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Oleksandr Shlapak: This Year Will Be Extremely Difficult But It Will Lay a Healthy Foundation for the Future

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Kyiv, 2 April 2014 – “Most probably this year we will observe a negative GDP growth of around 3%, but it will lay a healthy foundation for 2015. This is the medicine we will have to take to make up for the 10 years of absolutely reckless consumption,” said Minister of Finance Oleksandr Shlapak during a press briefing at the Ukraine Crisis Media Center.

According to Mr. Shlapak, a UAH 71.6bn deficit was projected in the 2014 budget by Yanukovych’s government, but analysis suggests that the actual fiscal gap is almost UAH 290bn. “Our predecessors ‘inflated’ the macroeconomic base: nominal GDP was overstated, income measures were overstated,” he said. Mr. Shlapak also noted that according to ministry’s estimates, a fiscal gap of UAH 130.6bn will have to be eliminated in 2014, while the allowable deficit has been left at UAH 68.6bn. As for the remaining UAH 62bn, the government is planning to cover it by increasing budget revenues by UAH 30bn and cutting spending by UAH 32bn.

Measures to ensure the necessary budget revenues are contained in the amendments to tax legislation (the Law of Ukraine “On the Prevention of a Financial Disaster and Creation of Preconditions for Economic Growth in Ukraine” dated 27 March 2014), and include the following:

–          Increase of royalty payments for the use of natural resources (+ UAH 2.7bn);

–          Increase of tax burden on luxury goods such as cars and real estate (+ UAH 0.6bn);

–          Restricting the use of products harmful to human health by increasing the excise tax on alcohol and tobacco by 25% (+ UAH 2.9bn);

–          Balancing tax burden among tax payers (cancellation of privileges, expanding tax base) (+ UAH 17.1bn);

The Ministry is planning to earn another UAH 6.7bn by putting an end to tax evasion schemes, which include illegal VAT schemes and import of goods without payment of excise tax.

According to Mr. Shlapak, the government will start by cutting its own spending. Spending on parliament staff, presidential administration, courts and local governments will be cut by 10% in 2014. The cost cutting plan will also apply to capital transfers to enterprises and expenditures on goods and services. “Not a penny will be spent on mobile phones, furniture, cars etc.,” the Minister promised. Retirement benefits paid to public officers and judges that amount to ten times their monthly salary will be cancelled, and their pension will be reduced from 80% to 70% of their salary. Another UAH 9bn are expected to be saved by reducing the overall public sector headcount by 26,000 and law enforcement and national security by 72,000.

The Minister explained that the social standards were put on hold due to the critical situation with state treasury, adding that salaries and pensions will only be indexed against inflation.

To further stimulate economic growth, the government submitted to the parliament a so-called compensatory package for the Ukrainian business which, if adopted, should “minimize pressure on business to restore investment activities of our enterprises.” The package includes a new law on public procurement and laws governing administrative services. It reduces administrative pressure on the food market and brings the metrology and standardization system in compliance with the European legislation. It also contains separate laws relating to business deregulation.

Explaining the reasons for the extremely difficult situation with state finance, the Minister noted that for the last two years the government has been covering deficit by squeezing out resources from local budgets, the Special Fund, social funds, advance payment of income tax by business entities and unrefunded VAT, which lead to a dramatic accumulation of debts. “In 2007, the foreign and domestic debt was quite decent, whereas now it constitutes 42.9% of the GDP. Taking into account the increasing exchange rate, the figure will be UAH 804bn, which is almost 53% of the GDP. The threshold debt level set by the IMF is 60%. Government debt service costs are soaring and now constitute almost 10% of the country’s budget. I would like to make a special emphasis on the decline in the reserves of the National Bank of Ukraine, which have nearly halved since 2012.”

Speaking about the state treasury, the Minister said: “When we came, the balance of the unified treasury account was close to zero, with nearly UAH 80bn of obligations to our partners. That means that all money of the Special Fund, local budgets, non-budgetary funds (i.e. social security funds) and other clients have been credited from the unified treasury account.” Oleksandr Shlapak also said that the situation with advance income tax payments and unrefunded VAT of UAH 58.9bn is “difficult”. The Minister highlighted the need to cover the deficit of the Pension Fund (over UAH 4bn were re-distributed from other social funds to the Pension Fund) and the deficit of NJSC Naftogaz of Ukraine which hadn’t been making losses until 2007, but then accumulated significant deficit due to the difference between Russian gas price and household tariffs.

According to the Minister, the current situation with the state budget is caused by a number of factors, the first such factor being disproportionate spending on government consumption which is one of the highest in the world. Since 2004, the number of public sector workers has increased by 50,000 at the central executive authorities and 36,000 at the local authorities. Also, Ukraine probably has the greatest number of judiciary workers in Europe. “Today, there are 35 prosecutors per 100,000 population, while in the European countries there are 3 to 5 of them”, Mr. Shlapak noted. According to him, since 2011, the number of judges and judicial administration workers in Ukraine has increased by 12,000, and the General Prosecutor’s Office staff has grown by 5500. Another factor, according to Mr. Shlapak, is the extremely high percentage of social security beneficiaries that constitute 28.2% of the entire population and require UAH 40bn. of budget funds this year, while only UAH 8bn have been projected.

Oleksandr Shlapak – a Ukrainian politician, bureaucrat, and current Minister of Finance of Ukraine (from 27 February 2014). Minister of Economy and European Integration of Ukraine (2001- 2002), Chairman of the State Treasury of Ukraine (2005-2006).


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