The desire to change the basic rules in favor of certain interest groups and avoid the risks of ‘not being heard’ during the formulation and execution of the national budget encourages members of parliament (further MPs) to hitherto unknown activity of initiating amendments to the Budget Code of Ukraine. While financial resources to meet all these whims are missing for a long time, yet the appetite does not diminish.
Lack of financial resources and their governmental control forces MPs lobbying of various interest groups to call for amendments to the Budget Code. These are designed to provide at least an illusory hope to lobbyists for spotted modifications or exceptions to the basic rules. The desire to change the budgetary rules in favor of certain interest groups substitutes routine legislative work on the national budget, its optimization, and diminishing the possibilities for losses that may constitute almost a half of budgetary expenditures (about UAH 200 billion, equivalent of USD 25 billion).
The unprecedented activity of MPs towards amendments to the Budget Code of Ukraine demonstrates the unpredictability of the budget process and weakened stability of public finances. However, the effectiveness of these efforts remains minimal.
The essence of legislative initiatives rarely coincides with the election program and declared intentions of the political parties. In some cases it would be better to perform relatively clear program provisions, particularly in relation to local budgets. Campaign intentions of many political parties were formulated quite generally that had allowed to report on program performance through a broad range of initiatives.
The promises of the political parties regarding the budget process
Public finance is a tool to implement public policy, which is why political parties in their election platforms paid some attention to the budget process. However, even the least of what was promised had failed.
The Party of Regions has firstly committed to provide 60% of consolidated state budget to local councils. But even in the estimates for 2013 , the share of local budget revenues amounted to only 46 %, and expenditure were much less - 43%. In 2012, the share of local budget revenues amounted to 51 %, and expenditures - 45%.
Election intentions of the Communist Party to ‘return of the country to the people’ have logically reflected in ‘bottom-up’ state budget formation promises. It should be noted, however, that they were probably stated in line with the campaign slogan ‘to bring the country back to people’. And it seems that the authors of the communist program were well aware that they had been unlikely to implement the declared intention because of the traditional coalition and heating on the side of the Party of Regions.
The promises of UDAR were more technologically advanced and met the requirements of the public finances: to make the budget work for the benefit of all citizens; to establish a system of mandatory public reporting of the budget for every citizen to be able to monitor the revenues and expenditures at all levels in real time; to ensure transparency in public procurement. But even such specificity did not lead to implementation of the intended program.
The program of the All-Ukrainian union ‘Batkivshchyna’ aimed at creating the conditions when paying taxes would be more profitable then bribing the officials. In addition, according to the extended version of ‘Batkivshchyna’ electoral program the personal income tax and land tax should have entirety remained in local budgets. However, this intention obviously lacks consistency.
All-Ukrainian union "Svoboda" did not provide specific commitments regarding the budget process, but its representatives have made efforts to improve financial capacity of local budgets.
The practice of election promises implementation by political parties
Within the first year of the Verkhovna Rada of Ukraine seventh convocation MPs filed nearly 120 draft-laws (excluding the relevant draft resolutions of Parliament) on amendments to the Budget Code. This is an unprecedented phenomenon for all the years of work of the legislature since the introduction of the Code in 2001. For comparison, for four years of the previous sixth convocation (2007-2012) these initiatives amounted to 77, in the fourth convocation (2002-2006) – to 49 only.
However, the efficiency of such work does not exceed 4%. In 2013 only five of these draft-laws had passed all stages of the legislative process and become part of the acting legislation. The same amount was rejected by the Parliament. The absolute majority of draft laws (almost 100 of them) is pending revision in parliamentary committees.
Thus, there is a steady tendency to change the basic rules of the budget process in favor of certain interest groups. It is particularly intense in the present Parliament. This is despite the fact that the current government in 2010 initiated and approved a new version of the Budget Code.
By the way, in fact the Party of Regions has been ranked first by the number of initiated amendments to the Budget Code - its members submitted 47 draft-laws. Representatives of ‘Batkivshchyna’ despite the relatively smaller fraction introduced to the Parliament 39 such draft-laws. The absolute leader among MPs of all factions in intensity of the Code ‘improvement efforts’ was ‘Barkivshchyna’ representative Tetyana Sliuz, former head of the State Treasury. Despite the above stated, ‘Batkivshchyna’ initiatives should better be introduced in the complex draft-law on the systemic changes of the Budget Code.
Fractions of UDAR and ‘Svoboda’ were acting uniformly by submitting 12 draft amendments to the Budget Code each, while the Communists were outsiders and introduced 8 draft-laws only.
Why is the Budget Code a constant subject for change?
The Code as a whole must describe the mechanism of the budgetary system and budgetary process, introduce the basic principles of their work, assign stakeholders with clear rights and responsibilities and , most importantly, establish procedures to objectively clarify the need for financial resources for territories and industries, ie different interest groups, which are represented in the parliament .
Specific indicators for allocation of financial resources, certain preferences shall be designed by basic fiscal policies and the law on the national budget.
Consequently, the Budget Code, on the one hand, and the law on the national budget, on the other, both have fundamentally different functions. However, a flurry of legislative initiatives to amend the Code indicates that this functional division is not working.
On the one hand, Code norms being abstract and disconnected from reality (as in the case of distribution of personal income tax between the different categories of territories and settlements) do not contribute to adequately accounted interests of communities or sectors in the budget process. The budget process shaped by the Code norms should create conditions for stakeholders to adequately formulate their needs, and these would not lie beyond the scope of affordability. Such conditions do not exist at the moment. Moreover, some provisions of the Code complicate the situation in advance.
On the other hand, the interests of the cities, regions, financial and industrial groups or certain social initiatives cannot be met within the budget process. It is clear that the national resources, as well as the market resources, are limited, and they will not be enough. Thus MPs seek to fix the guarantees to obtain the funds in the Budget Code to avoid risks of ‘not being heard’ during formulation and execution of the national budget. Thus the vast majority of the MPs’ initiatives aimed at changing the rules to favor certain interest groups. These introduce special and more favorable mode of formation and administration of certain costs. Thus they create the exceptions to the rules.
It turns out that a list of principles declared in the Budget Code, such as relevance, effectiveness and efficiency, fairness and impartiality, remains abstract for many stakeholders of the budget process and devoid of practical daily use.
The legislative initiatives analyzed in this paper were structured according to the areas of election promises of political parties represented in Verkhovna Rada, based on the ‘Open Society’ Foundation methodology. The Foundation had been analyzing the activities of political parties in the parliament for 12 consecutive years.
1. Money (on budget, finance, industry, business - everything about business and economic activities in Ukraine).
2. Person (a broad category that combines social, humanitarian, cultural and environmental issues - everything about the quality of life of citizens of Ukraine).
3. State (covering issues of state building, the system of legislature, judicial reform, fight against corruption; includes development and statutory authority of the Verkhovna Rada of Ukraine).
The array of analyzed draft-laws excludes those on financial support for the foreign policy of Ukraine.
Let us consider the ‘Money’ section in detail below (sections ‘Person’ and ‘State’ were analyzed in detail in the second part of the material in the upcoming issue of ‘Dzerkalo Tyzhnia’ (DT.UA)).
Money
Why follow the rules when you can get around them? Obviously, the authors of the draft law No.3377 on debt relief for the target loan have kept this in mind. Budget Code expressly prohibits write off companies’ loans to the state except bankruptcy and related court decisions. However for Kerch Training and Production Enterprise of Ukrainian Society for the Blind ‘Crimea- PAK ‘ the options of bankruptcy or court were obviously not attractive. That’s why the write off the debt up to the amount of UAH 5,580 millions was resolved through amendments to the Budget Code. The legal formula suggested by authors was also impressive: “In case of debt relief for “Crimea- PAK" the prohibition to write off the debt is not valid." This is not only a legal absurdity, but also a violation of the constitutional principle of the rule of law. Interestingly enough, the initiator of the draft-law was the representative of the ‘Bartkivshchyna’, and co-authors were MPs from the Party of Regions. Thus, declaring the fight against corruption as a program goal the oppositional ‘Batkivshchyna’, at the same time, did not omit lobbying specific business interests that had zero social benefit. Moreover, this was done in coalition with political opponents .
How to implement pre-election programs of political parties? By creating a special regime of financial support for each program promise.
For example, the Communist Party promised to ensure the development of knowledge-intensive sectors and industries. These promises were embodied in the proposal to introduce, no more and no less, a new type of subventions to local budgets for innovative programs (draft-law No.1091 on the Transition of Ukraine’s Economy to the Mode of Innovative Development).
The Party of Regions was also speaking for high-performance innovation economy. Thus its members decided to act differently and in a simpler manner. A number of draft-laws introduces by its MPs involves covert targeted support for certain activities that generally should not be subject to regulation by the Budget Code:
- Use of special targeted surcharge to the current tariff for electricity and heat in the energy sector only, excluding electricity generated by qualified cogeneration units (draft-law No.1235) . The price estimate – UAH 2.5 billion;
- Create sustainable sources of income for businesses in energy services sector by introducing so-called long-term commitment of public institutions, with the signing of contracts irrespective of the counters installed (draft laws No.2549a and No.3014 ). Local budget expenditures for the services of heating, electricity and natural gas cost more than UAH 12.5 billion;
- Fund recycling programs for vehicles through environmental tax (No.2593a). The price estimate – UAH 3.37 billion;
- Financing of environmental activities on mining, metallurgy, carbonite, chemical and petrochemical, fuel and energy, cement production enterprises by 70% of the income from the same environmental tax (No.2807) . The price estimate – UAH 1,75 billion.
By the way, the initiative of ‘Svoboda’ to increase special fund of local budgets with the mentioned environmental tax (draft-law No.2126) was not supported by the Parliament. In this case, the interests of particular business were more important. Alternatively, there might had been the need to take a new lead, as similar draft-law was later introduced by the Party of Regions MP (No.3169 ). The background in both draft-laws was essentially the same - the tax should be paid by all, but the government distributes it for individual entities only.
At the same time, Party of regions MPs were actively developing the idea of placing public funds in the state-owned banks. On the one hand, this could be an additional market segment and sustainable source of income for these institutions. On the other hand this would reduce the risk of freezing the funds at the Treasury accounts. Besides already mentioned ‘specific’ educational draft-law, Sergiy Tihipko’s initiative (No.3764) offered this possibility to all entities distributing budgetary funds. The draft-law introduced by Yaroslav Suhiy (No.3804) derives from the funds of the Ukrainian Obligatory State Social Insurance Fund for Unemployment Cases from the Treasury. Fund’s budget is currently about UAH 12 billion.
Election promises of ‘Batkivshchyna’ on fight against corruption were reflected in a number of draft laws on amendments to the Budget Code. Perhaps most of them should be merged into a single package.
This would increase their chances of adoption:
- Introduce parliament control over debt policy and provision of state guarantees; increase of the amount of public debt with the consent of Parliament (draft-law No.2040) . The amount of state guarantees established by law on national budget for 2013 was UAH 50 billion;
- Grant State Treasury the right to conduct on-site inspection in public procurement (No.2289);
- Establish an exhaustive list of documents to be submitted to the treasury to pay for public procurement contracts, refinement of procedure of payments for capital expenditures (No.2571a);
- Empower local councils and Verkhovna Rada to negotiate the redistribution of budget allocations (No.2781);
- Admission of fees from the provision of administrative services to the general budget (No.2472). Price estimate - UAH 2.8 billion;
- Conduct budgetary calculations in cash payments only, while limiting the treasury bills (No.3528).
Additionally to solve the problem of the deficit of the Pension Fund of Ukraine (about UAH 22 billion in 2013), ‘Batkivshchyna’ offered to cover it with charges on transactions with offshore jurisdictions (No.3126) and grand Pension Fund the right to engage interest-free loans from financial institutions (No.3024). These actions can be seen in the context of pre-election promises on fair pensions, as the latter require reliable resources.
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Thus, desire of MPs for spotted attempts to influence each individual problem, through creation of special regimes of financial support for each program promise, did not solve the problem altogether. Furthermore, a list of principles declared in the Budget Code, namely its relevance, effectiveness and efficiency, fairness and impartiality, remain abstract for many stakeholders of the budget process and have little to do with the actual practice of legislative activity.
