Ukrainian Government’s Austerity Action Plan

2014/03/14 • Analysis & Opinion, News

By Dmytro Dyenkov, EP, March 11, 2014

The Cabinet is ready to adopt unpopular austerity measures. This obviously will not include doubling gas tariffs for the population, but outrage probably is unavoidable. A limit on pension payments to working pensioners is envisioned as early as March.

In the beginning of March, the government planned to revise the state budget in order to save 65-80 billion UAH. Last week the sources of the savings were reported. In particular, personnel has already been reduced in some of the state institutions. The National Bank dismissed “investigators,” guards, and some staff that had been hired at the Bank during the Serhiy Arbuzov administration.

But this is not all. The Ministry of Finance has prepared an action plan for the government that has as its primary objective the optimization of budget expenditures. A document has been sent by the Finance Ministry for approval to the Ministry of Economic Development and is currently under review. Upon approval of this hastily written “plan of action”– most likely by the end of March–budget sequestration will be adopted.

What expenditures will be reviewed?

In general, this large 46-page document lists seven comprehensive goals and nearly 120 projects. To carry them out as presented in the business plan, regulatory documentation still needs to be developed. However, a preliminary analysis is already possible.

Who are the creditors?

First of all, the government is focusing on the resumption of cooperation with the IMF and the urgent delivery to Ukraine of financial help from the European Union. As has been learned, the first tranche from IMF may be expected in April. There is still no information on the final sum. However, the EU has already announced future possible help in the amount of 15 billion EUR. This is even more than could have been expected during Yanukovych’s time.

The authors of the Ministry of Finance action plan are proposing to focus at present on safeguarding the mission of the International Monetary Fund and the EU experts in the country. Also stressed is the need to complete all formalities for receiving from the EU the 610 million EUR promised as macroeconomic aid. The promise of 15 billion is still only a promise. However, the agreement on the 610 million EUR between the EU and Ukraine is already valid. It was signed a year ago but was not ratified. After the refusal to sign the Association Agreement with the EU, the question was no longer discussed. Only Serhiy Arbuzov mentioned it when he was still deputy prime minister, explaining to students what “pathetic help” Europe was proposing in exchange for the association. Nonetheless, on March 4, the Verkhovna Rada supported this ancient document, with 280 MPs voting for ratification. Thus, Ukraine can now get funding for 15 years at the rate of 3% per year.

The government action plan says nothing about further cooperation with Russia regarding Russia’s purchase of Eurobonds. Government representatives “do not exclude” this. However, is such collaboration even possible under Kremlin’s occupation of Ukraine?

Budget “lustration”

Most attention in the action plan is directed to the optimization of budgetary expenditures. Specifically, during a briefing following a Cabinet meeting last week, the head of the Ministry of Finance Oleksandr Shlapak announced the “purge” of certain budgetary programs and state projects. It appears this is not just a “cosmetic renovation.” According to the minister, 42 programs that had been moving from budget to budget and financed at 1-2% per year  have been eliminated.

Additionally, the Cabinet has reviewed more than 80 decisions of the previous government regarding certain government projects that Shlapak says will save 48 million UAH. It is not clear what projects are being considered. The government’s decision on “the optimization of existing programs and the introduction of a moratorium on approving new state programs” has not been released yet. One of the main objectives of the government’s plan is “to ensure the secure financing of budget expenditures and payments on public and publicly guaranteed debt.” The specified period is “always.”

Furthermore, officials are “encouraging” local governments to cut costs. The measures began to be implemented with the adoption of appropriate “regulations.” Last Wednesday, the government passed a resolution to balance the local budgets already in progress in 2014. This document has not yet been published either.

According to Shlapak, the government is requiring the regions to increase budget revenues by 2% and reduce costs by 1%. “By the end of this month they should report how they plan to do that,” he said. He also said the Treasury had received a recommendation from the Finance Ministry not to allow non-capital expenditures and other secondary expenditures from local budgets if there are deficits in the payment of wages, energy and utilities. Shlapak believes that during this winter, 77% of the expenses in local budgets went toward financing secondary expenses. However, the Association of Ukrainian Cities says that for over a year and a half capital expenses have not being funded and that in January-February local budgets had not received any funds.

Establishment cuts

The Finance Ministry plan also anticipates substantial cuts in spending for the state apparatus. Based on the document, the implementation of this task will be preceded by a number of decisions by the Cabinet. The government has already boasted about the adoption of the resolution “on saving public funds and preventing budgetary losses.” This document has not yet appeared on the government website.

Shlapak announced that all ministries and departments have been given the directive to conduct inventories of government residences, dachas, rest homes and health facilities. After the inventories are completed in two months, the real estate will be turned over to the State Property Fund for resale. State agencies are also prohibited from spending budgets on repairs, purchase of vehicles, mobile phones, and payment for charter flights. Additionally, without consent of the Cabinet, officials will be prohibited from creating budget funded services, hiring employees, giving cash awards to employees and spending on food subsidies.

The number of civil servants in the Presidential Administration has already been reduced to 65 employees, and in the Council of National Security and Defense to 90 employees. In the near future, officials are promising to provide information on reductions in other departments. So far, the number of deputy ministers in the ministries has been reduced. Now there will be only one first deputy minister and three simple deputies. In the oblast administrations, the head administrator will have three deputies; in the rayons only two. According to Shlapak, these measures should save the state some 500 million UAH in 2014 alone.

The government is promising to recoup another 40 million UAH from the sale of government fleets. Shlapak says they are planning to sell some 1.5 thousand vehicles. When reporters commented that one car would then cost almost 26,000 UAH, he answered that these are probably inaccurate calculations. It is probable that the new government prepared these decisions primarily as a public relations move to reassure the public about their devotion to the ideals of Maidan. Such demonstrative actions like Yatsenyuk’s trip to Brussels in economy class or Economy Minister Pavlo Sheremeta’s use of the metro really please the population despite being old hat.

However, these measures are undermined by strange appointments like the return of Yuriy Nedashkovsky to ENERGOATOM or the arrival in UKRTRANSGAS of Valeriy Yasyuk, who was responsible for the purchase of the infamous “Boyko Towers.” Even with the subsequent removal of Yasyuk, some of the dirt has remained.

Tax shake-up

Another task in the government’s “shock therapy” plan is the review of tax exemptions. In particular, nine ministries -Ministry of Finance, Ministry of Economic Development, Ministry of Industrial Policy, Ministry of Agricultural Policy, Ministry of Energy and Coal Production, Ministry of Infrastructure, Ministry of Social Policy, Ministry of Health, Ministry of Entrepreneurship –have been commissioned to analyze during April the effectiveness of tax incentives granted on certain individual or industry basis.

For a long time the review of benefits was a particular concern of Oleksandr Klymenko of the Ministry of Revenues and Duties. However, his department has not prepared an appropriate bill, possibly because most of these tax benefits will expire in two years. The austerity plan proposes that a new bill be prepared by May that would eliminate all tax preferences for companies working in the IT sector. Similar measures are being prepared regarding publishing and book publishing operations except for government contracts.

Additionally, by April, the government plans to expand the tax base and increase the rates of certain taxes and fees — especially excise tax rates for alcohol and tobacco products. As reference, the last indexation took place in January 2014. Also planned are tax rates increases for the extraction of certain types of minerals in the subsoil and the removal of the moratorium on the indexing of land for purposes of taxation with the fixed agricultural tax. This tax is paid instead of income and land tax and has unlimited validity. It is calculated according to the type and size of the land and is based on its normative monetary value. Its rate is 0.09-1% of the normative value of the land held since 1995. The indexing of the normative monetary value to determine the fixed agricultural tax was not taken into account earlier. The average fixed agricultural tax for 1 hectare of agricultural land is 6 UAH per year. In this way payments may rise to 31-32 UAH.

By March, the government plans to extend the rule on VAT tax exemptions for all transactions in the export of cereals and industrial crops until January 1, 2016. This means that the VAT will not be reimbursed on exports of these products.

Additionally, the government is preparing a large-scale audit of “Ukrspyrt” with the goal of putting an end to the production of alcohol without taxation. The government is also promising to deal with the “conversion” centers and “tax pits,” to control transfer pricing, to deal with “gray” import, and to recover capital located in Cyprus and offshore jurisdictions. The government is even promising to ask competent authorities in foreign states to freeze money taken out of Ukraine without taxation. The deadline is March.

Danger zone

The government is prepared to take unpopular steps. They do not include the doubling of gas tariffs for the population, but outrage is probably unavoidable. First, as early as March, the payment of pensions to working pensioners will be limited. They will receive only 50% of the intended retirement benefits, but not less than the required minimum for their age. Secondly, the government also plans to abolish allowances and wage benefits for medical emergency assistance.

Third, the government wants to cancel the housing subsidy and the one-time payment equal to 10 times the minimum wage for a young professional who agrees to work in the countryside. Fourth, the Ministry of Youth and Sports is instructed to cut expenditures to finance sports, youth and children’s organizations. How much will be curtailed is unknown. Also planned is a review of the remuneration of athletes and a decision to eliminate financing for “Eurobasket 2015.”

These are by far not all the “risky” items. Plans also include the cancellation of presidential grants and payment increases for kindergarten food subsidies, as well as the introduction of taxation on theater and concert tickets and the reduction of financial support for theaters.

Positive changes include proposals to establish a flexible incentive plan and a 20% premium to teachers and educators. Similarly, employers will be incentivized to provide the first job to a young professional through compensation from the Obligatory Insurance Fund. In addition, the government plans to stop the practice of closing schools and hospitals.

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Source: http://www.epravda.com.ua/publications/2014/03/11/426491/view_print/

Translated by Anna Mostovych

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