaden the taxation base, and increase revenues in the budget, with due account of all the commitments Viktor Yushchenko’s team made during the election campaign. Mr. Poroshenko also pointed out that the opposition had earlier backed the draft 2005 state budget proposed by the outgoing government because it believed that the increased social benefits, including pensions, should be paid out in good time and in full amount.

Budgetary billions may be looking good on paper, but will they find an equally easy way to the state treasury? Viktor Pynzenyk, Poroshenko’s party fellow and another candidate for prime minister, thinks that this country is for the first time facing a situation when 30% of the Pension Fund needs to be subsidized because of an acute shortage of cash and failure to effect payments to pensioners. He also insists that the state budget be radically revised. Still, in Mr. Pynzenyk’s view (apparently shared by Acting Prime Minister Mykola Azarov), the state will have to use the instrument of additional payments until wages have been raised by 20-25%, so that the public sectors and industrialists could outlay sufficient money for the Pension Fund. “We must redistribute resources in the new draft budget and, for the time being, slim down some expenditure items, redirecting their money to the wages fund. This decision will boost revenues because it will stimulate growth of the national economy. A 10 billion-hryvnia-worth additional growth of wages in the public sector is a good incentive for domestic demand,” said the economist who knows, not by hearsay, the inflationary price of so big amounts of money thrown into the consumer sector. (We learned a proper lesson at the end of last year.) How is the government going to protect this country against a new spiral of inflation? What means will be used for raising wages and pensions? No answer so far.

Ukrainian business is worried about irregularities in these matters. Ihor Mazepa, general manager of Concord Capital, says the Verkhovna Rada has passed a non-transparent and vague budget for 2005. In his words, both presidential candidates were making very similar and sometimes practically the same commitments basically aimed at the social sphere. Mr. Mazepa doubts that this part of pre-election promises will be fully kept because it may be difficult to raise the projected budgetary revenues. The businessman notes that some utterances of prospective ministers show that “the question is not to make administration and tax collection more effective but to broaden the taxation base, i.e., introduce new taxes.” In other words, businessmen will be “invited” to bear responsibility for somebody else’s pre-election promises. If the new government fails to find sources of additional budgetary revenues or improve the existing taxation, it will be very difficult to meet the social commitments of the previous government. The new president, too, is unlikely to agree to cut back what was promised and, incidentally, began to be fulfilled before him.