State Budget 2024 brings Ukraine back to reality

In Ukraine’s state budget for 2023, local budget expenditures for capital expenditures and improvements were frozen, and funding for many projects developed before the war began. This was stated by Hlib Vyshlinsky, Executive Director of the Centre for Economic Strategy, on Ukrainian Radio.

Meanwhile, the aggressor state of Russia is spending more and more money on the war. Therefore, the draft state budget of Ukraine for 2024 has brought the budget back to the reality that society expects, Vyshlinsky believes.

He adds that the money from local budgets, which was not really earned by them, is being returned to the state budget. And this creates one of the sources of additional spending on defence and modern weapons in 2024. On the other hand, the expert notes that there is a very significant reduction in central budget spending on any capital expenditures for reconstruction.

“Now they are building a street to nowhere near me in Kyiv, it’s a dead end…”

– The budget process is now in full swing. The government has prepared the draft state budget for the second reading, and now the Verkhovna Rada of Ukraine has the final say.

If the budget of 2023 was more of a budget of attempted reconstruction, then the budget of 2024 is the moment of returning to the budget for Victory. In 2023, the budget envisaged a lot of capital expenditures, i.e. funds to rebuild what was destroyed in the first calendar year of the war in the de-occupied territories. Also, local budget expenditures on capital expenditures were unfrozen for investment in public amenities. On a scale larger than planting flower beds.

As a result, in mid-2023, a public attitude was formed that something was going wrong. The enemy was concentrating all its efforts, including financial and managerial ones, on spending money on new technologies that would help turn the situation at the front in its favour, and in Ukraine, primarily from local budgets, many projects developed even before the war began to be funded.

Now, near me in Kyiv, they are building a street to nowhere, a dead end. The decision was made a week before the full-scale invasion, then frozen, and then construction began this spring.

So, we have a perception that we are spending a lot of money on expenses that are not fundamentally important during the war. And the enemy spends money on war. Accordingly, the draft budget for 2024 has slightly overturned this situation, bringing the budget back to the reality that society expects.

In other words, we are taking money from local budgets that was not really earned by them, it is a personal income tax on military personnel that the state budget pays to local budgets. So, through these accounting calculations, the funds are returned to the state budget, creating one of the sources of additional spending on defence and modern weapons in 2024.

On the other hand, there is a large field for meaningful discussions – a significant reduction in central budget spending on any capital expenditures for reconstruction. In fact, this money is not currently allocated, but it is only envisaged that the Reserve Fund – about UAH 45 billion – will be used to finance critical reconstruction issues, as well as funds from international donors.

– People today demonstrate their sharply negative attitude, and the formula “No to big construction! Everything to drones! Everything for the Victory!”. Does the central government have effective levers to bring order to these issues at the legislative level?

This issue will be largely resolved by the decision on military personal income tax (PIT – ed.). Because if there is no money, there is no extra construction.

Again, let me emphasise that local communities do not earn this money. The fact that some military units were deployed in certain settlements was often a matter of completely old decisions, accidents or semi-corrupt arrangements with local authorities.

That is, it is partly a matter of money and partly a matter of local community control. After all, what was initially perceived as strange distortions is now beginning to be met with real rallies outside local authorities.

On the other hand, there must be some systemic solutions. When local governments purchase some military equipment, we understand that they do not have the expertise to make such decisions.

So, we need to move towards systemic solutions, such as paying personal income tax not at the place of work but at the place of registration. This will help to equalise revenues and make income more fair. To correct the imbalances when some settlements have no money and are living on welfare, especially in the de-occupied regions, while at the same time, there are settlements that do not know where to spend this money.

The decision to impose a total ban on any treasury operations on capital expenditures and then some individual solutions is not the best option.

This is all a very large-scale hole that has not been completely closed today.

If you look at the draft state budget for the second reading, about UAH 1.7 trillion is revenue, UAH 3.2 trillion is an expenditure, and UAH 1.5 trillion is the deficit. As we can see, the deficit is comparable to the revenues, and all this is calculated on the basis that about UAH 200 billion – the price of the military personal income tax issue – goes to the state budget.

But for the next year, we still have a very large funding need. And no matter how much we talk about our international partners who signed the Budapest Memorandum and now don’t want to defend us, so let them give us money. Unfortunately, certain congressmen in the United States think differently.

They think differently about the money that Ukraine expects to receive to cover its budget deficit. For example, from the United States, it is about $10 billion a year out of the total amount we need. The total amount is $42 billion for the next year, of which $36 billion is to cover the deficit that arises from the need to finance the Defence Forces, and $4.5 billion is to cover old foreign debts.

All of this is a very large hole that has not been completely closed. As of the beginning of November, we have a situation that is significantly worse than we had a year ago at this point.

– Is there a logical assumption that this PIT card benefits the parliamentary opposition, which directly or indirectly opposes the central government?

For me, it is unpleasant from the opposition’s point of view. This is not the first time.

Let me remind you how the issue of paying 30,000 hryvnias to all military personnel, regardless of whether they are on the front lines or somewhere in Zakarpattia, was raised. At that time, a giant campaign was organised to block the Verkhovna Rada’s decisions on other important issues.

Unfortunately, the parliamentary opposition, which was in power before the 2019 elections and understood how difficult it was to make ends meet even in peacetime, is now, in times of war, when every penny is important for funding the Defence Forces, coming up with ways to say that the government is doing something wrong.

But in reality, this money is simply not there. In the worst case, it will have to be printed, which will be a new topic for the opposition to attack the government even though the government does have shortcomings. For example, the issue of financing TV series is a very strange and, at the same time, “good” indicator.

I remember the pre-war meetings of the Budget Committee at night…

– Where is the line between wishes and the harsh reality of war?

It is true that the volume of MPs’ initiatives is smaller in terms of available expenditures compared to pre-war times. The MPs have to reflect the priorities of their constituents, and there is a legal procedure in the parliament where the government introduces, the MPs make proposals, then the government considers, and the MPs discuss again.

During these meetings, it is clear that MPs’ discipline increased significantly during the war. I remember the pre-war meetings of the Budget Committee at night, when no one could fully understand, except for a few people most involved in the process, what had been approved and what would be introduced in the Rada next.

Now, everything happens calmly in the daytime and can be controlled. I think this balance is close to reality because the deputies now understand that there must be a point at which you stop and vote for the only responsible decision.

Source: Ukrainian Radio