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The last session of the Cabinet of Ministers of Ukraine in the year was surprisingly “successful and fruitful”. The Prime Minister stated that Ukraine was winding up the year of 2021 with a record dollar GDP of almost USD 200 billion. An order “On the approval of the strategy for reforming the public finance management system for 2022-2025” was also adopted at the government session, the implementation of which should result in a more efficient public financial management system. One of the first objectives of this strategy should be “improvement of the functioning of Ukraine’s tax and customs systems”, as well as “early detection of fiscal risks and adoption of measures to avoid and/or minimize their impact on the budget”.

About improvement. The national system of tax administration has such an anachronism as “planned” audits of taxpayers. The schedule of audits of taxpayers for the next year must be published on the website of the State Tax Service of Ukraine by December 25 of this year, which was actually done successfully.  

The website of the State Tax Service states that the schedule for 2022 includes 4700 risky (!) legal entities.

All enterprises selected for the audit schedule have criteria for the risk of taxpayers doing business. 2300 legal entities (49%) have 3 or more risks of non-payment of high taxes.

In particular, enterprises with the following risks were selected for inspections:

– the tax payments are less than the relevant industry average;

– available information on non-confirmation of the actual acquisition transaction;

– relationships with risky business entities which are wanted, liquidated, bankrupt, etc.;

– receivables payables more than twice.

At first glance, everything seems correct and natural, but this is only at first glance. If we analyze the list of enterprises included in scheduled inspections without going into details, we can see such companies with foreign capital as Coca-Cola and Philip Morris. The situation looks more absurd with the fact that in December, Philip Morris was awarded by the Ministry of Finance of Ukraine as one of the largest and most conscientious taxpayers in Ukraine! In fact, four companies with foreign investment make up almost one hundred percent of the tobacco industry in Ukraine, and how “the tax payments can  be less than average in the relevant industry” remains a mystery!

Therefore, the idea that the average and honest taxpayer will pay for everything in Ukraine remains relevant. Paraphrasing the proverb from a famous Ukrainian folk tale, we can say: those who pay taxes are … checked. Well, now you know!

Now about the enhancement in the form of record dollar GDP. There is also something to pay attention to, there are even more questions and nuances.

First, the dollar has lost 10 to 15% of its value over the past few years due to unprecedented measures by the US government to support its economy and population with liquidity. Therefore, it seems illogical to measure domestic GDP in a currency that has depreciated more than the hryvnia.

Secondly, I do not know why nobody recommended the Prime Minister to talk about other macroeconomic indicator – GDP per capita. It more accurately shows what governments need to take care of, namely the standard of living of the population. Therefore, if we take into account the fact that more than 600 thousand people left Ukraine for 10 months of 2021 and did not return, the level of “record” will be even higher, as important is not only an increase in the dollar numerator, but also a decline in the physical denominator. I think if the achievements of the year are presented in this dimension, there are even more reasons to talk about “improvement and enhancement”.

Thirdly, as we can see, absolute figures, converted even into hard currency, are not as important as the structure and proportions of GDP and they are alarming!

If we recall the main expenditures components of GDP, they include final consumption expenditures, household savings (they are investments in the economy), government spending (in our case, Big Construction) and net export (the balance of exports and imports).

Therefore, looking at the structure of Ukraine’s GDP from this point of view, we can see that the level of capital investment in 2020 and 2021 is at its lowest level during last 15 years, namely, 12-13% of GDP. If we calculate the balance of capital investments and capital consumption for the three quarters of 2021 according to the consolidated national accounts published by the State Statistics Service of Ukraine, we can see that it is even negative and amounts to minus UAH 20 billion! In other words, we live on what we invested before.

According to the official statistics of the State Statistics Service of Ukraine, the share of final consumption expenditure, more than 90% of which are household expenditures and, at the same time, is the basis of VAT taxation, is 85-90% of GDP. In the first quarter of 2021, it is 94%! That is, we not only live on what was created before, but we dissave everything. There is not such level of consumption anywhere in Europe and possibly in the world. The dependence is very simple here, the poorer the country, the greater the consumption in GDP.

In “poor” Cyprus in 2020, consumption expenditures accounted for 62.7%, in wealthy Norway – 41.1%. What we have managed to find comparable to our country in terms of this indicator is a small Montenegro, where there is actually no production and the country depends on tourism and wealthy immigrants, mostly from Russia. Against the background of these figures, the winning reports about the more than planned collection of state budget revenues due to VAT cause nothing but only surprise and sadness. The budget revenue collection is more than planned, but at what cost? At the cost of the collapse of the economy and loss of any prospects! We do not need such “victories”. Continue “eliminating contradictions” and seeking budget compensators, dear lawmakers and officials. Collapse is coming.

These are the “improvement and enhancement” in Ukraine in 2021.

Happy 2022 New Year to everyone!

Doctor of Economics, Professor Kostiantyn Shvabii