The budget is one-third empty. Where will the government get the money if the US and EU don’t help?
Finding an alternative to funding from the EU and the US is almost impossible. Ukraine is cut off from international capital markets, and the budgets of other partners do not have such significant funds to support Ukrainians. CES experts shared their views on how to finance the needs of 2023 in an article for Ekonomichna Pravda.
“USD 29 billion is more than 13% of the projected GDP in 2024 or two-thirds of the planned tax revenues. It is impossible to compensate for this gap fiscally. However, it is possible and necessary to find resources to reduce the likely amount of monetary financing in case of a shortfall in foreign aid,” said Yurii Gaidai, senior economist at the Centre for Economic Strategy.
Unofficially, government officials say that in the absence of positive decisions on financing, they will have to take unpleasant steps, the consequences of which will be felt by everyone. These steps will vary depending on the amount of money that will be missing and the length of time that the budget will be short of funds for non-military spending.
One possible step is to reallocate funds from local budgets. The Parliament has already approved a law that takes away personal income tax paid on the income of military personnel from communities.
Yurii Gaidai believes that local budgets will generally remain in surplus even after the military personal income tax compensation is stopped. We can see that a number of communities are planning a lot of non-critical expenditures for 2024. There may also be room for spending cuts, although they will face considerable resistance.
Another step is devaluation. A weaker hryvnia will allow for more customs payments. The hryvnia equivalent of international aid will also become larger, which will allow for more spending.
However, the hryvnia devaluation will not be able to compensate for the shortfall of tens of billions of dollars, and the potential negative consequences of the devaluation will outweigh the temporary benefits for the budget. Devaluation of the hryvnia should not be a tool for solving budget problems, said CES Executive Director Hlib Vyshlinsky.
“Firstly, devaluation has a limited effect: additional revenues from import VAT will fall if its value increases. Secondly, it will lead to the imposition of an inflationary tax, which is similar in terms of its negative effect on welfare to the deficit financing by the National Bank,” the expert said.
Source: Ekonomichna Pravda