1. The government gives biased information about fulfilling the budget...

Facts

The State Treasury of Ukraine published data on fulfilling the budget in the first quarter of 2008. It is reported that the overall fund of the state budget has been exceeded. UAH 37.5 billion of revenues was raised, that is by 43% more than in 2007. UAH 3 billion was collected over the plan (+9%). The budget deficit made up UAH 2.3 billion (instead of planned UAH 8.4 billion).

Success reports of the Ministry of Finance about exceeding the budget have logical explanation. The 2008 budget was made up on out-of-date macroeconomic basis, primarily, in the part of prognosis of consumer price index. It enables the government to receive extra inflationary income. Besides, a part of additional receipts was obtained through an illegal halt of using bills of exchange tax on import.

Going over the revenues plan is a result of manual management by Tymoshenko government. Such receipts are of one-time effect and unstable. Therefore, a possibility of real fulfillment of the budget (according to the year’s results) raises questions. More detailed analysis of revenues and spending items testifies to the existence of considerable disproportions in fulfilling the budget.

Comments

Taxation is carried out unevenly. 123% of planned profit taxes were raised from enterprises. Exceeding revenues from this tax could reach UAH 7 billion (+15%) by the end of year. According to several regional offices of the State Tax Administration of Ukraine, considerable part of revenues from profit tax was obtained through advance overpayments.

The government gives fragmentary information about execution of VAT. It is reported about exceeding revenues from import VAT by 32%, VAT refunds by 62%. At the same time, the plan on internal VAT is not accomplished. The plan of revenues from VAT is risky, given the necessity of:

Repaying overdue debts. According to the Ministry of Finance data, overdue VAT refunds since the beginning of year diminished by UAH 0.3 billion and as of the beginning of April made up UAH 3.6 billion. Avoiding accumulation of new debts. The budget envisages VAT refunds at the sum of UAH 24 billion. The total amount of applications for debt returns will exceed the plan. The 2008 budget is based on forecasted 20% increase in export, while the increase is expected to be +26%. The government once again granted NAK “Naftogaz” the right to pay VAT by installments. It reduces the prognosis of receipts from the VAT.

Implementation of the expense part of the budget is selective and incomplete. The Tymoshenko government violates the law in its choice of expense priorities. The covered expense items on paying salaries for people on governmental pay-roll (93.4%), settling Crimean Tatars (0%) and utilization of ammunitions (25%) are not fulfilled.

The government solves problems, which it had created, manually by means of the state budget. For the first quarter:

NAK “Naftogaz” received more than a half of annual budgetary assignations; over 80% of money for indemnification of lost savings of the USSR Sberbank were doled out.

The budgetary programs, which had been determined as priority by the government, are not executed in the sphere of culture, youth policy, health care, science and education, preparation for Euro 2012. The government did not provide financing for 273 programs of the state budget (it is one third of the planned part of the state budget).

The government’s failure in budgetary borrowings is positioned as an achievement:

UAH 372.5 million of internal borrowings were mobilized out of planned UAH 4.4 billion. The market of internal borrowings is underdeveloped. The rate of return offered by the Ministry of Finance is not interesting for commercial banks which experience liquidity deficit. The World Bank’s credit at the amount of UAH 1.5 billion was planned backed in 2007. The Ministry of Finance missed the moment for placing eurobonds. A current risk premium for Ukraine exceeds 3.3% above the rate of return of the US Treasury bonds. The rate of return of external borrowings could exceed 7% (higher than the last year's).

The Tymoshenko government provides insufficient and biased information about fulfilling the 2008 state budget. The condition of the budget’s revenue part raises apprehension. A level of filling the budget was defined by factors of one-time effect: unrealistic plan, abolishing bills of exchange for VAT and accumulation of its debt returns.

The Cabinet of Ministers has wallowed in manual management of the expense part. Resources are directed on solving artificially created problems of NAK “Naftogaz” and fulfillment of populist promises. It was achieved by insufficient financing of budgetary programs in social sectors. Stating about fulfillment of the budget, the government came to not financing completely the covered items of the state budget.

2. .. and on various pretexts delays making alterations to the budgetary plan

Facts

March 1, 2008 was a deadline for preparing alterations to the law on budget for the current year. This date was fixed in Article 5 Paragraph 5 of the Law of Ukraine on the state budget for 2008. Assigning obligations to the Cabinet of Ministers of Ukraine to prepare and submit budgetary alterations within a given period of time became one of the main public promises of signing the law on budget by the President and Speaker of VR.

The Law on the 2008 budget (as of 28.12.2007) requires earnest adjustment. However, by now alterations to the budget remain unapproved. The Party of Regions and Opposition government urged repeatedly the Tymoshenko Cabinet of Ministers to amend the 2008 state budget: foremost, to envisage tools for overcoming inflation.

In reply to the opposition’s public requirements as well as of both the President and speaker of VR, on May 14 at the Cabinet of Ministers meeting premier Tymoshenko stated that making alterations to the 2008 state budget was adjourned. A formal reason is that making such corrections will entail further acceleration of inflation. Thus Tymoshenko referred allegedly to the World Bank’s recommendations.

Comments

A dramatic change of the state budget indices is objectively needed: The exchange rate and inflation affect the income part, which already fall short of the planned figures. Annual inflation at the rate of 9.6%, which had been put in the basis for calculating the budget, was exceeded according to the first quarter results. The NBU prepares to fortify new official exchange rate of hryvnia, which has established on the currency market. Re-calculation of taxation basis is much-needed given the revised macroeconomic prognosis, which should take into account a new and realistic prognosis of: (a) inflation, (b) official exchange rate, (c) balance of foreign trade, (d) growth rate of people’s income.

Changes are needed in the expense part of the state budget for accounting:

Fixed for 2008 gas price $179.5 per one thousand of cubic meters. Excessive inflation in re-calculation of living wage and minimal social guarantees. Re-calculations of budgets of the major administrators of funds. In the 1st quarter state purchases were not carried out. A part of them became irrelevant. The new price level and inflation forecast by the end of year should be considered for another part. Altered terms of inter-budgetary social payments after making decisions on an increase in gas charges for population and changing the returns bases of the state and local budgets.

In the part of financing the state budget deficit it is necessary to:

Revise finance sources and the borrowings plan taking into account a growth of interest rates in Ukraine and their reduction as for external loans. Adequately consider funds remained from 2007 on the Treasury accounts as the items for covering the 2008 budget deficit. Take into account delays in the privatization program over the 1st half of 2008 and introduce a real privatization plan.

Tymoshenko’s arguments about the risks of making alterations to the budget are unfounded and groundless. The premier manipulates with notions, stating that “… all experts [of the World Bank and other international financial institutions] forecasted a new surge of inflation in case of making alterations to the budget”. An inflation level of the revised state budget depends on a pattern of the alterations being made rather than on the fact of revision. A new surge of inflation will be triggered if a focus of the state budget remains on implementing Tymoshenko’s populist promises. Authoritative experts in the economic sphere warn the government exactly against these actions.

Inflation can be lowered through toughening the budgetary policy: cut in unproductive spending, renunciation of generously given election pledges and populist rhetoric. The criterion for anti-inflationary orientation of the state budget will be a reduction to the minimum of its deficit. In practice it means temporal refusal of any sort of borrowings and privatization. In other words it means leveling the income and expense parts of the state budget.

Tymoshenko stated that “today we are incited to make alterations to the budget in uncertain situation. It will be another impetus to inflation”. The statement testifies that the government does not intend to curb inflation by means of toughening the policy of budgetary spending. The Tymoshenko government calls three drafts as the anti-inflationary program. All of them are directed at reinforcing administrative interference and managing commodity flows manually.

Tymoshenko tries to avoid accepting unpopular but vital for upholding the macroeconomic stability decisions by refusal to revise the state budget. The Tymoshenko government does not have an expert examination for carrying out the budgetary policy with anti-inflationary focus. This fact is hidden beyond statements that the state budget revision will trigger a new surge of inflation.

Review of revenues, expenses and deficit figures of the state budget is much-needed under new macroeconomic conditions. The alterations being made should pursue a purpose of cutting spending which are not covered by current tax receipts. A reduction in the state budget deficit to its minimum will be of anti-inflationary effect. It is possible through cutting unproductive spending, pegging the wages growth rate to an increase in labor productivity. International and domestic economic practitioners urge the Tymoshenko government to a more weighted social and budgetary policy.

Misunderstanding of obvious things reveals lack of professionalism of the economic block within the present government. The fact that premier Tymoshenko does not wish to make unpopular but vital decisions shows her political irresponsibility.