Budget draft 2012

The parliament has approved the government’s major macroeconomic recommendations for 2012: decrease the budget deficit to 2.5 percent of GDP, boost GDP growth from 4.5 percent to 6.5 percent, bring inflation down to 7.9 percent and the unemployment rate to 7.2-7.7 percent (based on International Labor Organization methodology), and maintain the hryvnia’s exchange rate within the range of 7.9-8 hryvnias for a dollar.

The government also recommended a decrease of the sales rate (and, consequently, revenue) on alcohol, beer and tobacco (due to the increase of excise rates), revenues from land payments and providing administrative services. At this, the budget deficit is planned to be reduced mainly by means of internal loans. “A decrease of state debt as a percent of GDP to the level of no more than 30 percent is expected,” Finance Minister Fedir Yaroshenko told parliament while presenting the budget resolution.

Next year the state is also ready to allot one percent of GDP under state guarantee, although it will be exclusively designated for investment and innovation projects for the development of the economy’s export potential. In Yaroshenko’s opinion, the activation of production and an improvement of the investment climate will influence the economy the most.

How realistic are these figures, given the current economic situation? What should the government do for their plan to become reality? The Day asked experts to comment.

COMMENTARIES

Volodymyr LANOVY, former minister of economy of Ukraine, president of the Center for Market Reforms:

“This prognosis is very optimistic. This is a kind of nice picture that everyone likes, but it is difficult to realize it in practice. Why do I say so? I’ll remind you that the 2011 budget didn’t presuppose an increase of salary expenses or pension growth. But now this decision was revised. To maintain a peaceful situation in the society, the government has to refuse from the previously announced freeze on salary and pensions growth. To pay for all these new expenses the government will have to incur more debts. This will accelerate inflation. Therefore, in late 2011 the consumer prices index will grow to some 19-20 percent, though when the budget was approved they promised 10 percent. Another reason for difficulties with the realization of the budget for 2012 is that the advertised modernization of the economy is actually not taking place. If it doesn’t exist, what additional production efficiency and revenues are they talking about? And the government’s intention to wipe out the budget deficit mainly by means of internal loans means that enterprises can actually forget about bank credits for modernization. In my opinion, to minimize all these budget risk factors, today one should accelerate economic modernization, increase the crediting of enterprises, and be economical.”

Iryna SHCHERBYNA, director general of the Institute of Budget, Social and Economic Studies:

“The only concern is the inflation rate. While one can’t say it’s too understated or overstated, 7.9 percent is the inflation rate set for 2012. However, taking into account the fact that already today the policy of increasing the population’s active income (the government announced an increase of salaries in the budget sphere) is observed, this will in a way influence the growth of inflation risks, because inflation depends on internal demand. Therefore, most likely, inflation in 2012 will be 2-3 percent more than the rate the government stated. We expect it will be within the range of 10 percent. We also agree with the conclusions of other experts, for example, the World Bank, that next year GDP growth will constitute not 6 percent but 4.5-5 percent. In order to reach the figures stated in the budget resolution, the government needs to keep to the established policy of currency regulation and economical regime with a simultaneous, efficient use of budget revenues, and decrease the debt load on the budget.”