“There is no safety cushion for an economic accident”

Are the president’s social initiatives going to improve the well-being of Ukrainians? This question is a topic of numerous discussions now, and their conclusions are not positive for the most part. Conducting scholarly discussions, during which the experts abstract away from their own problems and deal with the nationwide statistics and interests only is one thing; the personal feelings of the citizens is a completely different one. For example, the government has slightly raised the salaries for the Academy of Science institutions, even assigned some funds for their development. But housing bills, electricity were left unattended. And local authorities were forced not only to deprive the scientists from their bonuses for academic degrees, but to send them on “voluntary” vacations at their own expense. A professional union stood up to defend the workers of one academic establishment. But the director reproved the activists quickly by saying that the ones who do not want to go on vacation might as well fall under staff reduction; and if they did, he kindly asked them to inform him where they managed to find another job, if they did at all.

THE ELECTOR’S FISCAL DILEMMA

The new Finance Minister Yurii Kolobov is said to have stated a seditious thing during the pre-election period. Supposedly, he appealed to the entrepreneurs and the general population to brace themselves for the tax increase, since it would be impossible to implement Yanukovych’s social initiatives without it. Meanwhile, the mass media is already thrashing over the Finance Ministry’s set of tax initiatives, which are supposed to refill Ukraine’s budged with 7.4 billion hryvnias. And this is not just the luxury tax. The experts state that the main pressure is going to be put on the consumers, and is going to cause the decrease of budget revenue from tax instead.

But the Party of Regions already thinks that though the social initiatives were not implemented yet, they have already reduced the protesting mood within the society. They also link this to the increasing level of trust to the government. But what can be more dangerous than self-deception? However, Vadym Kolesnichenko, the Party of Regions faction deputy head, talks about “the real sprouts of trust for the government in the society” and states this is “the evidence of the fact that the society is going to support this government.”

Last week the leading economic experts debated over the level of trust for the government at the peak of political pre-election cycle. Oleh Ustenko, director of Bleyzer Foundation, says that as a rule, the current government “is going to try to increase the budget spendings before the elections.” The expert is sure that the impact of this on the inflation level will be seen right after the elections. But the opposition uses the same arguments, in his opinion. For the elector this means that the government lays the foundation of the inflation, and in case a new political force comes to power, they will also need to fulfill their election pledges. “Therefore a double inflation pressure is formed, which is called a fiscal dilemma for the elector,” Ustenko sums up. He says that “the macroeconomic policy is seen by both government and opposition as means of the maximizing of electoral support,” since electors tend to judge the competence of politicians at the moment of elections, since they do not possess the information about the future risks and pre-election budget machinations. At the same time, Ustenko notes that the research carried out by his foundation showed that a stable budget deficit can lower the chances of re-election of current politicians, and vice versa, the politicians who managed to stabilize the state funds have more chances to be re-elected. The expert thinks it is dangerous to let the weakening of budget policy take place before the elections, since the electors take inflation processes very close to the heart.

PRE-DEFAULT PIT

According to Ustenko, the national currency rate is viewed rather as a political factor than an economic one in our country. Therefore, it is of huge importance for the politicians from perspective of electorate mobilization. As a rule, before the elections the National Bank of Ukraine throws gold and currency reserve into the market to stabilize or even strengthen the currency rate.

The expert points out that there will be a two-year calm period in the electoral process after the 2012 parliamentary elections. This will give an opportunity to carry out some necessary reforms, even though they might be painful. But there are things to be worried about here too, Ustenko thinks. There is no safety cushion in case an economic accident takes place. Instead, there is a state budget, brought out of balance by pre-election pledges. Given the conditions of unstable external capital markets and limited abilities in financing involvement, serious structural deficit in Ukraine may be a cause of such negative consequences like pushing private investments out, short-term state debt accumulation, and the increase of its service costs.

Vasyl Yurchyshyn, economic programs director at Oleksandr Razumkov Center, interprets the “calm period” after the 2012 elections in a slightly different way. According to him, it is going to be quite a peculiar period. There are a few things the expert is concerned about: a debt pyramid that has already been build and a pyramid that is being built, and also the problems in energy sector. Besides, the expert does not see any ways of increasing export and decreasing import. He is worried by the reduction of gold and currency reserves of Ukraine, and that is why he foresees we are to experience a devaluation shock.

The 2012-13 risks level is not going to fall, and Yurchyshyn’s overall conclusion is that neither this year nor the next one the changes are likely to take place, and if they do, they will not be the positive ones. Here the expert refers to the Razumkov Center poll, which states that the economic situation in Ukraine and the citizens’ evaluation of it get worse during the post-election period, as a rule. This is due to the electors’ deep disappointment in their political choice. Expert sees system problems in the economic policy of the country. The main one is debts, the overall amount of which has already exceeded the level of state reserves and is about 10 to 15 percent of GDP. As a result, the country ends up in the “pre-default pit.” The gas import compound is no less significant. According to Yurchyshyn, net value of imported energy resources is 14 percent of Ukraine’s GDP. And if prices of oil are going to increase further on, this number may ascend to 17 to 19 percent as well. And where is Ukraine going to get resources to cover these expenses?

ARE THE “ELEVATORS” GOING TO PULL US UP?

“I will promise a whole bunch, but will do my best not to keep my word,” this is the short description of the government’s pre-election approaches given by Valerii Hladky, director general at the BEST Analytical Center. He calls the luxury tax, that the government intends to carry into effect, a tax for the middle class, not for the rich ones. He predicts that as a result, the government is going to lose the votes of the middle class as well. But whose favor is it going to win? The expert emphasizes that the present economic policy looks more and more like manual division of limited resources using some unintelligible criteria. It is not clear, what regions and what sectors of industry receive the budget money, Hladky says. According to him, the largest part of budget money is going to be assigned to the regions where current government is supported the least, and to those sectors, where it will be possible to gain the support of business. “The main mistake in the government’s pre-election policy is their focus on swift victories: Tax Code never worked, Customs Code is never going to work, permit system never worked, land reform slowed down considerably.” Fooling the electors with these projects is not going to work either, Hladky thinks. He estimates that the rate is going to jump up to 50 percent, and the myth about low inflation will be done with. The expert thinks the country needs a different policy.

Is that what Valerii Heiets, director of the Institute of Economics and Forecasting, Ukraine’s National Academy of Science, was talking about? Though he called it “an attempt to solve the worldwide inequality problem,” and pointed out that he does not know what the final result is going to be. According to him, this policy is about shifting some problems to the “high-income social stratum,” people who possess excessive property, luxury items, and get their wealth from the uncontrolled access to the country’s resources. “This would set the stresses in an absolutely different way,” Heiets hinted at the elections campaign, which so far is developing not to the government’s benefit. He also said he could give other examples. He did mark one of them, saying that a new body of documents was to be announced soon, which would expand the government’s social initiatives. “It is going to influence employment, income, and is going to form some ‘elevators’ that work really bad in Ukraine nowadays. This is another attempt,” said Heiets, and noted, “if it is going to be realized in the way I see it, it is going to have both pre- and post-election consequences.”