Budget Expenditures: Achievements and Failures – blog by Tetiana Bogdan

In the first half of 2021, the dynamics and structure of budget expenditures reflected both the objective needs of the country and the political preferences of the ruling party. They, however, lacked a strategic vision of the country’s goals and ways of development, and a clear understanding of the role of the state in achieving social progress.

The growth rates of real state budget expenditures compared to the first half of 2020 reached an impressive 7.7%, and compared to the first half of 2019 – 11%. The growth rates for the Consolidated Budget were 7.2% and 10.2%, respectively. The priorities of the state expenditure policy in the first half of 2021 were the road maintenance, healthcare, education (preschool and secondary), and debt service. In contrast, the actual financing of housing and communal services, higher education, environmental protection, subsidies to agriculture was significantly cut.

In particular, in the first half of 2021 the following types of expenditures by functional classification were characterized by the highest rates of real growth:

• road maintenance: + 99.5% compared to the first half of 2019 and + 25.8% compared to the first half of 2020;

• health care: + 43.1% and + 31.4%, respectively;

• education: + 15.6% and + 16.2%;

including preschool education: + 22.3% and + 26.1%;

general secondary education: + 16.9% and + 16.9%;

• spiritual and physical development: + 14.2% and + 18.9%;

• public debt service: + 11.1% and + 11.6% (see Table 1).

Areas-outsiders in terms of actual budget funding in the first half of 2021 were:

• housing and communal services: increase in financing by -18.3% compared to the first half of 2019 and by -16.2% compared to the first half of 2020;

• environmental protection: -17.5% and -8.7%, respectively;

• subsidies to agriculture: -16.4% and -14.3%;

• investments in construction (excluding road maintenance): -10.9% and -36.5%;

• higher education: -15.4% compared to the first half of 2019 and + 9.8% compared to the first half of 2020;

• social security and welfare: -6.1% and -3.6%.

Table 1. Expenditures of budgets of Ukraine in the first half of 2019, 2020 and 2021, in billion UAH and % of real growth

Source: Compiled by the authors based on the State Treasury of Ukraine dataExpenditures	Absolute amount, billion UAH	Rates of real growth, %
1st half of 2019	1st half of 2020	1st half of 2021	1st half of 2021 to 1sthalf of 2019	1st half of 2021 to 1sthalf of 2020
Expenditures of State Budget, total	508.6	536.9	633.6	11.0	7.7
Expenditures of the Consolidated Budget, total	622.3	655.8	769.8	10.2	7.2
– State administration	35.8	3.6	40.7	1.3	4.4
– Debt service	60.8	62.0	75.8	11.1	11.6
– Defence	44.6	47.3	54.4	8.7	5.0
– Public order, security and judiciary	60.7	67.2	71.5	4.9	-2.9
– Economic activity	47.3	62.4	73.4	38.2	7.4
including road maintenance	20.0	32.5	44.8	99.5	25.8
railway transport	2.6	3.5	2.5	-14.3	-34.8
coal industry	2.0	2.7	2.5	11.3	-15.5
agriculture	4.9	4.9	4.6	-16.4	-14.3
– Environmental protection	2.7	2.5	2.5	-17.5	-8.7
– Housing and communal services	12.1	12.1	11.1	-18.3	-16.2
– Healthcare	54.9	61.3	88.2	43.1	31.4
including polyclinics, outpatient clinics, ambulance	6.9	4.9	2.3	-70.3	-57.1
hospitals, sanatoriums	32.0	22.7	9.6	-73.3	-61.4
program of state guarantees of medical care	8.2	26.3	59.1	542.0	105.2
– Spiritual and physical development	13.1	12.9	16.8	14.2	18.9
– Education	120.1	122.4	155.8	15.6	16.2
including preschool education	16.9	16.8	23.2	22.3	26.1
general secondary education	60.3	61.8	79.1	16.9	16.9
extracurricular education and extracurricular work with children	5.5	5.9	7.4	19.9	14.5
higher education	25.6	20.2	24.3	-15.4	9.8
professional higher education	5.4	5.9	7.6	25.4	17.6
– Social security and welfare	170.4	170.1	179.7	-6.1	-3.6
incl. transfers to the Pension Fund	90.5	102.8	97.7	-3.8	-13.2

As for financing planned budget expenditures, the execution of the general fund of the State budget was less than planned by in average 7.3%. The largest areas of underfinancing were the following (see Figure 1):

• housing and communal services – the execution was less than planned by 97.5%;

• spiritual and physical development – by 30.4%;

• economic activity – by 29.1%;

• environmental protection – by 28%;

• state administration – by 23.8%;

• health care – by 11.1%;

• education – by 9.1%.

The share of current expenditures in the structure of expenditures of the Consolidated Budget increased from 93.6-93.8% in previous years to 95% in the first half of 2021. Among the components of current expenditures, financing of debt service and procurement of services (excluding utilities) increased the most. That is, the structure of expenditures showed the preservation of the consumer economic model in the country.

In the first half of 2021, capital expenditures of the Consolidated Budget both in nominal and real terms decreased. In dynamics, capital expenditures amounted to UAH 38.6 billion in the first half of 2019, UAH 42 billion in the first half of 2020 and UAH 38.6 billion in the first half of 2021. In the structure of the Consolidated Budget expenditures, the share of capital expenditures went down from 6.2-6.4% of the total expenditures in 2019-2020 to 5% in 2021.

Capital expenditures of the State and the Consolidated budgets of Ukraine remained very modest even with a threefold increase in budget financing for the State Agency of Motor Roads of Ukraine: from UAH 10.9 billion in the first half of 2019 to UAH 33.6 billion in the first half of 2021. This is related to the fact that the increase in the budget of this agency was offset by reducing other components of capital expenditures. For instance, among their components, the costs of capital repairs decreased the most (from 1.3% of total expenditures in January-June 2020 to 0.9% in January-June 2021), and capital transfers to enterprises, institutions and organizations decreased from 3.1% to 2.4%.

Capital expenditures of the State Agency of Motor Roads of Ukraine, financed from the budget, in the first half of 2021 reached almost 62% of the total capital expenditures of the Consolidated Budget. For comparison: this share in the first half of 2019 was only 22%, and in the first half of 2020 it was 43.4% (Figure 2). That is, the modest amount of capital expenditures of the State and local budgets of Ukraine was increasingly aimed at the road construction, thereby reducing the expenditures for investment purposes not related to roads.

The proportions of the distribution of capital expenditures of the budget in 2021 can hardly be called reasonable, considering the deterioration and obsolescence of housing and communal services, energy infrastructure, urban and railway transport, the shortage of social infrastructure in rural and urban areas.

Economic theory has proved that state capital expenditures increase the country’s economic growth through several channels: 1) the fiscal multiplier boosts aggregate demand during the implementation stage of investment projects; 2) public investment increases long-run growth by expanding the productive capacity, facilitating human capital accumulation, enhancing productivity gains and returns on private investment. Experts of the International Monetary Fund estimate that 1% of GDP increase in public investment in different types of countries could have the potential to push GDP up by 2.7%, private investment by 10%.

However, there is no investment breakthrough in the public sector of Ukraine and this is hindered by both the chronic budget deficit and the inability of public authorities to conduct quality strategic planning to clearly define the goals of the state and means to achieve them.

One of the reasons for the chronically low level of public capital investment, the critical stance of health care in Ukraine, the permanent underfinancing of education and social security is the high burden of public debt service. Since the absorption of a significant share of tax revenues by debt payments inevitably means a decline in financing for critical needs of the state.

The average public debt service rate (the ratio of double the amount of interest payments for six months to the amount of public debt at the beginning of the year) in January-June 2021 was 5.8%, while in 2020 it was 6.1%, and in 2019 – 5.4%. At the same time, Ukraine’s share of interest payments on debt is one of the highest in the world, 3% of GDP, compared to the average level in emerging market economies of 1.8% of GDP (IMF data). In Ukraine, due to high interest rates on government issued bonds, the cost of domestic debt service in the first half of 2021 increased by UAH 9.4 billion, or 24.6% compared to the first half of 2020.

Therefore, in the first half of 2021, Ukrainian authorities spent budget resources on such important areas as maintaining public health and overcoming the pandemic, rebuilding road infrastructure and investing in preschool and secondary education. In addition, practice of permanently increasing unproductive government expenditures on public order, security and judiciary was stopped.

Nevertheless, the negative aspects of expenditure policy were: keeping higher education on “a starvation diet”, environmental protection, continued increase in expenditures on debt service, stagnation of capital budget expenditures with the deformation of their structure. In general, the dynamics and structure of budget expenditures reflected both the objective needs of the country and the political preferences of the ruling party. They, however, lacked a strategic vision of the country’sgoals and ways of development, and a clear understanding of the role of the state in achieving social progress in economic change.

Doctor of Economics, Scientific Director at the Growford Institute Tetiana Bogdan for Lb.ua.