ECONOMY FOR THE WEEK 

The first approach to the budget problem last week could hardly rate as front page stories in economic journals. There were no original solutions to financial problems and no political discoveries. Considering that the budget bill is perhaps the most important instrument issued by the government to determine Ukraine's life for the next year, political debates focusing on it acquire a special meaning.

To begin with, unlike all previous budget battles in Parliament, even the official version of the 1999 budget program does not pretend to be realistic. In other words, the executive knew from the outset that they would not be able to offer a genuine financial document, state cost and profit sheet. Suppose we try to find out why.

Regrettably, the mean reason for the political and economic situation that has developed is the inadequacy of the government's social obligations (i.e., laws, habits, and illusions) to the actual capacities of the Ukrainian economy. Over the past few years the state has actually discarded most previous commitments in the economic domain which allowed the economy to become a market or at least market-like. The situation in the social sphere turned out entirely different. Here the state did the opposite, constantly declaring its adherence to all the guarantees which it could never implement, considering the amount of spending required by the economy with its continuous production decline and failure to collect taxes in full.

It should be noted that social commitments, with regard to the Ukrainian economy, are very different from the approach practiced in all civilized countries: public education, health care, pensions, and welfare. In Ukraine, these budget expense items are smaller compared to other countries with transitory economies. Here social maintenance is manifest, say, in government subsidies in the coal industry and constant concessions to coal miners' blackmail; gratuitous loans to perfectly incompetent administrators and managers. As for refusing to launch a real large-scale bankruptcy vehicle in the industries, it was a purely social commitment undertaken to keep people on enterprises' payrolls, regardless of those enterprises' efficiency or viability. And the same is true of agribusiness. In other words, what we have is social obligations "a la Ukraine" - i.e., the Cabinet's commitments to retain industries that are useless and even harmful from an economic point of view. And that all the above examples are to be referred to social obligations is evidenced by the simple fact that the powers that be receive nothing in return, not even political support.

It is hard to say which of the factors - political short-sightedness or administrative incompetence - played the decisive role, but the absurd principles of financing the so-called budget sphere have been kept intact and automatically transferred from one budget program to the next.

Considering that the social obligations assumed by the powers that be do not tally with the capabilities of the economy and state, Ukraine had a large-scale budget deficit from the very onset. The consequences have been studied and described in sufficient detail by the media. Until 1995, this deficit was coped with by the government using National Bank credits - in other words, by direct monetary emission. The inevitable result was soaring inflation during the first three years of independence. In 1995, it became possible to apply a more civilized non-inflation instrument: borrowings made by the Cabinet abroad using internal government bonds. Naturally, it was a typical financial pyramid, yet this vehicle has been used by many countries for many years, in most cases working quite effectively (for as long as the loan-GDP ratio remains within certain limits and its precise value is very hard to determine - say, an average of 30-40%). As a rule, the state acts as the most reliable guarantor, using taxes and a normally functioning and growing economy. This was what the Ukrainian government relied upon, as a matter of fact, as loans were first received only from domestic resident legal entities, mostly commercial banks. However, in 1996 it became clear that the banks were prepared to credit the state only at a very high interest rate. The simplest way to lower it was by allowing nonresidents access to the IGB market. This was done, but the result was that Ukraine had become dependent of foreign buyers of government securities and of the world market situation. In 1997, the situation was going from bad to worse, with factors setting to work which were beyond Ukraine's control. But there were domestic factors, too. The most important one was that in the second half of 1997, each and everyone who knew and cared realized that the Cabinet could not arrange for economic growth, so the trends appearing at the turn of 1998 continued to gain in strength, but then the economic crisis broke out and the situation worsened drastically.

The Day was informed by a Cabinet source that by the end of the third quarter, government finance was on the verge of catastrophe. In July, real budget returns amounted to Hr 995 million and dropped by a quarter in August. In view of this decline, September ought to have brought at least Hr 1.9 billion so as to make up for the July-August losses. In reality, the September indices are likely to remain more or less the same as in August and the prospects for the fourth quarter do not look any better, although the government originally hoped to receive at least Hr 1.5 billion monthly.

The budget bill tabled by the Cabinet (and voted down by Parliament) represents the income item in the amount of Hr 19.2 billion and expense worth Hr 22.9 billion, with 0.6% GDP budget deficit. Therefore, the Cabinet still hopes to collect at least one billion hryvnias every month (compared to Hr 744 million in August, which was more or less trouble-free). In turn, the VR Budget Committee intends to continue working on an alternative budget bill. Will it sound more realistic?

If one remembers that Yulia Tymoshenko pushed through Parliament a budget resolution making no mention of a budget deficit and with the Committee being prepared to finance all the above-mentioned social obligations, either of two things is bound to happen: the alternative budget bill turns out even less realistic than the Cabinet's (see 3rd quarter income figures), or Ms. Tymoshenko urges to start the money-printing machines (because at the interest rate stipulated by her budget resolution, no one will borrow money from anybody).

Before actually starting the budget process, the key positions of the opposing sides are polarized so much that an attempt to reconcile the interests of budget-sustained  and other applicants for government subsidies will have to be put off until all key political and economic issues are ascertained, namely: will there be a financial landslide? If so, who will remain in power (to allocate the budget resources)? Will the money-printing machines be activated? If so, who will be the first to get hold of this printed matter (along with the first superprofits). These questions sound much more interesting, don't they?