Article “The Naked King – 2”, “Dzerkalo Tyzhnya” № 3, January 31, 2014.
The promises of parliamentary parties to increase financial self-sufficiency of Ukraine’s regions and reduce their dependence on the central budget were not met in general. Moreover, they were treated selectively based on political expediency. The opposition was forced to play by the rules of pro-governmental majority, initiating new forms of subsidies and revising statutory transfers of certain taxes. Although these initiatives were designed to support local communities, they still did not address the fundamental question of traditionally weak financial base of local budgets.
For more than a year the 7th convocation of Verkhovna Rada was in place, despite campaign promises of political parties present in the parliament, regional and municipal budgets had not received more financial capacity to solve local problems within the existing mandate.
Instead of compelling and simple steps (e.g. leaving personal income tax (PIT) in a local budget, dealing with the land tax and ensuring the implementation of competitive and transparent procedures for the sale and lease of land plots through tenders and auctions, increasing the share of other taxes, meaning increase of the second basket, actually implementing target-oriented method for formulating and reporting on the budget) the practice of spotted attempts to make exceptions to the rules in order to increase revenues to individual local governments had continued. Such selective practice was hopeless; it was rather simulation-and-manipulative implementation of pre-election promises. Most importantly, it failed to fundamentally address the existing situation.
Moreover, every year the share of local budgets revenues and expenditures is being reduced. The heads of the local communities remain ‘hooked’ by the government transfers from the central budget. In fact, mayors are nothing more than “naked kings”. Even if there was a desire to change things for the better, this was usually accompanied by limited financial resources for such change.
When promises do not meet the action. Members of the Party of Regions and the Communists were not able to take any steps towards increasing the financial capacity of the Ukrainian regions. They bet on the centralization of fiscal policy.
The Party of Regions (PR) promised the voters to give 60% of consolidated central budget to local councils and expand the powers of local self-governments. By controlling majority in the Verkhovna Rada of Ukraine, given the head of the government was PR member, the Party of Regions had more than sufficient opportunity to fulfill campaign promises. Moreover, provision of additional financial opportunities to local budgets and, therefore, Ukraine’s regions and local communities would correspond with the name and the mission of the party that presents itself as the defender of the interests of the regions. However, the actual political practice suggests that PR has chosen a different approach.
PR placed its bets for the redistribution of financial flows through the central budget, which had provided it more options to control the financial flows to local budgets through targeted subsidies and donations. This strategy allows one to control the regional elites and mayors who continue to be dependent on governmental decisions. Given the dominance of non-transparent and non-competitive procedures for determining winners in the budget procurement such fiscal policy certainly creates opportunities for lobbying «friendly» contractors.
Quite symbolic, the share of local budgets in revenues and expenditures of the central budget decreases from year to year. As estimated for 2013 the share of local budget income was only 46%, and expenditures share was even less - 43%. Significantly enough, the 2012 share of local budget income equaled to 51%, and expenditures – to 45%. The draft central budget for 2014 forecast was even worse. Although the absolute amount of local budgets compared to 2013 increased by 6.7% to UAH 234.9 billion, it was only 47% of the estimated consolidated budget - UAH 498.9 billion.
Pre-election intentions of the Communist Party on “returning the country to the people” have found logical reflection in the thesis on the ‘bottom-up’ approach to central budget formation. However, this progressive campaign slogan of the Communists was left on paper and professionally made commercials and posters designed for voters nostalgic over the Soviet Rule. Among the reasons for Communist party inability to “return the country to the people” were traditional blocking and heating of Party of Regions. Joint voting with PR for the draft central budget for 2014 had once again confirmed the political position of the Communists being at odds with their election slogans and promises.
PR and the Communists mainly imitated the care of local governments and mostly advocated interest groups and cities represented by their MPs, elected through majority vote. PR initiated many exceptions to the existing rules in order to increase revenues to specific local governments.
The noticeable draft-laws include:
- Increase of the share of resource payments by 10-20% for the use of forest, water, mineral resources as local budget revenues while reducing by half the proportion of personal income tax taken into account in determining the transfers (2375a);
- Increase of the personal income tax share in local budgets (2478a);
- Admission of the paid personal income tax by agricultural producers to the relevant local government budgets at the place of residence (2547a);
- Replacement of budgetary borrowing with additional targeted subsidy in the amount of non-compliance revenues, established by the law on the central budget (2620a);
- Increase of the State Regional Development Fund from 1 to 3% of the central budget, empowerment of the Cabinet of Ministers and the parliamentary Budget Committee to distribute the costs of the fund (2271a);
- Increase in allocations to local budgets for subsoil use (2611).
The draft-laws that look especially “innovative” and thus unrealistic are the initiatives of the Party of Regions on allocation of the income tax for enterprises to local budgets (2918) and prosecution of the treasury employees for the use of funds of local governments without their consent (2465a). Does this mean civil servants have to be prosecuted for the execution of the orders of central government? The draft-law on the inclusion of revenues from the extraction of some types of kaolin and clay (2944) in general local budgets revenues looks equally bizarre, as only those regions where there are such clay and kaolin deposits are present would benefit from it.
A number of draft-laws were designed for regulating the procedures and strengthening the budgetary discipline and execution of local budgets, tax administration, widening local government powers in budget process and advocacy of Donetsk city interests in the formation of the central budget of Ukraine (draft-laws 2381, 2382, 2465a, 2479a, 2546a). All these were introduced by M.Levchenko – PR MP, elected from majority vote Donetsk district.
To summarize, despite the real opportunities to fulfill electoral campaign promises to decentralize the central budget and increase the share of local budgets possessed by the Party of Regions and the Communists, traditionally blocked the 7th convocation parliament, they had failed to produce a joint position regarding the decentralization of the budget process. Presumably, the declared policy of fiscal decentralization did not fit in vertically centralized model of state power, even under the PR control of executive branch (Regional State Administrations, Rayon State Administrations), mayors and local councilors in many cities of Ukraine.
The draft-laws introduced by UDAR, “Batkivschyna” and “Svoboda” on fiscal decentralization were mainly spotted and incomprehensive and focused on city of Kyiv mostly.
UDAR and United Opposition “Batkivschyna” in their pre-election promises concentrated on the importance of decentralization of the budget process, transparency of subsidies and subventions.
Promises of UDAR were more technologically advanced and meet the requirements of the public finances: they were designed to make a budget work for the benefit of all citizens, to establish a mandatory system of public reporting on the budget, in which every citizen could monitor in real time the revenues and expenditures at all levels, and to ensure transparency public procurement. Among other election promises UDAR claims “provision of funds to local community… 100 % of personal income tax, land tax and property should stay in the community. The redistribution of revenues from other taxes should be endured in order to provide funding for community needs.”
The election agenda of “Batkivschyna” involved creating the conditions in which it would be better to pay taxes than bribes to officials. In addition, according to the extended version of “Batkivschyna” agenda personal income tax and land tax should entirety remain in local budgets. United Opposition “Batkivschyna” set the same goal of “returning to 2009 version of the Budget Code, which established the financial basis for local self government: personal income tax and land tax in full shall remain in the local budgets”.
However, even such specificity did not imply real progress in the implementation of the agenda. One should take into account inability to form the majority by the opposition in the parliament of the 7th convocation, which was a significant obstacle to change financial flows in the country. It should be noted, however, that for some reason, the implementation of opposition campaign promises regarding fiscal decentralization was largely limited to the budget of Kyiv.
In particular, three draft-laws - two submitted by the UDAR faction (1090 and 1090-1) and one by “Batkivschyna” faction (№ 1090-2) focused on restoration of the practice for contribution to the budget of Kyiv of 100% of the personal income tax, in force until December 2010. Certainly, it would be in the interests of Kyiv inhabitants, who could refuse transfers from the state budget in case of preservation in the city budget of 100% of personal income tax.
The “manual” control over withdrawal of 50% of personal income tax , which is the largest source of the city budget revenue, and “tie” of the Kyiv budget to the transfers from the central budget makes any Kyiv mayor a hostage to the government. Traditionally, personal income tax ranges from 40 to 50% of the total revenue of the capital city budget, and removal of 50% of the personal income tax revenues to the state budget, which was introduced by the new Budget Code, was a brilliant plan of the Party of Regions. The capital being no more than 10% of PR electorate, this party thus gained control over Kyiv cash flow. Any mayor who, not having enough financial resources, had to go to the government and “stay in line” for subventions or subsidies.
All three draft-laws introduced by UDAR and “Barkivschyna” were recommended for rejection by the parliamentary Budget Committee due to various reasons. Firstly, in Kyiv many visitants work, thus increasing a revenue basket for Kyiv would reduce the income of other towns and villages. Secondly, the change of the Budget Code means amending the Law on the central budget, but such changes were not developed by the draft-law authors. Thirdly, the increase in income in Kyiv would result in increased contributions to the state budget and partial redistribution of other subsidies and grants. Thus, one can conclude UDAR and “Batkivschyna” had partially fulfilled their pre-election promises. Motivation and focus of UDAR and “Batkivschyna” attention on Kyiv is logical given the traditional electoral support of the opposition (UDAR, “Batkivschyna” and “Svoboda”) in the capital of Ukraine. However, such selective approach focused on Kyiv (obviously, with all the same electoral considerations. - Ed.) gave a solid foundation to PR, which controls the Budget committee, to reject all three legislative proposals submitted by the opposition.
Among the initiatives of the opposition political parties (UDAR, “Batkivschyna” and “Svoboda”), aimed at restoring fiscal decentralization and financial capacity of local budgets, there are many draft-laws worth mentioning (2527a, 2242a, 3268, 3477, 3618, 3652, 2283, 2314a, 2223a, 2242a-1, 2622, 3675, 2334, 2706, 2994).
Among the draft-laws introduced by “Batkivschyna” focused on fiscal decentralization, it is worth to pay attention to the following.
Draft-law 2527a suggests directing the personal income tax by place of residence of the employee, and not the location of the employer. The justification of this approach is interesting because “personal income tax is a payment of an individual for services rendered by the territorial community in which such individual has a tax address”. However, people pay separately for administrative services, and when it comes to spending on education and health in the entire country personal income tax would not create sufficient base to cover the cost of these services. PIT revenues to local budgets are about UAH 70 billion, while spending on education - over UAH 71 billion, and health care – UAH 47 billion.
However, transfer of personal income tax is indeed a problem that needs a thorough study and preparation of balanced proposals. On the one hand, there are constitutional principles of freedom of movement and freedom to work. On the other hand, citizen’s tax address is actually the address of his/her registration. Thus, if a citizen lives in one place and works in another place, the transfer of personal income tax at the place of registration will have nothing to do with obtaining services provided by the territorial community.
The draft-law 2242a proposes to transfer to the second basket of local budgets revenues 20% of corporate income tax, and increase local budgets income from a number of resource payments.
The draft-law 3268 proposes to set clear deadlines for government approval of the list of projects funded by the State Regional Development Fund being three months after the date of enactment of the law on the state budget. Two months from the same date should be the deadline to establish an order of intergovernmental transfers. The reasoning here lies in long delays in the approval of these documents by the Government (up to six months), resulting in the situation when local governments receive money at the best in the third and fourth quarters.
The draft law 3477 introduced a new subvention to local budgets for construction, repair and renovation of schools and kindergartens. This subvention is intended to ensure proper learning conditions, and it should be planned based on the dynamics of fertility in different regions of Ukraine.
The draft-law 3618 introduced a clear separation of subsidies from the state budget to local budgets for construction, reconstruction, repair and maintenance of streets and communal roads: 70% for reconstruction, and 30% for construction.
Taking into account the blocking of local budget accounts in the state treasury, the draft-law 3652 proposed to leave the funds on the accounts in the next budget period, rather than deduct, as provided for in the Budget Code now.
The draft-law 2283 initiated by “Svoboda” proposed to solve the problem of blocking in another way. Namely, it allowed the Parliament of the Autonomous Republic of Crimea and local councils across Ukraine to determine financial institutions to service their respectful local budgets.
“Svoboda” did not provide any specific commitments regarding the budget process, but its representatives also called for restoration of the financial capacity of local governments. On can mention here the draft-laws on the admission of personal income tax to the relevant local government budget for the tax address of the individual taxpayer (draft-law 2314a), and the one regarding the inclusion of a number of revenues to the second basket of local budgets (2223a).
Specifically, the draft law 2223a moved from the first to the second basket of local budget the revenues of 50% of fees for the use of subsoil for mining of the national importance (excluding payments for subsoil use for oil, natural gas and gas condensate from the list). The difference between the two baskets is that revenues to the first basket are relevant for intergovernmental transfers, and those of the second basket are not relevant. The second basket income is actually the own revenues of local budget.
“Svoboda” also submitted the draft-law suggesting leaving 100% of personal income tax in possession of Kyiv and Sevastopol city councils (2242a-1). Another draft-law introduced a new subsidy for social and economic development of certain areas (2622). An interesting draft-law 3675 proposed to leave in local budgets second basket half of the corporate income tax collected in the territorial communities, as well as VAT and excise duty on goods manufactured in Ukraine.
Among the legislative initiatives introduced by UDAR it is worth noting the draft-law 2334, which suggested directing the fees for notarization of real estate in the budget of the settlement, where the property located. The reason is that notaries work in the district and regional centers, thus the village and small town communities with no registered notaries are to lose this source of income.
UDAR parliamentary faction while ensuring the provision of the funds for local communities, and also caring of the financial side of urban development, proposed to introduce a new subvention for urban planning monitoring, namely creating and maintaining urban planning cadastre, accompanied with development (update) of city planning documentation (draft-law 2994). This initiative is important because majority of local governments usually lack funds to develop urban planning documentation, which provides wide opportunities for mayors and city council deputies to manually distribute and change the purpose of land, make numerous amendments to the general lay-outs of cities (if such exist) in virtually uncontrolled manner.
An interesting proof of the imbalance, lack of transparency in the allocation of subsidies is the draft-law 2706 on the redistribution of the subsidies in 2013 from the central budget to local budgets for capital repair of water supply and sewerage systems. This subvention was intended only for six regions - Donetsk, Dnipropetrovsk , Zaporizhzhya, Luhansk, Mykolaiv and Kherson. The authors of the project proposed to leave 30% of scheduled subvention (UAH 440 million) to these regions and redistribute the remaining amount among all other regions of Ukraine proportionally to population size.
Conclusions
One could argue that electoral campaign promises of decentralization of the budgetary process and increase of the financial capacity of local councils remained largely on paper. Although ostensibly significant activity to meet pre-election promises made by opposition political parties (“Batkivschyna”, UDAR and “Svoboda”), they have failed to produce a joint position on this issue and continued the practice of spotted attempts to make the exceptions to the rules in order to increase revenues of specific local governments. Such selective practice given the absence of a majority in parliament was not productive for the opposition, and most importantly – had not fundamentally changed the situation.
Party of Regions and the Communist Party, which, along with unaffiliated MPs control the majority in the Verkhovna Rada of the 7th convocation, with real opportunities to fulfill their electoral campaign promises to decentralize the central budget. Yet, they also introduced “targeted” draft laws. They, just like the opposition, had failed to produce a joint position on the decentralization of the budget process. It is likely that the declared policy of fiscal decentralization did not fit in vertically centralized model of power, which was advocated by the Part of Regions since 2010.
All these unfortunately resulted in the simulation of the care of local governments, while the annual reduction in their share of revenues and expenditures in central budget being the reality.
