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This year, budget resources are focused on such important areas as health care, investment in preschool and secondary education, reconstruction of road infrastructure. On the other hand, a practice of the permanent increase in spending on public order, security and the judiciary has been discontinued. These shifts in fiscal policy in terms of its long-term effects deserve a positive assessment. However, it is difficult to justify reduction in real financing of defense and higher education, stagnation and deformation of the structure of capital expenditures.

State budget expenditures exceeded UAH 1 trillion for 10 months of 2021, and the execution of the budget plan for the general fund was 92.7%, i.e. 7.3% of expenditures remained underfinanced. In real terms, expenditures increased significantly compared to both 2019 and 2020. The growth rate of real state budget expenditures for 9 months of 2021 compared to the same period of 2020 was 2.7%, and of 2019 – 11.3%.

The comparison of the growth rates of real expenditures by different state functions allows us to prioritize spending of public funds. For example, for 9 months of 2021 the following Consolidated Budget expenditures had the highest growth rates:

• road maintenance + 104.5% compared to 9 months of 2019 and + 12.7% compared to 9 months of 2020;

• health care: + 31.8% and + 17.9%, respectively;

• spiritual and physical development: + 20.2% and + 22.0%;

• education: + 13.8% and + 12.9%;

              including preschool education: + 19.7% and + 21.7%;

              general secondary education: + 14.0% and + 12.7%;

              extracurricular education: + 17.6% and + 12.9%.

Areas-outsiders in terms of real financing were:

• housing and communal services: an increase in financing by -17.9% compared to 9 months of 2019 and -13.4% compared to 9 months of 2020;

• environmental protection: -12.1% and -3.6%;

• higher education: -16.2% and + 8.1%;

• defense: -0.9% and -6.9%;

• social security and welfare: -3.6% and -6.7%;

• state administration: -0.7% and + 4%.

As for the execution of the planned budget expenditures, the following areas were underfinanced least of all (see Fig.1):

• social security and welfare – the execution for 9 months was less than planned by 1.1%;

• public order, security, judiciary – by 7.7%;

At the same time, the execution of expenditures was less than planned by an average of 7.6%.

Figure 1. Deviation of actual financing from planned by functions of the state on the general fund of the State budget in % in January-September, 2021
Source: calculated by the author based on the State Treasury of Ukraine data

On the other hand, the largest areas of underfinancing were the following:

• housing and communal services – the execution was less than planned by 32.6%;

• spiritual and physical development – by 30%;

• economic activity – by 25.5%;

• environmental protection – by 22.7%;

• state administration – by 18%;

• health care – by 14.5%;

• defense – by 10.4%.

In other words, the first priorities of the state spending policy were road maintenance and health care, which took UAH 92.1 and 128 billion, respectively. Of the total expenditures of the Consolidated Budget on health care (UAH 128 billion), UAH 85.7 billion was used for the implementation of the program of state guarantees of medical care.

The 2021-budget envisages UAH 36 billion for special measures to fight against COVID-19, and over UAH 31 billion has been spent for 10 months of 2021. In particular, the funds were spent on:

• payment to health care institutions for services provided for inpatient medical care and vaccination of the population under the program of medical guarantees – UAH 14.6 billion;

• subventions to provide hospitals with oxygen – UAH 0.6 billion;

• measures for social support of the population in quarantine conditions – UAH 2.9 billion;

• payment of financial security in connection with a temporary disability (sick leave payments) – 0.8 billion;

• payment of unemployment benefits – UAH 1.5 billion;

• payment of additional payments to the salaries of the bodies and units of civil protection, police, medical and other employees of departmental health care institutions – UAH 0.8 billion.

Thus, the analysis of the budget execution and the growth rate of real budget allocations compared to previous years allows us to draw conclusions about the actual priorities of budget funds spending for 9 months of 2021. They included the road maintenance; health care and education (preschool and secondary). On the other hand, housing and communal services, higher education, state administration, environmental protection, defense were the functions with significantly smaller amount of financing than planned or reduction of real financing.

This year capital expenditures of the Consolidated Budget in nominal terms have increased slightly while their real volume has decreased. In dynamics, capital expenditures amounted to UAH 83.9 billion for 9 months of 2020 and 86.5 billion UAH for 9 months of 2021. In the structure of the Consolidated Budget expenditures, the share of capital expenditures went down from 8.1-8.2% in 2019-2020 to 7.4% in 2021 (Table 1). Capital expenditures relative to GDP also decreased, in particular from 2.9% in January-September 2020 to 2.5% in January-September 2021.

Table 1. The structure of Consolidated Budget expenditures by economic categories, as a % of total expenditures 

IndicatorsConsolidated Budget
9 months of 20199 months of 20209 months of 2021
Current expenditures91.891.992.6
Compensation of employees25.825.626.2
Charges on compensation of 
Goods, materials, equipment 
and inventory
Service charges (except for 
Municipal services and 
energy charges
Special measures for state 
(local)-interest programs 
Debt service9.99.79.6
Subsidies and current 
transfers to enterprises 
(institutions, organizations)
 Social security24.623.521.6
Capital expenditures8.28.17.4
Purchase of equipment and 
items of long-term use
Capital construction (acquiring)
Reconstruction and restoration0.70.70.6
Capital transfers to enterprises 
(institutions, organizations)
Other expenditures0.20.20.2
Total expenditures100.0100.0100.0

Source: Compiled by the author based on the State Treasury of Ukraine data

Among the components of capital expenditures of the budget, expenditures on renovation (from 1.7% of total expenditures to 1.4%) and transfers to enterprises (from 3.8% to 3.6%) decreased the most.

The meager budget capital expenditures were increasingly aimed at road construction, thereby reducing the expenditures for investment purposes not related to roads. For example, the expenditures of the State Agency of Motor Roads (excluding debt service) for 9 months of 2021 reached 84% of the total budget capital expenditures. For comparison, this share in January-September 2019 was only 37.2%, and in January-September 2020 – 75.5%.

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.

The share of current expenditures in the structure of Consolidated Budget expenditures increased from 91.8 – 91.9% in previous years to 92.6% in January-September 2021. Among the components of current expenditures, expenditures on service charges increased the most. On the other hand, social security expenditures decreased the most (from 23.5 to 21.6% of the Consolidated Budget expenditures).

That is, there is no investment breakthrough in the public sector of Ukraine, and the structure of expenditures of the Consolidated and State Budgets of Ukraine demonstrates the preservation of the consumer economic model in Ukraine. 

With a share of budget investment in GDP of 2.5%, Ukraine lags significantly behind other emerging market economies. For example, the average investment of the general government sector in these countries in 2019 was 3.4% of GDP, including 5.5% in Albania, 14% in Azerbaijan, 6.9% in Georgia, 5.5% in Kyrgyzstan, 5 % in Serbia and 4.6% of GDP in Uzbekistan.

In general, assessing the quality of government spending policy in the current year, we should mention the following positive aspects: a) the concentration of budgetary resources on such important areas as public health and fight against the pandemic, investment in preschool and secondary education, road repair; b) cessation of the permanent increase in expenditures on public order, security and the judiciary. The negative aspects include: a) the execution of the budget expenditures by 7.3% less than planned and the implementation of restrictive fiscal policy in the midst of the pandemic; b) the reduction of real financing in defense, higher education, environmental protection; c) the stagnation of budget capital expenditures and diversion of their abnormally high share for road construction purposes.

International experts argue that in the medium term, the priority areas of public investment should be an effective health care system, quality education, modern digital infrastructure and environmental protection. At the same time, fiscal policy should support the process of transforming the economy into a more productive, more digital one and with lower carbon emissions.

To stop investment degradation in Ukraine, the main efforts should be aimed at improving the efficiency of public investment management and eliminating corruption factors; at establishing a modern system of strategic planning of public investment and determining their reasonable priorities; at releasing the required amount of budget funds by rationalizing current budget expenditures and improving the efficiency of tax administration. In the short term, the urgent tasks of fiscal policy are to concentrate resources on measures to combat the pandemic, its economic and social consequences (until the pandemic is under full control) and gradually begin to support economic recovery, increase and improve public investment.

Doctor of Economics, Scientific Director of the Growford Institute Tetiana Bogdan for LВ.гф.