The fiscal results of 2018

In 2018, fiscal policies did not undergo radical changes either in revenue or in spending.

These changes are ahead – in 2018, the Verkhovna Rada voted for the country’s transition to a three-year budget planning. So, the budget for 2019 has already been adopted taking into account the three-year plan. The budget for 2020 can be the first among the budgetary documents that will take into account the strategic objectives of the government policy and allocate the resources according to priorities rather than historical practices. This chance is to be given by a new composition of the Verkhovna Rada, which will vote for the budget after the elections, in October. As a result of the 2018 budget, Ukraine still redistributes too much money through the budget – about 43% of GDP. Economic growth could accelerate if this level fell below 40%. This can be achieved due to well-thought planning: in 2019, budget planners will face functional revisions of budget expenditures.

The 2018 budget like previous budgets has both positive and negative points. The main ones were:

Positive points:
Due to the UAH revaluation, the debt servicing expenses were UAH 12 billion lower than expected, which contributed to a decrease in mandatory budget expenditures.
Like in 2017, the primary balance of the state budget turned out to be positive – UAH 56.2 billion (1.6% of GDP).
Reduction of the state and guaranteed state debt from 72% to 61% in relation to GDP.
The lack of quasi-fiscal expenditures, which in the previous years amounted to 2-6% of GDP.
Significant growth of defence expenditures compared to the previous year that reached 2.7% of GDP in 2018.
The successfully financed expenditures relate to the reforms in education and healthcare. The financing of the educational program “New Ukrainian School” and the National Health Service made up 98% and 96% of the plan, respectively.

Negative points:
The distribution of expenditures by functional categories is still far from the optimal one and proves rather a slow process of reviewing costs and improving their effectiveness compared to neighbouring countries in EU. However, the current structure of expenditures by functional budget classification reflects government priorities – significant expenditures for defence and social protection are compulsory and necessary.
Privatization proceeds are not fulfilled again: in 2018, the state received only UAH 269 million from the expected UAH 21.3 billion.

The total expenditures of the general government sector remains high – 43.3%. To accelerate economic growth Ukraine needs to reduce this category of expenditures to 37%.

A 4-fold change of the state budget by the Verkhovna Rada during the year. As a result, there was a reduction of certain categories of expenditures and their redistribution. It suggests ineffective budget planning;
For the first time in the last 8 years, the local budgets have become deficit: UAH -8.2 billion or 0.2% of GDP.
The additional need for funding sources throughout the year. Due to the non-fulfilment of the plan of privatization inflows and the lack of funds for a single Treasury account, the state had to attract additional funds both on the external and internal markets. The problem is that these borrowings will create additional debt servicing costs in the future.
In general, the analysis of the 2018 budget shows the importance of further steps to ensure the transparency and predictability of public finances. Firstly, certain categories of expenditures and financing need to be finalized, since this year there were budget programs that were not fulfilled, and the budget items that did not generate cash inflows. Secondly, it is necessary to proceed to the three-year budget planning according to the budget declaration, which was enshrined in the Law of Ukraine No. 8044 on the introduction of the mid-term budget planning. The adoption of this draft law is an achievement in the field of public finances, as it will make the budget process more predictable and effective in forthcoming years. Third, it is necessary to gradually reduce the share of general government sector expenditures in relation to GDP, as the current level of these expenditures (-43.3%) is too high for Ukraine.