Why are we short of money?

The Ukrainian parliament has passed the 2013 budget. It was beyond any doubt that the “old” Verkhovna Rada would vote on the state’s financial plan drawn up by the “old” government. The MPs themselves were also saying that there was no other option but to have the 2013 budget passed by the old team. The Party of Regions faction maintained that to postpone the budget adoption until the next year would mean to wreck the whole process and leave people – first of all, teachers, doctors, and public utility workers – without money. Political scientists in turn pointed out another weighty factor: the parliament’s climate in the next season. For it is obvious that the attitude of the new-convocation parliament to the executive branch is still open to question.

So 242 out of the 351 MPs registered in the session room finally pushed the green button to give their consent to the government’s vision of the next year’s “state pocket,” even though the latter is essentially as scanty as this year’s one. According to the parliamentary committee chairman Valerii Baranov, the 2013 state budget deficit will come to 50.43 billion hryvnias. This means that the budget hole is 30 percent deeper than the one projected for this year. It will be recalled that, under the law “On 2012 State Budget,” the deficit is 33.203 billion hryvnias.

It is this “void” that prompted public-sector employees to raise the alarm last spring, for this meant that the state treasury would be just short of money to make payments for a month (!). Indeed, the local authorities of several regions reported in early November that they were unable to foot the bills. And what awaits us now that the deficit has grown by another 30 percent?

The hole widened even though the government had done a lot of cutting in the expenditures, including those intended for medicine, research, and the agrarian sector. This sequester allowed saving just 410,661 billion hryvnias (according to the explanatory note, the expenditures were reduced by 1 percent in comparison with the 2012 figure). But, as the government admits, state budget revenues will diminish still more in the next year – by 3 percent against this year’s target. The government hopes to raise at least 361.51 billion hryvnias.

So why are we short of money? Why are experts saying that the “battle for the creditor” is the main task for this country, so rich in resources and possibilities, in 2013? It is a bitter fact that we will only manage to hold out until the year’s end, our teachers and doctors will be paid their salaries, Ukrainian books will be published, roads will be built, and gravely-sick patients will receive treatment if the IMF chooses to resume cooperation with us.

Experts offer a very simple explanation of the budget-related mess: the foundation has been undermined. The economy bears no fruit because its roots have been so much suppressed that it can barely stand on its two feet.

“There is no money in the budget because the economy is slumping,” ex-minister for the economy, Volodymyr Lanovy, says. In his words, the management model which the government applied was to bring about, sooner or later, a drop in real industrial output, reduction of jobs and incomes, and, hence, fewer assignments to budget. The minister means centralization of financial flows in the state and their utilization for non-profit projects, particularly those in the infrastructure. “All the other sectors were not in fact given money for development,” Lanovy concludes.

Secondly, in the expert’s opinion, budgetary revenues are shrinking also because “the stratum of free entrepreneurship – small-scale and medium business – has in fact been eradicated.” “They have either ceased to exist or, in an attempt to survive, handed out some of their assets to oligarchs. The latter, as Ukrainian experience shows, do not care much about the health of the economy. All they are doing is sucking the money out and transferring it abroad,” the expert notes.

In his words, this state of affairs eventually resulted in an acute hard-currency crisis in this country. Lanovy is sure that the tax on hard currency sales will not salvage but worsen the situation. “Leveling this tax in fact means a ban on hard-currency operations for the populace. Accordingly, this will reduce the inflow of hard currency into the banking system,” the expert says.

To bear fruit, a tree must have a healthy root. In other words, Lanovy concludes, the budget should not have a hole, everybody should be “well-fed” and “satisfied,” the industry should work, and the banking sector should fund the economy’s real sector. Today, however, this “blood circulation” is upset. Banks do not fund business, except perhaps for Naftohaz and some infrastructural projects which the government benefits from.

The expert takes a skeptical view of the government’s plans to increase the budget deficit and the level of borrowings. He says nothing will come out of this. On the contrary, he forecasts: “What awaits us is failure to pay off old debts and denial of new loans to us.”

Yet there is a way out of the blind alley. One must simply curb the appetite and stop sucking juices out of a half-dead body. In other words, experts say, one must stop “pumping” money from the banking sector to fund mammoth projects, and individuals’ deposits and free entrepreneurship are bound to breathe new life into the economy.