
Significant tightening of Ukraine’s fiscal policy with the exacerbation of the epidemic crisis and weak economic recovery is early and unjustified.
The general fund deficit of the state budget for 10 months of 2021 was UAH 54.5 billion, or 1.3% of GDP. At the same time, the surplus of the Consolidated Budget (for January-September) was UAH 2.5 billion, or 0.1% of GDP.
These figures contrast sharply with the budget deficit of 5.2% of GDP, or UAH 217.6 billion in 2020. Then, for the first time after many years of budget restrictions, fiscal policy became stimulating and significantly supported the economy and the humanitarian sphere.
This year, the overexecution of the revenue side of the budget (by 4.5% in January-October) made it possible to reduce the actual budget deficit. But at the same time, 7.3% of general budget expenditures remained underfinanced. Health care expenditures were by 14.5% less than planned. The largest areas of underfinancing were the following: housing and communal services (the execution was 32.6% of the plan); spiritual and physical development (30%); economic activity (25.5%); environmental protection (22.7%); state administration (18%) (see Figure 1).

These indicators contradict the fact of the country’s entry into the phase of autumn exacerbation of the pandemic. Unlike most countries in the world with high rates of vaccination and which have prepared healthcare facilities for the reception of patients, Ukraine has once again been helpless and poorly prepared. In terms of the number of daily deaths from COVID-19, our country now ranks third in the world, and as of November 5, we have registered 70,842 deaths from COVID-19. Many Ukrainian families have experienced terrible tragedies and continue to suffer from the insidious disease. At the same time, the number of tests performed on COVID in Ukraine is one of the lowest in the world – 340 per thousand population.
The obsession with fiscal austerity while ignoring the acute problems of the social and humanitarian spheres for decades has resulted in the degradation of the public health sector, poor equipment of medical institutions, demoralization of medical staff and shortage of medical personnel. Although real budget financing for health care increased by 31.8% in January-September 2021 compared to the same period in 2019, this was obviously not enough to put the acute diseases of our medical system into remission.
Against this background, it is rather absurd that Ukraine had the tightest fiscal policy in the worldin the third quarter of 2021 in terms of the cyclically-adjusted primary budget balance. This indicator is arithmetically equal to the difference between revenues and primary government expenditures, adjusted for the GDP gap; at the macro level it shows the impact of discretionary fiscal policy on aggregate demand.
According to the NBU estimates, the cyclically-adjusted primary balance (CAPB) of the general government sector of Ukraine in the third quarter of 2021 reached +3.4% of GDP. In the first and second quarters of 2021, this indicator was also positive. That is, this year the impact of Ukraine’s fiscal policy on aggregate demand was contractionary. The fiscal impulse in 2021 became negative, which meant a tightening of fiscal policy compared to last year, and transition to the stage of fiscal consolidation.
However, after the comparison of cyclically-adjusted primary balance (CAPB) in Ukraine with the relevant indicators in other emerging market economies, we reveal excessively tight nature of fiscal policy in 2021 in Ukraine. In particular, according to the IMF, the Ukrainian CAPB in the third quarter of 2021 was many times higher than the average CAPB in emerging market countries (-0.8% of GDP). CAPB in the countries of this group of the European region in 2021 is expected at the level of -1.8% of GDP, including: in Poland – -2.6% of GDP, Romania – -4.9% of GDP, Hungary – -4.7% GDP (see Figure 2).
Significant tightening of Ukraine’s fiscal policy as the epidemic crisis persists and the economic recovery is weak is early and unjustified. This course of fiscal policy contrasts sharply with the policy of 2020, which significantly supported the national economy during the economic and epidemic crisis. Notably, in 2020 the CAPB of the general government sector in Ukraine was -1.8% of GDP, and the fiscal impulse was positive and reached 3% of GDP.

In the October 2021 issue of the Fiscal Monitor, IMF experts emphasize that for overcoming the pandemic and accelerating the economic recovery, the timing and pace of reducing deficits need to be carefully considered.
The main factor for making such decisions should be the COVID-19 pandemic stage; at the same time, countries where the virus is still spreading rapidly and vaccination rates are low need to continue protecting lives and livelihoods. Even where the virus is under control, prolonging fiscal support could still be the correct choice if recovery is slow and fiscal space remains.
Both accommodative monetary policy and external financial assistance can support stimulating fiscal policy in countries with limited fiscal space.
M. Cardenas, L. Antonio Ricci and J. Roldos emphasize: “Avoiding an early withdrawal of support in 2021 and 2022 is important given that countries are still facing high rates of contagion and deaths, vaccination takes place very slowly, the economic recovery is partial, uncertain and not strong enough to help those most affected by the twin public health and economic crisis”.
A recent declaration by the leaders of the G20 at the Rome Summit states that the global economic recovery remains highly divergent today and is exposed to downside risks, in particular the possible spread of new variants of COVID-19 and uneven vaccination paces. For this reason, the leaders of these countries remain determined to use all available tools for as long as required to address the adverse consequences of the pandemic, in particular on those most impacted, such as women, youth, and informal and low-skilled workers. The G-20 declaration also notes that the states will continue to sustain the recovery, avoiding any premature withdrawal of support measures, while preserving financial stability and long-term fiscal sustainability.
Therefore, taking into account the negative processes in Ukraine and the recommendations of global leaders, in 2021-2022 Ukraine should avoid too active and too early departure from the programs of fiscal support of the economy and the humanitarian sphere. This requires a more sound approach to the policy of financing budget expenditures and attracting the planned amount of government borrowings to finance the budget deficit.
Doctor of Economics, Scientific Director of the Growford Institute Tetiana Bogdan for 24.tv.