How the State Owes Itself
Ukraine has found itself on the brink of a budget crisis. According to a State Tax Administration report, a mere 75% of projected revenues were collected in taxes in May, with state-run entities emerging as the main debtors. STA Deputy Chairman Vadym Kopylov said that his agency will toughen control over the entities piling up red ink. Large enterprises that reported losses in May will clearly be subject to audits, and the promised increases in pensions and wages to employees of budget-supported organizations due on July 1 could become just more proverbial pie-in-the-sky. No wonder, following increases in pensions in April, Prime Minister Anatoly Kinakh made it clear that further increases will depend on the rates of growth in the economy and collection of corporate taxes.
Collecting income taxes is definitely the biggest problem for the budget, with a 50% shortfall of estimated revenue. STA Chairman Mykola Azarov says he cannot conceal his amazement at the financial reports filed by most grain trading companies. In his opinion, their declared losses are simply untrue. It is very likely that this assertion by the STA chief will be followed by checks. With private farmers paying their taxes quite well, state-run agricultural companies have paid less than a half of last year’s target. As such, they are most likely to be targets of stricter STA oversight. Lower rates of tax collection in the agricultural sector seem all the more strange as only a month ago large state-run firms promised to improve their tax track record by signing a memorandum with the cabinet. It appears that the shower of memoranda begun by the premier has produced little effect.
In May the coal industry was also subjected to close scrutiny by tax inspectors as their skyrocketing volumes of barter transactions equaled what was due in taxes. Like their grain- trading brethren, coal enterprises have reported losses. Probably, in this way the coal barons are engaging in a covert protest against shrinking budget subsidies, while the increasing role of barter is a signal of lower confidence of coal mines’ directors in the authorities. Coal directors’ open disenchantment with Prime Minister Kinakh’s budget policy was voiced last month at a forum of the Trade Union of Coal Industry Workers. Now, it seems that this disenchantment has translated into economic counteraction, with political protests apparently not far away.
In May the state was also let down by the energy companies. Stuck between consumers of electricity and power plants are the privatized oblast utility companies and the state-run Enerhorynok wholesale seller, with a quite sizable chunk of payments for electricity getting lost along this complex payment chain. The existing system of payments on the wholesale market makes tax collectors feel uneasy, leading Prime Minister Kinakh to instruct the Ministry of Fuel and Energy to draw up proposals on how to solve this problem, down to firing the officials who should be held responsible for the existing situation. Meanwhile, electricity companies put the blame for their failures on industrial consumers, which pay for electricity depending on the mood of their directors or political and economic winds blowing from Kyiv. To date, their payment arrears for electricity supplies have reached a staggering UAH 15 billion.
Payments for natural gas transit via Ukraine, the concern of the state Naftohaz Ukrayiny Company, were equally low, at 50% of the target. This oil and gas monster demonstrates its typical weak tax discipline. STA experts believe that by dodging taxes Naftohaz Ukrayiny tries to make up for shortfalls in payments for supplied gas. A month ago, former enterprise’s boss and present STA Deputy Chairman Vadym Kopylov was ordered to look into the company’s deteriorating financial condition, with little improvement if any so far. According to the STA forecast, Naftohaz Ukrayiny’s tax arrears in 2002 could grow to UAH 2.5 billion. As punishment, in the near future the energy giant might see its monopoly on sales of natural gas taken away. Under pressure from industrial managers, the Economy Ministry is on track to launch gas auctions where Ukrainian plants will be able to buy the Russian and Turkmen gas under direct contracts bypassing Naftohaz. The enterprise’s Board Chairman Yury Boiko vehemently opposes the idea, but his stance will most probably be taken into account only after the tax debts are paid.
Former Finance Minister Ihor Mitiukov believes that, faced with the impending failure to clear receipts targets from privatization, the government can deal with the budget deficit only by raising energy prices. In his opinion, Naftohaz Ukrayiny is fated to accumulate more debts if gas rates remain at their present level. Given the track record of the former chief financier, it would be a sure bet to predict that the enterprise will put forward relevant proposals to the government soon. If Prime Minister Kinakh can steer his program through Verkhovna Rada, the only thing which will stop him from imposing higher gas prices (something he has always been cautious about) would be the risk of slowing down industrial growth. So far, the premier and industrialists have enjoyed mutual confidence, albeit not always reciprocal, judging by the tax shortfalls.
However, the sitting finance minister is not inclined to dramatize the situation, “For half of May the country has been idled due to holidays, which impact on revenues,” Ihor Yushko explains. To quote him, the country’s economy is growing dynamically, with the result that the government can keep state coffers full. Rising petroleum prices could potentially prove another big earner for the budget. For this reason, pensioners and budget-supported employees should keep their fingers crossed for the Finance Ministry’s hopeful plans to be carried out.
