Capital expenditures in budget-2024: challenges and plans

Authors: Maria Repko, Centre for Economic Strategy; Oleksandra Betliy, Institute for Economic Research and Policy Consulting.

Defence and security expenditures remained the top priority of the government in 2024, as clearly shown in the draft State Budget Law for 2024. Among other expenditures, the government deprioritized funding for recovery and reconstruction in 2024 to allocate resources to social and other resilience expenditures, given the dire state of public finances.

This has fuelled a competition of ideas between the Ministry of Finance and the Ministry of Restoration in both CAPEX cuts and budget allocation procedures, which is the focus of this brief.

This series of events reflects the ongoing competition within the government. While the Ministry of Finance is primarily focused on attracting as much financing as possible to the general fund of the budget to cover government liabilities, the Ministry of Restoration is striving to secure funding specifically for recovery and reconstruction, which is its primary goal and responsibility. These tensions arise due to the dire state of public finances, as described in the first part of this note.

The Ministry of Restoration’s aim is to secure financing for recovery and reconstruction in 2024. However, the lack of funds for essential functions such as resilience (ensuring effective government operations) and social priorities (e.g., pension indexation) and uncertain aid inflow from the foreign partners raise questions about the overall priorities of the government as a whole.

We believe that the situation is complex and warrants a broader discussion on governmental priorities, including a detailed review of budget programs, up to considering specific programs for a mild sequester if the situation necessitates it. It’s important to recognize the significance of social security, while also acknowledging that capital expenditures, including the repair and reconstruction of fixed assets, are essential prerequisites for economic recovery.

While there are alternative ways to finance recovery and reconstruction, such as the Reserve Fund, we believe that the procedures for recovery spending should ensure transparency, clear processes, and prioritization. All of these elements are already in place within the Fund for the Elimination of the Consequences of Armed Aggression, including the DREAM system promoted by Ukrainian CSOs. In contrast, the Reserve Fund within the budget lacks established procedures, and the proposed new Fund, while not yet approved, does not align with best fiscal practices.

The new Fund, proposed for creation, has not yet been approved and it does not comply with best fiscal practices – to manage public finances in a most effective way the country should avoid creating numerous funds with earmarked revenues within the special fund of the budget and use the general fund to finance its priority expenditures instead.

Therefore, we would recommend sticking to the existing procedures of the Fund for the Elimination of the Consequences of Armed Aggression for all recovery expenditures.

This publication was produced with the financial support of the European Union. Its contents are thesole responsibility of ”The Recovery Spending Watchdog” project team and do not necessarily reflect the views of the European Union.