Igor Mazepa: Why the 2019 state budget of Ukraine was approved under the cover of night and what came of it

The 2019 state budget was the earliest approved in all of Ukraine’s history, as many have noticed. Traditionally, the budget had been approved in the shadows of a Christmas tree in the best-case scenario. In the worst case, it’s passed already after the new year. This rush was prompted by the budget’s approval being the last requirement for signing the new stand-by agreement with the IMF, which offers Ukraine the chance to receive USD 3.9 bln during 14 months. Approving the budget in parliament is a complicated process requiring many hours, which is better left uninterrupted. That’s why its approval typically requires working the whole night with the final vote occurring the next morning.

Yes, the budget deficit of UAH 90 bln, or 2.3% of GDP, meets IMF requirements. On the whole, the revenue side doesn’t present any new innovations that would cast doubt on whether its fulfillment is realistic.

One example is the shuffling of UAH 1 bln worth of agricultural subsidies towards regional development. It can be assumed that in this way, the budget’s engineers tried to mollify dissatisfaction with agri-holdings gaining subsidies despite not needing any state support. But in fact they weren’t left without any support and can expect to receive UAH 6 bln next year. At the same time, the UAH 1 bln that will go towards regional development can help support the government’s positions at the local level, which is important in a year of presidential and parliamentary elections.

On the whole, the main sources of fueling the budget will remain those from the previous year. Accelerating revenue growth is planned from taxes on individual citizens. That means that the government is counting on high growth rates of nominal wages, and possibly their increasing legalization by coming out from the shadows.

2019 budget also plans for significant changes in the system of subsidies for utility and maintenance services. Firstly, budget expenditures for subsidies have been reduced by 22%, or UAH 16 bln, from the previous year. Against the background of rising household prices for natural gas and an expected rise in rates for other utilities, the reduction of earmarked budget expenditures means the government is planning to apply stricter criteria on receiving subsidies. Moreover, the government divided into two parts the UAH 55.1 bln amount for subsidies. UAH 20 bln is planned to be distributed for subsidies in cash. The mechanism for these distributions is not quite yet understood.

From an economic point of view, enhancing the system of subsidies is a task that’s necessary and important. However, the expected toughening of criteria to receive the subsidies will likely prompt rising dissatisfaction in society. And that creates additional risks for the government in a year of two big elections.