Crazy budget 2015

UKRAINE - In Brief 23 Dec 2014 by Dmytro Boyarchuk

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It was a huge disappointment to see draft budget 2015 the Cabinet submitted to the parliament today. Given that Ukraine badly needs financial support from the IMF it was widely expected that Minfin will present a realistic revenues’ target with substantial spending cuts. The numbers we saw today were absolutely the opposite. The central budget revenues were targeted at the level of UAH 475.2 billion which is more than 30% y/y increase vs. expected collections this year. To large extent the increase was due to re-allocation of personal income tax from local budget to central budget (this went in contrast to decentralization promises) but even net of this effect the authorities outlined very ambitious task (+26% y/y) for tax collections which does not look realistic. The Cabinet targets to reach this level of collections at the expense of tax increases; however, in light of already high tax pressure in economy it does not look as a good plan. All in all, we see risks of substantial shortfall (UAH 30-40 billion) on the revenues’ side in 2015 since economy is not ready for ambitious fiscal targets. To make matters worse, the Cabinet plans to rely heavily on the Central bank support in 2015. The first disturbing point is the sharp increase of the Bank direct support to the budget (wire of Central bank profits) which almost tripled to UAH 65.4 billion in 2015 vs. UAH 22.8 billion in 2014. The second alarming point is the UAH 63.7 billion deficit (3.7% of GDP) which has hryvnia printing as the only reliable source of funding (privatization was planned but chances are unclear). The third issue is the size of quazi-fiscal needs (UAH 88 billion) the Central bank will be required...