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Devastating effects of the COVID-19 pandemic and growing inequality throughout the world enhanced the societal requests for the effective healthcare and social protection systems, high-qualityeducation and modern infrastructure.  Relevant inquiries have already been reflected in the actual processes of transformation of public finances in many countries and in advisory work on their further development. To build a balanced economic model, Ukraine should take into consideration global processes.

In Ukraine, health care provides minimal assistance to patients, and businesses affected by lockdown and employees receive symbolic financial state support. During the corona-crisis, the fiscal rescue package in Ukraine was 4.3% of GDP, which lags by 1.5 times behind the average level in emerging market economies and by 6 times – in advanced economies.

At the same time, Ukraine’s fiscal policy in 2020–2021 supported aggregate demand and provided some support to the economy and healthcare sector. For example, the fiscal impulse in Ukraine was positive ​​in 2020 and 2021, in particular 2.4% and 1.8% of GDP respectively. We should remind that the fiscal impulse is the difference with the inverse of the cyclically adjusted primary balance (CAPB) of the current and previous periods. In this case, the CAPB is equal to the difference between government revenues and primary expenditures adjusted for the GDP gap. As a result, the positive value of the fiscal impulse indicates the period of fiscal expansion, and the negative one is during the period of fiscal consolidation.

Figure 1. Fiscal impulses in Ukraine and country groups as a % of GDP
Source: Compiled by the author using the data from the IMF Fiscal Monitor, April 2021

Figure 1 indicates the dynamics of the fiscal impulse in Ukraine and different groups of countries over two years. Comparisons of the fiscal impulse in Ukraine in 2020 (2.4% of GDP) with the averages in emerging market economies (3.4%) and advanced economies (5.8%), evidence only theslight expansionary effects of fiscal policy in Ukraine. This conclusion is confirmed by data from individual countries, in particular the Czech Republic, Slovakia, Hungary, Poland, China (see Figure 2).

Figure 2. Fiscal impulses in Ukraine and some emerging market economies as a % of GDP
Source: Compiled by the author using the data from the IMF Fiscal Monitor, April 2021

The dominant factors of quite modest indicators of the fiscal impulse in Ukraine are the limited fiscal space, limited scope for government private borrowings, insufficient external support, and archaic monetary policy of the central bank.

 Leading researchers suggest that in the medium term, the main challenges for public finances in the world are: expanding the social safety net, improving the quality and accessibility of public services, expanding and modernizing infrastructure. IMF experts emphasize that the COVID-19 pandemic has exacerbated the poverty and demonstrated the importance of effective social protection systems. The pandemic also found inequalities in access to basic services, such as health care, education, and digital infrastructure, which made access to new conditions worse.

Various studies show that infection and mortality rates among different groups of the population are positively correlated with their level of well-being. As COVID-19 hit the poorest and weakest groups the hardest, inequality has only intensified since the beginning of the pandemic. Therefore, to ensure social stability and reduce vulnerability to new epidemics in the post-pandemic world, experts find it appropriate to focus fiscal policy on addressing poverty and inequality.

In addition, economic theory and practice show that expenditures on education and health care improve the quality of people’s life, promote economic growth through the channel of human capital accumulation. Modern education and high-quality medical services increase economy-wide productivity, boost growth in incomes, and reduce inequality. It is also important that children’s health and future productivity depend significantly on public investment in education and health care.

Different population health indicators in different countries of the world are largely explained by the public spending on health care. The average level of public expenditures on health care in 2017–2019 was 6.2% of GDP in advanced economies and 4% in emerging market countries (see Figures 3 and 4).

Figure 3. Public expenditure on health care in emerging market economies as a % of GDP, 2017-2019 average
Source: Compiled by the author using the data from the IMF, GFS, COFOG
Figure 4. Public expenditure on health care in advanced economies and in Ukraine as a % of GDP, 2017-2019 average
Source: Compiled by the author using the data from the IMF, GFS, COFOG

These data signal the insufficient level of financial provisions for health care in Ukraine compared to both emerging market and advanced countries. The average expenditures on health care in Ukraine 3.3% of GDP is significantly lower than the average in these groups of countries. In 2020–2021, health care financing increased in all countries, and therefore Ukraine lagged behind many countries of the world even when the annual financing increased to 4.1% of GDP.

In this context, Professor S. Storm’s study is quite interesting, which showed that in advanced countries the high morbidity and mortality from COVID-19 had been largely due to insufficient financing of healthcare systems. He proved that there was a statistically significant relation between the level of government spending on COVID-19 (per capita) and the mortality rate from COVID-19 (per 100,000 population).

Turning to education, it should be noted that an effective and inclusive education system contributes to the realization of people’s life potential and guarantees the development of skills in demand in the national and international labor markets. And public financing of educational services reduces the gap between private investment in child development between rich and poor families.

In Ukraine, the financing of education looks satisfactory in comparison with both emerging market and advanced economies (see Figure 5). But empirical data suggest a lack of financing ofpreschool education and basic secondary education in Ukraine.

Figure 5. Public expenditure on education in emerging market economies and in Ukraine as a % of GDP, 2017-2019 average
Source: Compiled by the author using the data from the IMF, GFS, COFOG

According to IMF experts, government investing in early childhood education and care yield some of the largest social and individual returns because a person can build on the acquired learning in later education stages, creating a “virtuous circle”. Оригінал Investing in early childhood education and care has been shown to yield some of the largest returns because a person can build on the acquired learning in later education stages, creating a virtuous cycle.

Therefore, improving the quality and expanding the list of medical and educational services, creating the necessary infrastructure for these industries and ensuring equal access to these services should become public policy priorities after the pandemic.

Until the end of the pandemic, the healthcare sector should receive emergency financing for providing new hospital beds for COVID-19 patients, involving additional medical staff and its training, purchasing medicines, materials and drugs, and widespread vaccination. In the future, priorities should focus on expanding the medical infrastructure and medical institutions, including the hiring of the necessary staff and providing reward systems for them to work in remote areas.

There is no doubt about the need for additional financing to the educational sector during the pandemic with the use of funds to support students’ online education during quarantine restrictions and to provide methodological and technical support to teachers during the restructuring of the educational process. In the future, public policy should focus on improving the quality of education, ensuring access to education, and adaptability of the education system to labor market demand. As for public investment in infrastructure, in the post-COVID era the priority areas for public investment should be social, digital and transport infrastructure. Increased effectiveness of social protection programs should be based on higher spending on social safety net, solving unemployment problems and strengthening a retraining/training component, developing multifunctional programs that cover the needs in healthy nutrition, obtaining the medical and educational services.

One of the reserves for finding funds for the implementation of the proposed measures is the rationalization of public order, security and debt service. For example, the total expenditures on defense and security in Ukraine in 2020 amounted to 6.7% of GDP, which is one of the highest in the world. According to the IMF, the average expenditures on these items in advanced countries in 2016-2018 were 3% of GDP, in low-income countries – 3.7%, and in emerging market countries – 4.5% of GDP. The low efficiency of public order, judicial and anti-corruption bodies in Ukraine should encourage the state to review the relevant budget expenditures (including the number of employees and their wage rates). On the other hand, the objective needs of Ukraine in the development of the defense sector should be met by more substantial investments and current financing from our Western partners, which have obligations to Ukraine in the context of the Budapest Memorandum signed by them.

Expenditures on public debt service in Ukraine at 3% of GDP are 1.7 times higher than the average level in emerging market economies (1.8% of GDP), although the public debt in Ukraine does not even reach the average level. To solve this problem, the NBU should stop pursuing the policy of serving the interests of financial capital, but take into account the triad of goals (price, financial stability and economic growth), while formulating the monetary policy. 

In the post-pandemic period, a quality public finance transformation is impossible without strengthening and improving the structure of tax systems. In particular, achieving the goals of redistribution and mobilization of the necessary budget revenues requires more progressivity of income taxes and more active using the potential of the real estate and inheritance taxes. Moreover, having used the potential of these taxes, a possibility of introducing a wealth tax should be considered in the future, taking into account the ability of collecting this tax by responsible institutions and bodies

As for specific tax mechanisms for solving the problems of post-crisis transformation in Ukraine, the most appropriate are the following: to introduce a progressive scale of personal income tax; to increase the dividend tax rate; to raise the inheritance and gift tax rate for distant relatives; to establish the rates of real estate taxation at the level of 0.5 – 2.5 minimum wages; to expand the base of luxury taxes (cars and real estate) and raise the annual rate of these taxes.

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