All to get less than necessary
The state began the new budgetary year, which coincides with the calendar year in Ukraine, so spectacularly that the national economy, if it developed instinctively rather than by objective laws, would have immediately skipped the “transitional stage” and ridden out the crisis forever. Recall that Verkhovna Rada adopted the state budget in an all-time record pace of three days. The budgetary expenditures (a total UAH 52.056 billion) were calculated overnight (December 25-26) on the basis of the revenues (UAH 50.021 billion) approved the day before. On January 5, President Leonid Kuchma signed this year’s budget, but sent a letter to parliament requesting it “to reconsider the question of the 2003 state budget in order to introduce changes that would correct its defects.”
TAXPAYERS MUST...
The state hopes that changes in the laws On VAT, On the Taxation of Enterprise’s Incomes, etc., and the increased GDP projected in this year’s budget will allow it collect a total of UAH 33.32 billion in taxes. Almost a third of this amount, UAH 11.64 billion, is to be “clipped off” the profits of enterprises. The Tax Administration has set a goal to raise UAH 1.69 billion more than is stipulated in the draft budget which has gone through the first parliamentary reading, while business entities were told to identify their gross incomes/expenditures on the basis of contractual prices that are not lower/higher than “common prices.” It will therefore be more difficult to underrate the delta of profit, while the state will undoubtedly stand to gain. In the light of the above-mentioned changes, state-run enterprises will have a bitter pill to swallow: according to a separate item in the chapter “Non-tax (!) Earnings,” the state is going to withdraw UAH 400 million worth of profits (incomes) from them before January 1 of the budgetary year 2004.
VAT earnings are another fiscal stronghold. The budget contains provisions that not only worsen the existing conditions for levying this tax but also introduce additional exemptions, including the application of zero rate to the companies that import and export gas (except for public-sector organizations and individuals). Nevertheless, the budget calls for UAH 13.652-billion-worth of VAT-related revenues (up 44 million from what was expected before the law On VAT was amended).
Comparing the draft budget’s approved version to the one that went through the second Verkhovna Rada reading, we see that the projected earnings resulting from the imposition of excise duties on Ukrainian-made goods have risen by UAH 0.97 billion up to 3.89 billion. If you also note that the expected import excise revenues are supposed to drop by almost UAH 130 million to UAH 552.9 million, then you’d better forget such a thing as protection of consumers and national producers. The state expects entrepreneurs to pay UAH 20 million more (82.2 million) for receiving a “license for certain economic activities,” 25 million more (UAH 736.445 million) for the special utilization of natural resources, and 70 million more for special utilization of water resources and for using water for power generation and transportation.
This is even stranger because, let us stress it again, Verkhovna Rada approved budget revenues the day before it did the expenditures (in other words, it is hardly plausible to assume that some revenue items were transformed not only due to legislative changes but also due to, say, planned budgetary subsidies for the river transport, for instance).
It is also hardly plausible that privatization will fetch UAH 2.15-billion in revenues. Former National Bank chief Volodymyr Stelmakh once said at a press conference that last year the state budget had received less than one billion worth of privatization-related revenues. The situation is unlikely to improve this year (unless, of course, changes in profit taxation produce an additional effect). It is also essential that privatization revenues be utilized for making up the UAH 2.035-billion budget deficit. In other words, a disastrous privatization policy may force the state to seek other ways to offset the deficit.
HOW MUCH DOES THE STATE COST?
The priorities that the state sets, spending the taxpayers’ money, produce even a greater effect on the country’s socio-economic development than taxation policy does. The point is that changes in the structure of public expenditures (public sector consumption, investments, debentures, transfers and subsidies) affect the amount of the gross revenue and consumption greater than changes in the rates (or methods) of taxation do. Public spending can only have a positive effect if the share of investments and transfers in their structure is sizable (given a normal level of employment).
Following the approval of this year’s budget, the state put the main emphasis on itself. It did so, as we said above, with a UAH 2.03-billion deficit at hand. The promised minimal wage hike, the amount of interbudgetary transfers (UAH 5.423 billion from the central to local levels), social security and insurance expenses, let alone investments, look negligible compared to how public administration bodies value their own activities. Almost every item of state budget expenditures can be looked at through the prism of its users’ political interests. So, to avoid being biased towards a certain financial group, let us see how much of the taxpayers’ money — and in what areas — the state is going to spend on itself this year.
Firstly, Verkhovna Rada, Ukraine’s highest legislative body that keeps promising this country reforms in the system of government, taxation, and other vital areas. If the Yanukovych government manages to fulfill the budget, it will take parliament a total of UAH 220 million to do its job (up UAH 21 million on what the Kinakh cabinet unsuccessfully proposed). Out of this, 106.7 million hryvnias (up 10 million on what was previously expected) will be channeled into the lawmaking process. Some figures, although small against the backdrop of total expenses, would bewilder, say, a civilized European: e.g., UAH 9 million is to be spent on the “coverage of people’s deputies’ activities by television and radio.” Take care of the pennies and the pounds will take care of themselves? Not in such a “rich” country as Ukraine. On the other hand, hope (which dies last) tells us that the six million budgetary hryvnias earmarked for “foreign visits of people’s deputies” (two million more than in the first-reading draft budget) will not be squandered.
Now, with respect to the Presidential Property Management Division, according to the final budget, Presidential activities will cost this country “a mere” UAH 42.2 million (1,600,000 fewer than ex-premier Anatoly Kinakh planned). Conversely, financial support of the division-controlled health centers has been raised from UAH 26.4 million to 86.4 million. Although children’s recreation at the Black Sea Artek camp will be funded at the same level (15.2 million), some new important expenditure items emerged: in- patient medical treatment of people’s deputies and governmental officials (24.5 million), first aid to the same “strata of the population” (4.7 million), out-patient treatment of sick parliament members (13.5 million), the Feofaniya VIP hospital (20 million), etc. Who will now dare say there is no free high-quality medical care in Ukraine?
It is quite all right that only 59 million will be spent on the centralized purchase of state-of-the-art equipment which is sure to reach only a few clinics, and 1.3 million on fundamental research in preventive and applied medicine. As before, Ukrainians are not going to remain without care: 54.9 million has been earmarked for the anti-tuberculosis program, 13.7 million for combating AIDS at all levels, 114.65 million for cancer research and treatment, and another 60.8 million for “individual (!? — Author) medical programs...” And should, God forbid, an epidemic break out, it could be suppressed at UAH 5 million.
In any case, the Ukrainian health care system has always been sick. The judicial system is in no better situation: the staff of the State Judicial Administration, the Supreme, Constitutional, High Economic, and High Administrative Courts will perhaps receive a total of slightly more than UAH 400 million to keep themselves afloat. On the contrary, the Prosecutor-General’s Office and the police force will have UAH 228.3 million and 2.86 billion, respectively. Judging from budgetary calculations, taxpayers can rely on efficient law-enforcers as much as on themselves: 1.58 billion will be spent to ensure the rights, freedoms, and security of the state and its citizens. It is alarming, however, that the logistical support of the police is to be financed from a special fund (at UAH 79 million), while the General Directorate of Inland Security Forces will be pleased to get a total UAH 248.8 million.
In all probability, the consensus of those who adopted the 2003 budget was predetermined during the first reading. After Azarov was appointed First Vice-Premier and Minister of Finance, Tax Administration expenses remained largely unchanged at the level of UAH 1.176 billion, both in the common and special funds. Moreover, some items, such as supervision over the observance of taxation laws, were even cut by as “many” as 11,000 hryvnias to the current UAH 1,087,929,200.
Funding the army remains the most acute problem. Since the Kinakh government resigned, the Armed Forces budget has been raised from UAH 3.93 billion to 4.28 billion. It is pleasant to note that the army budget’s common fund has gone up by almost 100 million, and about 275 million (up UAH 21 million on what was expected) will be spent on military housing construction.
Public education is going to be buffed up by another 230,000 hryvnias. Yet, all this resembles gap-stopping rather than essential constructive changes — especially against the background of the metamorphoses undergone by the Fuel and Energy Ministry’s budget: it has risen by UAH 800 million and is now 3.358 billion. The new government has awarded a special privilege to the State Coal Mining Department, with its share in the ministry’s overall expenditures rising by almost half a billion to UAH 2.77 billion. UAH 830 million of taxpayers money are supposed to partially cover the expenses to reduce the cost of coal production, while UAH 1.1 billion will be made available as governmental support to the coal mining industry. The matter must be so gainful that a smaller but still considerable amount of UAH 657 million is being allocated for restructuring the coal industry. And so on and so forth...
What considerations guided the state, adopting this kind of budget on the old taxation basis? What is the use of investing in the loss-making coal-mining sector and agreeing to mind-boggling expenses with respect to the state apparatus?
THE FOURTH MODEL
Last year’s public opinion polls in Ukraine showed that only 15% of the population trust the central bodies of power. A solid half of the Ukrainians still believe (if at all) in future market-oriented transformations, preferring, however, to take personal care of their lives. A state whose citizens (workforce, pardon the word) go job-seeking abroad and entrepreneurs (another productive factor) rally their abilities to evade taxation can rejoice as much as it pleases at the stability of the national currency, but it is just doomed to be an ever- “developing” state.
What makes things still worse is that it is not quite clear in what direction Ukraine is developing. At any rate, this year’s budget reveals nothing about it. Conversely, the economic science identifies, in this connection, three typical models of market economy organization— American, Swedish and Japanese.
The first model calls for the greatest possible encouragement of entrepreneurship, personal success and, hence, redistribution of the national wealth in favor of the population’s most active part, while the “passive” part is provided with reasonable living standards by means of various benefits and privileges. The American model allows very modest governmental involvement in the economy, which mainly boils down to setting the “rules of the game” for the market, performing the functions of arbiter, ensuring a stable market situation.
The Japanese model (in a way, the reverse of the American one) provides for the essential impact of the state on the national economy. In this case, the development and optimization of production facilities is viewed as a national goal. Social problems are mostly handled by corporations, which — owing to national mentality and traditions — causes no great tension in society. It is, as a rule, the high-technology economic sectors and technological progress in general that benefit (duly aided by the state) from this system: a certain slowdown in the growth of ordinary employees’ wages coupled with the growth of labor productivity is accompanied with the reduction of production costs and the increase of product competitiveness on the world market.
The Swedish model is in fact a symbiosis of the American and Japanese ones. Its main principle lies in the creation and most equitable distribution of wealth. The former function is performed by the private sector in a competitive market environment and the latter by the government. What can be regarded here as a cementing factor are high taxation rates, which, incidentally, does not upset the taxpayers; public spending mostly focusing on access to free education, health care, unemployment insurance, old-age pensions, etc., account for 50% of GDP.
Ukraine still seems to be hesitating about the choice of reference point or inventing a fourth, hitherto unknown, model of the market economy. Although our high taxation rates are lower than in Scandinavia, the methods of their assessment are so “Turkish” that entrepreneurs have every reason to work in the shadow, even without learning all the “subtleties.” The union between the financial powers-that-be and politicians might mean application of the Japanese clan-corporate principles, but Ukrainian products are not competitive on the world market. Meanwhile, technologies are, for some reason, regressing. Regrettably, there is no question of a competitive environment (such as in the US, for example) or arbitration functions of the state in Ukraine. In other words, the adopted budget shows that the state has not yet decided what its main goal is. It neither eases its grip on business nor is capable of making major investments in its citizens’ quality of life.
