Budget-2022: the Main Vectors of Changes – by Tetiana Bogdan

They are going to save on social protection, law enforcement and capital investment.

Given the ongoing pandemic and economic uncertainty, Ukraine has begun a budget process-2022. The draft Law on the State Budget (registered No. 6000) has already been submitted to the Verkhovna Rada and now the Budget Committee is working on it.

According to this draft, state budget revenues are projected at UAH 1,267.4 billion, or 23.6% of GDP, and expenditures – at UAH 1,441.9 billion, or 26.9% of GDP. That is, expenditures will be at the level of 2019 and reduced by 3.8% of GDP relative to 2020 (see Figure 1). Given the gradual recovery of the country from the crisis and the achievement of the pre-crisis production level in 2022, some decrease in the relative amount of budget expenditures can be justified.

Figure 1. Relation state budget revenues, expenditures and deficit to GDP in 2013-2022

The budget calculations take into account the forecast of consolidated budget expenditures for 2022 at UAH 1,856.6 billion, or 34.6% of GDP. The table shows the budget expenditures in 2012-2022 in relative terms.

Table 1. Consolidated budget expenditures by function, in % of GDP

Indicators	2012	2013	2014	2015	2016	2017	2018	2019	2020	2021 Plan	2022 Project
Expenditures	34.9	34.8	33.0	34.2	35.0	35.5	35.1	34.5	38.1	36.2	34.6
General government expenditure (exluding debt service)	2.1	2.0	1.7	1.6	1.6	1.9	2.1	2.1	2.0	2.1	2.0
Debt service	1.8	2.3	3.1	4.3	4.0	3.7	3.3	3.0	2.9	3.4	3.4
Defense	1.0	1.0	1.7	2.6	2.5	2.5	2.7	2.7	2.9	2.5	2.5
Public order, security and the judiciary	2.6	2.7	2.8	2.8	3.0	3.0	3.3	3.6	3.8	3.6	3.3
Economic activity	4.4	3.5	2.7	2.8	2.8	3.5	4.0	3.9	6.3	4.8	3.7
– agriculture	0.5	0.5	0.4	0.3	0.2	0.4	0.4	0.4	0.4	0.4	0.3
– coal industry	0.9	1.0	0.6	0.1	0.1	0.1	0.1	0.1	0.1	0.1	0.1
– road maintenance	1.1	1.1	1.1	1.4	1.0	1.4	1.7	1.7	3.2	2.4	1.6 (3.2)
Environmental protection	0.4	0.4	0.2	0.3	0.3	0.2	0.2	0.2	0.2	0.2	0.2
Housing and communal services	1.4	0.5	1.1	0.8	0.7	0.9	0.9	0.9	0.8	0.6	0.7
Health care	4.1	4.2	3.6	3.6	3.2	3.4	3.3	3.2	4.2	4.1	4.2
Spiritual and physical development	1.0	0.9	0.9	0.8	0.7	0.8	0.8	0.8	0.8	1.0	0.9
Education	7.2	7.3	6.3	5.7	5.4	6.0	5.9	6.0	6.0	6.6	7.3
Social security and welfare	8.9	10.0	8.7	8.9	10.8	9.6	8.7	8.1	8.3	7.2	6.6
– transfers to the Pension Fund	*	5.7	4.4	4.8	6.0	4.5	4.2	4.6	4.8	4.2	3.7
– housing subsidies	*	0.1	0.1	0.7	1.6	2.2	2.0	1.1	0.9	0.7	0.7

In the draft budget, the increase in the relative volume of expenditures for 2022 comparing with the plan-2021 and/or the fact of 2020 is projected for the following functions of the state:

• education (from 6.0% of GDP in 2020 to 6.6% according to the plan for 2021 and up to 7.3% according to the forecast for 2022);

• public debt service (from 2.9% of GDP in 2020 to 3.4% according to the plan for 2021-2022).

The budget in 2022 will be cut according to the following state functions:

• social protection and welfare (decrease from 8.3% of GDP in 2020 to 7.2% in 2021 and to 6.6% in 2020);

• public order, security and the judiciary (from 3.8% of GDP in 2020 to 3.6% in 2021 and up to 3.3% in 2020);

• defense (from 2.9% of GDP in 2020 to 2.5% in 2021–2022);

• road maintenance (from 3.2% of GDP in 2020 to 1.6% in 2022).

For the defense and road maintenance sectors, some reduction in budget financing will be offset by revenues from other sources: official defense assistance from France, Britain and the United States in the amount of UAH 21 billion and the Roads Agency’s loans of UAH 40 billion.

The newest positive of fiscal policy is the violation of the negative dynamics of expenditures on human capital development during 2014-2019. Since 2020, the education and health care spending has been raised significantly. For example, in 2022, relative to 2019, expenditures on education are to increase by 1.3 percentage points of GDP, and health care expenditures – by 1 percentage point of GDP. Figure 2 clearly shows these changes.

For the first time in the last decade, the relative level of education financing in 2022 is to approach the level of 2013 – 7.3% of GDP. It is planned to additionally allocate UAH 3 billion for healthy food and fire safety in schools, UAH 1.4 billion for the “New Ukrainian School” program, UAH 1.3 billion for the implementation of the “Capable School for Better Results”. The budget also includes UAH 8.4 billion to increase the nominal salary of teachers and UAH 1.2 billion for academic scholarships.

The continued real financing of health care in 2020-2022 will be combined with the expansion of the Healthcare Guarantee Program, the budget of which in 2022 will rise nominally by 75.9% compared to 2020. However, the increase in the average salary of doctors by 56% and medical staff by 34% announced by the Government is unlikely to be implemented, as the planned budget of the Ministry of Health is to rise by only by 15.3%.

Public debt service is one of the largest budget programs with UAH 181.4 billion in financing. Nominally, its volume is to increase by 14.3% compared to 2021, and the relative value will reach 3.4% of GDP (on average among emerging market economies this indicator is 2%). In 2022, a program of fulfillment of guarantee obligations for borrowers who received loans under state guarantees in the amount of UAH 6.9 billion will be additionally financed. The effective debt service rate of 2022 will reach its maximum value in the last five years – 7.2% per annum.

One of the ways to consolidate Ukraine’s public finances in 2022 will be a reduction of spending on public order, security and the judiciary. Compared to 2020, financing for this function is to be reduced by 0.5 percentage points of GDP. But even after such reduction, the level of its financing will remain unreasonably high. For example, spending on public order and security in Ukraine is 3.8% of GDP in 2020 and 3.3% of GDP in 2022, which is the second largest among the emerging market economies after South Africa.  Moreover, the average level of such expenditures in emerging market economies was 2.2% of GDP.

The comparison of spending on public order and security in advanced countries and in Ukraine again indicates significant disparities. The average level of such expenditures in advanced countries is 1.5% of GDP, which is many times lower than in our country. That is, Ukraine spends an excessively large share of GDP and budget on law enforcement, while the efficiency of these bodies is very low. From a historical perspective, some increase in such expenditures was justified in 2014-2016 with the start of military operations in Donbass and hybrid war by Russia. However, the maximum level of expenditures was recorded in 2019-2020, which is difficult to explain only by security factors. At the same time, Ukraine exceeds the average level of spending on public order and security of emerging market countries in 1.5 times, which shows the untapped potential for further rationalization of spending on law enforcement and judicial authorities.

The study of the ten-year dynamics of consolidated budget expenditures revealed another trend in budget financing. This is a reduction in budget expenditures on social security and welfare of the population. Their relative size was reduced from 10% of GDP in 2013, 9.6% in 2017, 8.3% in 2020 to 6.6% of GDP according to the project for 2022. The planned amount of targeted housing subsidies to the population (UAH 38.4 billion) will obviously be insufficient to cover the needs of low-income households. Indeed, the heating season of 2021-2022 will be characterized by record gas prices, and the planned amount of housing subsidies for 2022 is UAH 9 billion less than provided by the latest version of the 2021 budget.

To study the phenomenon of excessive or insufficient spending on social security, international comparisons were made by general government sector based on the IMF database GFS-COFOG (see Figure 4). As we can see, the expenditures of the consolidated budget and state social insurance funds in Ukraine at the level of 13.7% of GDP exceed the average in emerging market economies – 10.4% of GDP. But a number of European countries – new EU members spend most of their GDP on social programs compared to Ukraine.

Figure 5 showsthe comparison of expenditures on social security in Ukraine and in advanced countries. In these countries, the average level of such expenditures was 15.3% of GDP, slightly exceeding the Ukrainian figure.

The results of these comparisons point to the possibility of a slight reduction in the relative value of social spending in Ukraine. However, the reduction should be achieved not by further decreasing the real subsistence level, but by rationalizing the social system, in particular, by reducing the number of recipients of social benefits. The ways to solve this problem could be consolidating the existing social programs along with avoiding their duplication and providing unjustified support; improving the functionality of the unified social register and better targeting of social protection programs. The launch of the Unified Information System of the Social Sphere is already partially solving these tasks.

With the stabilization of financing for state administration at 2% of GDP, the budget for 2022 plans to reduce expenditures on individual government agencies (State Management of Affairs, the State Service of Ukraine for Food Safety and Consumer Protection, the Verkhovna Rada, the State Service of Ukraine for Geodesy, Cartography and Cadastre, others) This is an unconditional positive of the 2022 budget, which demonstrates some efforts of the authorities in the field of rationalization of budget expenditures for the state administration.

On the other hand, decisions to reduce the planned allocations for the Ministry of Culture and Information Policy (by UAH 1.8 billion, or 14.9%) and to liquidate the Fund for the Development of Institutions of national importance are insufficiently justified. Expenditures on the function of “spiritual and physical development” in the consolidated budget have never exceeded 1% of GDP, although they are extremely important for the survival of national culture and art. Therefore, in finalizing the draft budget for 2022, it is a good idea to abandon plans to reduce cultural and artistic programs.

According to the 2022 budget, it is projected to reduce share of capital expenditures in the consolidated and state budgets (by 0.4% and 0.2 percentage points of GDP relative to 2020), which is difficult to call a positive shift, since the country has significant needs to improve the quality of transport infrastructure, create a modern digital infrastructure, build a national health care system and modernize the education sector. Ideally, the consolidated budget capital expenditures should be increased to 5% of GDP.  However, Ukraine has chronic problems with the quality of institutions for planning, selecting, financing, monitoring and controlling investment projects financed by the state. Therefore, increase in investment expenditures should be in line with the formation of a system of strategic planning of public investment, the establishment of clear procedures and criteria for selection of investment projects, development of common methodological guidelines for project evaluation, systematic monitoring / control of these projects. The implementation of modern public investment management practices should minimize the impact of corruption factors and ensure the maximum economic effect of investing budget funds.

Doctor of Economics, Scientific Director at the Growford Institute Tetiana Bogdan for “Dzerkalo Tyzhnia”.