War for survival. How to close the “hole” in the Ukrainian budget, and what will happen without money?
The UAH 1.8 trillion of revenues that the Ukrainian economy can provide next year are matched by UAH 3.3 trillion of expenditures. And there is a UAH 1.5 trillion deficit, i.e. the difference between revenues and expenditures. This is, in fact, the other budget, says Hlib Vyshlinsky, executive director of the Centre for Economic Strategy, to BBC News Ukraine.
“The ‘hole’ in the current year’s budget is a quarter of the total GDP. Next year it will be slightly less – 20%.
One solution is the law passed by the parliament to redirect the military income tax from local budgets to the state budget. This revenue, which unexpectedly appeared in local budgets when the war began, sparked fierce debate about paving and landscaping instead of drones.
According to Serhiy Marchenko’s estimates, this redistribution will bring in more than UAH 200 billion, or about $6 billion, next year.
According to Hlib Vyshlinsky, the adoption of the law is the first sign of “sobering up”, and the government and society understand the need for financial mobilisation.
The minister says that if the “hole” is $10 billion, this will also be a solvable problem, but the government will have to “cut spending somewhere, increase taxes somewhere.”
Most likely, such steps will be similar to what happened in 2022 – the refusal to increase salaries for public sector employees, indexation of pensions, and increased tax pressure. This will look ” unpleasant” and unpopular, says Hlib Vyshlinsky, but it is unavoidable.
But the government does not know how to cover the more than $20 billion gap.
The government will hardly dare to reduce the provision of the military, Hlib Vyshlinsky says, because it will undermine morale. The government is also unlikely to abandon pension indexation. In the expert’s opinion, more realistic is the resumption of money printing – through the National Bank’s purchase of the Ministry of Finance’s bonds, as it was in the spring and early summer of 2022. He recalls that UAH 400 billion was injected into the economy in this way.
“This created the need to devalue the hryvnia from UAH 29 to UAH 36.6 to the dollar, and this led to inflation of 26%,” Vyshlinsky recalls.
“After we received large and regular external financing, we have inflation of 6% instead of 26%.”
Source: BBC News Ukraine