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Where to cut UAH 60 Billion(+) from the 2016 budget?

October 20, 2015

November seems likely to be shaping up as a very feisty month within the walls of the Verkhovna Rada.

Firstly some legislation seems set to be strong-armed through those feckless parliamentarians relating to outstanding, and Visa-free preventing, laws that require adoption – amongst other more critical legislation.

It is amongst these others, to which this entry wanders.

Specifically the budget for 2016 will be submitted to, and hopefully passed by, the Verkhovna Rada.  Also major reforms to the tax laws will be submitted and are required to pass if for no other reasons to move away from the corrupt and unwieldy mess that currently exists.

But there are problems with these two issues that will undoubtedly make the populist contingent of the Verkhovna Rada recoil quite (metaphorically) violently.

budget

Ukraine is to produce a 2016 budget of -3.7% to fulfill its obligations to the IMF.  Generous credit must be given where generous credit is due – both Ministry of Finance and the NBU have stuck doggedly to their task as agreed with the IMF throughout 2015.  Despite the national pain, to be quite blunt, there is little other choice whatever the populists may state.

However, the preferred new tax legislation (if passed) will immediately deprive the government of about UAH 60 billion in revenue.

Thus, UAH 60 billion in reduced tax revenue naturally equates to UAH 60 billion in budget cuts to meet the IMF budget deficit obligations for 2016.

Both defence spending and debt servicing have been publicly ring-fenced already, so clearly no cuts will be coming from there.

This was perhaps anticipated by recent events and recent moves within the Ukrainian elite in yet another sickening display in an attempt to keep guzzling State subsidies by way of grotesque and illegal attempts to quietly privatise entities associated with the ring-fenced defence sector.

As defence is ring-fenced then subsidies and government investments will continue in that sector – thus the odious and nefarious attempt to privatise the Institute of Electrical and Mechanical Devices in Kyiv is a sign of things to come.  It is an institution that is part of high-tech development within the Ukrainian military industrial complex, and was to be privatised in a grubby and nefarious deal for UAH 16 million.  The land in Kyiv this institution sits upon is worth UAH 80 million without accounting for the assets of the Institute.

hopkohopko 1

Fortunately, the courts have arrest 94.4% of the shares to prevent the sale – but what if anything will happen to those from the State Property Fund and within government that opaquely and nefariously attempted this privatisation?  Probably nothing!

Some readers may ponder the morality of the individuals involved when attempting to quietly privatise an entity that is part of the Ukrainian defence industry which remains “at war”, and at a cost far below even the value of the land upon which it sits, simply to insure continued gorging upon government subsidies in the years ahead as other subsidised sectors disappear.  Little has changed within the cesspit of power in Kyiv it appears.

Returning to the 2016 budget however, what to cut?  Where to cut it?

Apart for ending subsidies across the board, there must be a dozen, perhaps two dozen taxes that cost more to administer than the revenues they generate – and thus simply should end.  Likewise there will be State delivered bureaucracy that delivers nothing more than bureaucracy at a cost far greater than its regulatory worth or benefit (hindrance would be a more accurate description) to society.

If ending subsidies is a requirement for State survival, then clearly tax exemptions need fall under the microscope too – and tax exemption is an area where agricultural tops the league.

Very prickly issues for any government – let alone for one with a small military war going on within its territory, and far larger wars on the political, diplomatic and economic fronts emanating from the same aggressor.  This before considering the internal destabilisation of the State caused by the vested interests of the oligarchy and highly corrupted officials.

So prickly the issues, and such is the conundrum, that the Ministry of Finance has asked politicians, journalists and experts to help identify areas where government expenditure can be cut during 2016 – no doubt to soften the political backlash when cuts are actually made, but perhaps also to find areas which it has otherwise missed during its own evaluation..

It would perhaps be helpful to know what the current draft budget for 2016 looks like, and the annual UAH/$ rate to which it is roughly premised upon.

To use last years budget as a template considering it was something of an extraordinary year is perhaps questionable.  It seems certain that UAH 30 billion of NBU redistribution will not be the same – if there is any at all in 2016.  There will be no UAH 24 billion from the interim import duties that disappear from 1st January.  Gone will be UAH 5 billion in taxes from gas production due to a reduction being an IMF commitment.  There is no UAH 9 billion generated from 3G licensing in 2016.

Will the expected privatisations of State owned entities raise a similar amount to the numbers listed above?  If Odessa Port Side and Centrenergo are the stars of the first round of privatisation, then the answer is clearly “no”.

Those tax gains of 2015 mathematically become tax revenue losses in 2016 that account for more than the UAH 60 billion the new tax legislation will remove from the budget – thus are we perhaps talking about a decrease in tax revenue of UAH 120 billion when these things are added together?

That culmination (if reasonably accurate) would be about a 25% tax revenue cut to the government in a single year.  Is that even achievable without the State collapsing?  If it is achievable, then for sure there is good reason to do it and take the severe pain in 2016 to deliver a far better outlook in 2017 – but it can it be done with such rigor as to meet the IMF budget deficit obligations?

This in no way even begins to account for the populists within the Verkhovna Rada that will want to increase spending on populist things.  Unsurprisingly they will not offer areas to cut expenditure when stating there must be increased expenditure – for that is not what populist politicians do.  Perhaps there should be a requirement when the Verkhovna Rada wants to make populist changes to the budget, to state exactly how such changes would be financed.

What if the Finance Ministry’s proposed tax legislation is voted down in the Verkhonva Rada?  Does that not effectively save UAH 60 billion in current tax revenue?

Aside from going some way to simplifying the tax system, the idea of the proposed tax legislation is to move more of the black/grey economy into the white.  Thus killing these proposed legislative changes in parliament will condemn the nation to at least another year (if not longer) of unnecessarily complicated and corrupt taxation, whilst insuring that a huge portion of the black/grey economy remains that way.

Heated debate within the Verkhovna Rada in November seems assured – the outcomes however, far less so.

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