Budget Castling in Political Game

When approving the 2000 budget program in the first reading, the Verkhovna Rada left out of its resolution the clause instructing the government to take into account all of the budget committee’s changes and amendments. On November 28, it turned out that the Cabinet had resolved to reject a large part of the committee’s proposals aimed at increasing budget revenues. NBU head Viktor Yushchenko said that the Cabinet was “sending the budget bill for a second reading, and the income items are increased by about two billion hryvnias” (instead of Cabinet’s proposed UAH 13.65 million). Mr. Yushchenko further stated that such increased budget income items “are not due to the mobilization of new revenues,” but are the result of attaching part of the social funds to the budget. He described this as castling which, however, did not indicate quality.

This article defends the Budget Committee’s stand in the matter, but the Editors are also willing to let the other side express its view.

Ukraine’s budget process is characterized by a multivector direction. The Cabinet of Ministers and the Verkhovna Rada Budget Committee are acting on the tug-of-war principle. While the committee proposes innovations, the Cabinet shrugs them off. This results in deformed budget relationships, leading to the yearly underplanning of current budget expenses, the absence of a balanced budget sphere spending reduction program, along with the annual nonfulfillment of the budget revenue items at all levels, have caused staggering mutual liabilities to taxpayers, especially between the energy monopolies and the budget. Hence the question arises of whether we can change to normal monetary settlements without clearing the debris of all those mutual arrears that continue to accumulate.

When working out the 1999 budget bill, the Budget Committee developed a debt-repayment mechanism. The Cabinet resisted it for quite some time, actually offering nothing instead, thus insisting on preserving the process of piling up mutual debts. Still, the committee succeeded in adding Clause 45 to the 1999 budget, authorizing mutual settlement of arrears between energy companies and state and local budgets. The 1999 experience shows that this approach has more positive than negative aspects. One could say that part of that central and local budget deformity was reduced. Now that the Cabinet has such positive experience, the next logical step would be stipulating similar procedures in the 2000 budget bill. This did not happen, and the Budget Committee once again initiated such mutual settlements. True, this year the move was easier to justify precisely because there was that positive experience.

Consider another episode connected with the search for new sources of budget revenues. The government proposes to accumulate in the budget 20% of the depreciation deductions from enterprises under all patterns of ownership. The Budget Committee regards this as the imposition of an additional tax and in turn proposes a more lawful means of getting such returns. In our opinion, the net profits of state enterprises could be regarded as state revenues, and a compulsory budget deduction ratio (for example, 50% of net incomes) could be imposed. This is practiced by other democratic countries. The total amount of such budget returns may be more than that of the depreciation deductions, while observing the law; the state would thus manage the profits of only state enterprises and not private ones as in the case of depreciation deductions; such deductions would be exercised only if there are net profits.

The third problem in the Cabinet-committee relationship is the budget surplus and how much to be channeled in servicing the public debt. For the past two years the Budget Committee has defended a zero budget making it possible to stop building the debt pyramid. The Cabinet understands this, so it decided to repay some of the foreign debt principal using budget tax returns, stipulating a surplus of some UAH 550 million. The Budget Committee, however, believes that this amount will not solve the problem. The capital amount of the public debt falling on 2000 should be recredited (meaning some $3 billion) and tax payments used for the budget’s internal needs. The Committee believes that in the course of negotiating the issue with international financial institutions as creditors the matter of restructuring the funds servicing the debt obligations must be broached.

A lengthy debate is underway, focused on the relationship between the overall state budget and local ones. The committee proposes mechanisms of inter-budget relationships guaranteeing local self-government bodies and entire regions adequate independence of the center. The 1999 budget program, apart from increasing the actual volume of local budgets (by approximately UAH 2.5 billion, compared to the program the Cabinet proposed), for the first time developed a mechanism of guaranteed regional subsidies. Progress report on the 1999 budget (at least with regard to three quarters of the year) shows that this mechanism worked and that the regions did receive 71% of the amount of such subsidies; the year’s results will show that these subsidies were received in full, while in previous years, when no such mechanism was used, certain regions received up to 50% of such subsidies.

In addition, the committee proposes changing to the system of local budget formation, allowing for the per capita availability of funds in terms of such budget sphere sectors as education, medicine, culture, social protection, and municipal management. In our view, when forming local budgets, one should bear in mind the region’s tax bases, the demographic factor, and how much the local authorities are interested in enhancing local budget revenues.

However, the Cabinet adheres to its old stand in all these issues, a stand inherited from the Soviets, causing the centralization of budget funds, under new conditions, mainly on the upper budget floors (central and oblast levels) with the liabilities and social problems heaped up on the ground floor.

True, there are certain innovations in the budget process. For the first time this year the committee’s proposals were not flatly rejected by the government. The result is that the budget bill was approved in the first reading and the Cabinet agreed with a number of Committee findings, submitting them for processing and inclusion in the budget to be considered by Verkhovna Rada in the second reading. Unfortunately, the Cabinet is again backpedaling, just like last year, returning to Parliament its original version, even though slightly edited. The wrangling goes on.