Will the Tax Code distabilize the budget?

The government plans to submit the draft budget for 2011 to the parliament when the head of the state signs the Tax Code. Ukraine’s Finance Minister Fedir Yaroshenko announced this on Friday, November 19, reporting before the parliamentarians during the government’s hour. The numbers for next year reported by the finance minister were: GDP growth of 4.5 percent, inflation at 8.9 percent, and decreasing the state budget deficit by 37 percent compared with 2010 — to 34 billion hryvnias. Generally, according to the official, the draft budget will be prepared based on the revised tax policy and will become a transition stage from the “patience economy” to stable economic development.

At the same time, the head of the parliamentary committee for industry and regulatory policy and entrepreneurship Natalia Korolevska believes that in 2011 the budget can be repeatedly revised because of the Tax Code. “It is impossible to predict what the ­bud­get revenues will be as a result of the repressive measures presupposed by the Tax Code. This will lead to repeated revisions of the budget in 2011. Social items will be cut down, decreasing the people’s living standards,” RBK-Ukraine quotes Korolevska as saying.

Besides, in the opinion of the head of the parliamentary committee, while approving the code, deputies did not take into account the amendments that would save small and medium businesses from being destroyed. Korolevska reminds that the share of such entrepreneurs in the formation of the GDP constitutes about eight percent. Only in 2009 enterprises of this sector paid over five billion hryvnias in taxes and charges to the state budget. Therefore, after implementing the norms of the new Tax Code hundreds of thousands of entrepreneurs will have to curtail their activity and ­bud­get revenues will fall by billions of hryvnias. Limiting even a small part of entrepreneurship will lead to the abrupt unemployment growth and aggravation of the social-economic situation, warns Korolevska.

One can be sure even now that the budget for 2011 will hardly be stable. The military can be one of the first to feel the lack of funds next year. As UNIAN reports, referring to Ivan Marko, the Finance Department director of the Ministry of Defense, the government will cease financing the state programs on creating corvette-class ships, An-70 planes, and the modernization of helicopters.

Who will be able to grow if the 2011 budget is adopted based on the revised tax norms, and who will have to continue experiencing the “survival economy?” How advantageous for the budget will the new “sustainable development” philosophy be?” The Day asked experts about it.

COMMENTARIES

Valentyn BADRAK, director of the Center for Army Research, Conversion and Disarmament:

“Discontinuing the financing of state programs on creating corvette-class ships, An-70 planes, and the modernization of helicopters are very problematic things for the army. Though these projects are not directly connected with the issues of the country’s defensive capacity, they allow Ukraine to develop military-technological cooperation. This parti­cularly concerns the corvette project, which helped us work with Western technology.

“Next year’s budget will not be able to stop the stagnation of the Ukrainian army. The armed forces themselves have a very low confidence in the government, in its statements about improving their situation. If this persists, unfortunately, in 2-3 years the state of the Ukrainian army will be catastrophic.

“According to our estimates, which we presented earlier this year, expenditures of at least 17.5 billion hryvnias are necessary to stop the degradation of the Ukrainian armed forces. At this, it would be necessary to allot 500-700 million dollars annually to buy new weapons and modernize the old ones. In 2011 these figures will be even higher. The funds allotted today allow for only small repairs and maintaining the existing weapons.

“The army is an institution of potential aggression containment. But today this institution doesn’t work in Ukraine. The weaponry of the Ukrainian army is a generation behind the weaponry of leading countries, which would not allow it to adequately react to any potential aggression.”

Volodymyr DUBROVSKY, senior economist, member of the supervisory board of the Center for Social and Economic Research Case Ukraine:

“At present, the government is hastily cutting the budget for next year. Therefore the ‘creation effect’ will likely be miserable. Curtailing the kinds of entrepreneurial activity that can work based on the simplified taxation system means that the budget ­re­venues will be cut as well. I want to remind that after introducing the simplified system the budget got almost six billion hryvnias extra revenue. Besides, there is a risk that people who would lose their job due to this will claim state welfare benefits. This is an additional expense for the budget. Generally, all these factors can have a destabilizing effect on the budget process — the budget deficit will increase. In my opinion, for this reason the budget deficit will increase by several billion hryvnias. However, the main risk for the budget and economy generally lies in something else: the tension in the society continues to increase because of the approved code. This can lead to social disturbances. And if people start riots, they don’t pay taxes.”