A Truckload of Commitments

The new Ukrainian cabinet will submit a revised draft 2005 budget bill to the Verkhovna Rada on March 15. According to President Yushchenko, the bill will envisage the implementation of his campaign promises. “We undertake to carry all program statements that we made during the campaign. We’re paying special attention to our social commitments,” said Mr. Yushchenko, emphasizing that “It’s a package of compulsory payments that will be financed by the 2005 budget.” The Ukrainian head of state also briefly listed the sources that will allow the new government to maintain a high social standard, including a revision of the policy on free trade zones and territories slated for top priority development (these zones are expected to yield another 7 billion hryvnias in revenue); “fresh approaches to the management of state property, particularly with regard to Ukrzaliznytsia, Ukrnafta, and Naftohaz Ukrainy (expected to yield another 5-6 billion hryvnias); the cancellation of all corporate privileges (another UAH 15-18 billion); and reprivatization (UAH 20- 25 million). Mr. Yushchenko declared: “I’m convinced that we will have the most socially targeted budget program in 2005, that we’ll be able to make up for the 15 billion pension fund deficit, 9 billion state budget deficit, and to carry out those commitments that were laid down in the draft presidential edicts.”

The current president’s budgetary optimism, however, strikes a discordant note with recent statements by Finance Minister Viktor Pynzenyk. As a veteran in the fiscal battlefield, the minister has indicated that the 2005 budget bill “contains serious systemic problems that cannot be left unresolved because they are ruining the national financial system...This budget must have a considerably greater deficit than what has been committed to paper. This is largely because of pension fund payment problems.”

Budget and pension fund problems were also discussed at a roundtable organized jointly by the Institute of Economic Studies and Political Consultations and the Friedrich Ebert Foundation. Projected social transfers from the government to the population were recognized as the principal destabilizing factor of the budgetary process, considering all the inflationary risks that are involved. Even though Viktor Yushchenko is among the founders of the institute, one of its key findings reads that it would be best to carry over all such social promises to the year 2006, since implementing them, even with an increase in revenue, might cause the 2005 budget deficit to reach a record-breaking 5%. The recommendations of experts boil down to expanding the taxation basis and enlisting additional sources to increase budget revenues by cutting state assistance to the population. Interestingly, the institute’s findings are not that critical of the 2005 budget bill (its prognostications are acknowledged as realistic and not subject to any revision). The biggest fears concern two bills passed by the Verkhovna Rada after it approved the budget bill (shortly before the political crisis stemming from the presidential campaign, which ostensibly heralded a new parliamentary campaign).

These are bills about establishing a minimum pension equal to the subsistence minimum and about additional increases (up to UAH 423) of the subsistence minimum (UAH 382 per month, according to the current budget program). These decisions represent UAH 13.5 billion. As mentioned earlier, the minimum pension allowance will exceed the minimum wage.

Ahead are the parliamentary elections. According to certain estimates, the coalition in power can win only by issuing the electorate no less than UAH 20-25 billion. This is the minimum sum of expenditures from the budget, which will enshrine the campaign promises. It looks as though no one, neither the Verkhovna Rada nor the president nor cabinet, will dare cut social spending. Economists, however, claim that this is precisely the remedy for today’s Ukrainian economy. Viktor Lysytsky, Pryvatbank’s number-one advisor, who can hardly be accused of harboring any ill will toward the current government, is urging that these farfetched social commitments be discarded. A deficit-free budget program should be formulated without any foreign loans and without channeling the revenues from privatization to plain subsistence. Referring to the huge popular trust vested in the new Ukrainian president, Mr. Lysytsky, one of Mr. Yushchenko’s closest associates, suggested that the new government ought to sacrifice some of its current popularity by annulling some social benefits, stressing that deliberations of the new budget bill should be kept transparent to avoid what happened last year. Mr. Lysytsky admitted, however, that he is not sure about certain aspects of the project. It appears that truly realistic proposals may not be heeded. Now is not the time to stage an act of self-immolation. It’s time to drive that truckload of campaign promises.

COMMENTARY

Volodymyr MAISTRYSHYN, member of the VR budget committee:

Any budget program proposed by the Yushchenko cabinet will be approved. This will be the political will of the current government and head of state. It should be kept in mind that this administration will be allowed one or two such attempts. I’m reminded of an old Soviet joke about a dairymaid, who was asked how much milk she could get out from one cow each day: fifteen, twenty, thirty liters? She said “yes” to fifteen and twenty liters, but then added that thirty liters would be pure water. Likewise, this government could certainly build up its revenues. But will this increase be real? For example, they want to close down all those free trade zones. So will this mean an instant increase in the wellbeing of the population? I am not at all sure that this will happen. International practice shows that the most that the Ukrainian budget can count on is 20-25% in losses now being debated. Yet no one seems to consider the political consequences of this approach. Therefore, in my opinion the new government will have to think long and hard about this problem. Although from what I know, this government isn’t likely to heed anyone’s proposals, not at this stage anyway. Suffice it to say that in the current state of tension, the Verkhovna Rada’s Budget Committee, of which I am a member, is not working and not studying the most important issue. By now cabinet should have come out with certain proposals. That we-know-it-all-and-will-solve-all-problems approach is possible under the circumstances. But it will be their responsibility alone. I am not against the planned 3 or 3.5 or 4% budget deficit. Many governments are known to have worked with such a deficit, eventually turning it into economic growth. I can only wish this new government Godspeed to work out the correct formula. As for canceling the laws associating pensions with an increase in the subsistence level, no one will do anything about this now. Unfortunately, there is another election campaign in the offing.