State budget deficit of 6% GDP to result in public debt increase, its expensive servicing – CES expert

16 September 2020

Ukraine’s state budget deficit of 6% GDP will result in public debt increase and its expensive servicing, Deputy Director of the Kyiv-based Center for Economic Strategy (CES) Maria Repko has said.

“Several things at once make this budget dangerous for macroeconomic stability. Firstly, the budget has a deficit of UAH 270 billion, at about 6% GDP, which is a very large amount,” Repko said on the CES website.

“Financing such a deficit will result in public debt increase and its expensive servicing. Since there will be a lack of cheap funds from institutional creditors to cover the budgetary deficit and still an obligation to pay off the last year debts,” she added.

At the same time, according to the expert, the inflation forecast of 7.3%, on which the state budget was drawn up, greatly exceeds the actual inflation (2.4% in August).

It is therefore highly likely that the government may not receive revenues that it is now counting on, the expert explained.

She also pointed out that the minimum wage increase in Ukraine results in a number of risks and economic incentive distortions.

“This leads to tax burden and budget expenditure increase, to distortions of incentives to invest in consumption (for mainly imported goods) and a new round of the problem of simplified wages for public sector employees, when the minimum wage for an imaginary nurse is slightly lower than that for a surgeon or when the wage of a cleaner equals to that of a university lecturer,” Repko explained.