The drama of the 2024 budget: how to close the $41 billion hole and where to get money for social payments

In 2024, budget revenues will amount to UAH 1 trillion 768 billion. Expenditures are planned to be much higher – UAH 3 trillion 355 billion. This means the deficit will amount to half the budget – UAH 1 trillion 571.5 billion.

“Expenditures have increased because defence spending is growing. We need to defend the country, which is very expensive,” explains Maria Repko, deputy director of the Centre for Economic Strategy.

Half of the budget is allocated for security and defence. It is planned to spend UAH 1 trillion 692.6 billion, which is 22.1% of GDP, as the state’s top priority in the war.

“The Ministry of Finance is doing everything to finance this military campaign. And this is done at great cost. First of all, a portion of personal income tax, which traditionally belonged to local budgets, is being taken away from them,” explains Maria Repko, explaining the situation with revenue sources.

Thus, the government plans to raise UAH 93.7 billion in personal income tax from local budgets. According to the analyst, this step is absolutely necessary and will be painful, especially for those local governments that will not be able to finance their expenditures in the required amount.

The second step needed to finance defence is to raise the bank profit tax.

“They have made a really high profit for wartime, and now this profit will be taxed at a higher rate so that Ukraine can finance the salaries of the military, the purchase of necessary clothing, ammunition, and so on,” says the deputy director of the Centre for Economic Strategy.

Social support for veterans

Almost 15 billion hryvnias have been allocated in the budget to support veterans, which is twice as much as last year. UAH 1 billion of this is earmarked for prosthetics for soldiers.

UAH 5.75 billion has been allocated for housing programmes for veterans and their families. And 3.85 billion hryvnias were allocated for introducing the institute of a veteran’s assistant.

Another UAH 2.58 billion was allocated for mental and physical rehabilitation and professional adaptation of veterans.

UAH 247 million was allocated for the Ukrainian Veterans’ Fund.

“‘Veterans’ policy is one of the areas for which funding has been greatly increased. Almost twice as much. We can expect programmes to expand prosthetics and other programmes, such as the Institute of Veterans’ Assistants, returning veterans to the labour market, rehabilitation, etc. There are now quite a few NGOs that deal with veterans and veterans’ policy, and the Ministry of Defence strongly focuses on this area. And, in fact, there are more and more veterans now,” explains Maria Repko, deputy director of the Centre for Economic Strategy.

Does the state have money for social payments?

Social expenditures, like the entire half of the budget “not for the war,” are in deficit. To close the gap and fulfil its social obligations to citizens, the government is going to attract international financial assistance, just like in previous years.

“This is a huge hole. But as a state, we cannot afford to finance the war with Russia, an enemy that is many times bigger than us economically, without such a deficit. And the fact that we can still function somehow, and, in principle, people in the rear do not feel the full impact of impoverishment, is only due to the donors and our Western partners who finance this deficit,” Repko explains.

For the past two years, “half of the state budget has come to us through Western and Japanese loans and grants, grant aid. But in the 24th year, we have problems.

First and foremost, there is a delay in approving grant aid from the US, where discussions are still ongoing on whether to provide support or not.

“In the United States, assistance to Ukraine is really very difficult. Negotiations are underway, and everyone is working to ensure that the US finally votes to provide aid to Ukraine, but so far, this has not happened,” says Maria Repko.

The European Union is also delaying assistance. Unlike the US, the EU provided Ukraine with loans rather than grants. The MPs explained they were on favourable terms, long-term, with a low-interest rate. The EU plans to continue assisting the Ukraine Facility programme in 2024, but it has not yet been voted on.

“The European Commission is going to allocate 50 billion euros for 4 years. But this large amount of aid, all these 50 billion packed into this Facility, still needs to be voted on by the European Parliament and the European Council.

When you have half of the budget to be financed from loans that have not yet been approved as of the beginning of December but only exist somewhere, perhaps on paper, perhaps in the minds of MPs from different foreign countries, there is a very high risk that there will be a lack of aid,” Maria Repko believes.

And under such conditions, the state will have to resort to “printing money or tightening belts. And this can become very problematic for Ukraine.”

An additional factor in the problems with budget revenues is the situation on the border with Poland. Because of this, “there is a risk for Ukraine of not receiving payments from customs” that are supposed to fill the army’s budget.

Alternatively, Ukraine can rely on so-called bridge financing, suggests Maria Repko, explaining that these are “preliminary tranches that precede the programme, but not within its framework, such advance payments until the programme is approved.”

Source: Radio Svoboda