A significant burden on expenditure part of the budget caused by programs of state support to enterprises significantly increases the risk of default, because such aid does not promote economic growth and therefore wealth of citizens, effective demand and increase in budget revenues, respectively. Poor quality analysis when making government decisions on granting state guarantees has forced the government to pay more than UAH 2 Bln on loans received by companies under the state guarantees in 2014.
Disregarding the country to be on the edge of default, the government continues practice of inefficient financing of enterprises and whole sectors. Thus the budget funds are spent for nothing and social expectations of employees of enterprises, that receive budget support, unreasonably increase.
In general, the budget losses caused by excessive and ineffective state aid to enterprises, nontransparent and noncompetitive public procurement and deficiencies in VAT administration, as well as other schemes with signs of corruption risks and rent- seeking behavior, will amount to UAH 188 Bln (USD 24 bln.) That is almost half of the draft 2014 budget expenditures. Improper personal income tax and land tax administration that make the basis of local budget revenues, and other schemes of “washing out” budget funds, allow estimation of Ukraine budget losses at the level that exceeds UAH 200 Bln (USD 25 Bln).
According to Denis Chernikov (Director of Laboratory for Legislative Initiatives programs) in coal sector budget support of production costs of coal extracted had doubled during 2009-2013. At the same time the production cost of coal extraction is 2.5 times higher than its market price. The expenditures on technical modernization of coal mines are practically not envisaged in the budget. It is indicative that the amount envisaged in the 2014 budget for support of the production cost exactly corresponds to the expenditures of 2013 (UAH 13 301 847.8). Therefore neither the cost benefit analysis was not conducted, nor the Performance Program Budgeting method, according to which the budgetary system of Ukraine should function, was not applied. Taking into account the previous years’ experience, the envisaged amount may grow by 70% or by 100% during 2014 (more than UAH 26 Bln), but a big question remains whether budget funds cover the payment.
Although last year electricity export reached UAH 4.3 Bln, the government plans UAH 2.7 Bln of soft loans for this sector. The budget works with electricity sector at a loss.
In 2014 expenditures on construction and development of highways are three times lower than repayment of loans of this sector. But the government again takes UAH 2.3 Bln of loans for the automobile road sector.
The role of SME for economic growth is underestimated. Micro-loans to SME are planned only in the amount of UAH 11.2 Mln. It is almost 20 times less than it was envisaged by the 2013-2014 government program of economic development promotion, and a thousand times less than financing of coal sector. At the same time the SME sector provides at least one-fifth of consolidated revenues of the budget of Ukraine.
Among other shortcomings of the draft budget Denis Chernikov noted the fact of “non-providing of calculation of budget losses from tax benefits, for the first time in recent years”. As the experience of recent years shows, the absolute amounts of losses are significantly overvalued, and therefore the sectors that really need incentives cannot use the tax benefits”.
According to the estimates of Ivan Sikora, Director of the Open Society Foundation, “one can state more than UAH 100 Bln of losses only in public procurement (USD 12.5 Bln), assuming 30% of “kickbacks” and official estimates by higher officials regarding budget losses because of corruption risks in procurement made in 2011. Its about ¼ of budget expenditures. At the level of local budget of Kyiv city it exceeds UAH 4.1 Bln (USD 0.5 Bln) every year”. According to the expert’s opinion among other corruption risks it is worth to note: approximately UAH 5-7 Bln do not get into the budget because of smuggling of oil products’ practice. By experts’ estimates, 25-33% of light oil products came to the market from unknown sources. This means the budget losses from missing excise tax revenues from oil products’ import. Another source of corruption revenues is the margin that settles in special business structures when trading natural gas of the Ukrainian production by playing on a considerable difference in prices between the cost of Ukrainian and imported natural gas. The value of such game with prices is UAH 25 Bln (USD 3.15 Bln.)
Non-return of VAT remains a vehicle of crediting economy by exporters. “Fees” of intermediaries for assistance in VAT return to exporters amounts to UAH 22-40 Bln (USD 3-5 Bln), while in 2014 exporters might not get half of paid VAT at all under bills of exchange schemes of settlement.
As a result more than UAH 188 Bln could be optimized in the case of lowering corruption risks or direct these funds to the needs of structural reconstruction of economy and other goals.
Ivan Sikora touched separately the policy of budget centralization. In his opinion, “the policy of budget decentralization (to give 60% of the consolidated budget to the budgets of local councils) remains just an electoral promise of the Party of Regions”. In plans for the year 2013 the share of local budgets was only 46% in revenues and even less (43%) in expenditures. It is indicative, that even in 2012 the share of local budgets was 51% in revenues and 45% in expenditures. The forecast in the draft 2014 budget is even worse: although the local budgets are expected to grow to UAH 234.9 Bln (by 6.7% compared to 2013), it will amount just to 47% of consolidated budget revenue forecast of UAH 498.9 Bln. The current budget policy of financial flows centralization leads to dependency of the local elites from the government through the mechanism of budgetary transfers.
Ivan Sikora and Denis Chernikov made proposals regarding increase of the fiscal policy efficiency. In their opinion, it is necessary to apply the Performance Program Budgeting method in full when managing public finances, introduce international standards in the area of state support of enterprises and public procurement. It is also important in the fiscal policy to pay more attention to the real support of SME.
The Project “Civil lobbying of EU standards of state aid” is financed by International Renaissance Foundation and is implemented by NGO “Laboratory for Legislative Initiatives”.
