The total level of tax burden on the economy in 2020 was the highest in the last twenty years. The tax rate in Ukraine in 2020 was 40.4% of GDP, rising by 3.4 percentage points relative to the previous year. The danger of the current situation is that according to numerous studies, the tax rate of 39-40% of GDP is considered the maximum allowable to maintain positive economic growth.
In terms of the components of the tax rate in 2020, there was a slight increase in consumption taxation (+0.4 percentage points of GDP), an increase in the tax burden on the labor factor (+4.5 percentage points of GDP) and a decrease in the tax burden on capital (- 1.5% of GDP). Currently, the largest object of taxation in Ukraine is labor (22.5% of GDP), and the second largest is consumption (14.4% of GDP). The main components of the tax rate traditionally are four budget-generating taxes and a single social contribution. In 2020, their total share was 30.9% of GDP, including VAT at 9.8% of GDP.
The total amount of state budget revenues in 2020 was UAH 1,065.4 billion. The ratio of tax revenues of the state budget of Ukraine to non-tax is 79% to 21%. State budget revenues collection was significantly higher than planned due to indirect taxes (VAT and excise tax) on goods produced in Ukraine.
This is a general positive trend of the year, which is due, first of all, to a more effectiveadministration of these taxes by the State Tax Service of Ukraine. In 2020, the increase in state budget revenues from the payment of VAT on goods produced in Ukraine was +37.556 billion UAH (+ 42%), and from the payment of excise tax – +10.552 billion UAH (+ 15.4%). Revenues from VAT on goods imported into the customs territory of Ukraine fell the most (UAH -15.646 billion).
The analysis of legislative initiatives in taxation, the consideration of which is planned by the Verkhovna Rada in the first half of 2021, leads to the conclusion that they fail to solve the main problems of the domestic tax system, which are manifested in the form of existing structural disparities and the general extremely high level of tax burden on the domestic economy.
In terms of expenditure policy, the authorities of Ukraine focused limited budget resources on extremely important for the country areas related to public healthcare, protecting the country from external enemies, and rebuilding the country’s road infrastructure. And this was absolutely justified in a pandemic, economic crisis and ongoing military aggression. But the government’s decisions to keep the spheres of education, spiritual and physical development on “short rations”, which have been in poor state since the radical reforms of 2014-2015, can be negatively assessed. On the other hand, the practice of permanently increasing spending on law enforcement and the judiciary is also unfounded. Such expenditures belong to public consumption, which does not contribute to the increase of human or physical capital of the country and has little effect on the total productivity of factors of production.
In terms of economic categories of budget expenditures, the largest increase in funding in 2020 compared to the previous one was achieved by the following items: a) subsidies and current transfers to enterprises (+ 1.3% of GDP); b) wage bills in budget institutions (+ 1% of GDP); c) social security and welfare (+ 0.3% of GDP).
Unfortunately, in 2020 there was no significant growth in the investment orientation of public expenditures. The capital expenditures of the Consolidated budget in relative terms (in % to GDP) went up from 3.9% to 4.2%, and of the state budget – from 1.9% to 2.3% of GDP. The increase in financing of road (by 1.5% of GDP) was mainly due to a change in the structure of capital expenditures: in 2020, budget expenditures for the purchase of equipment and durable goods, and capital construction / purchase dropped in nominal terms.
The state budget deficit of Ukraine in 2020 was 5.3% of GDP, and the Consolidated budget deficit was 5.5% of GDP. In 2020, fiscal policy was reversed from restrictive to expansive. According to our estimates, in 2020 the fiscal impulse in Ukraine was + 1% of GDP. That is, Ukraine’s fiscal policy has become countercyclical, and its easing during the economic and epidemiological crisis has allowed it to support the economy and the social sphere.
Net financing of the budget deficit on debt operations in 2020 was UAH 253.2 billion, which is many times higher than in previous years. At the same time, the gross government borrowing (UAH 638.7 billion) also significantly exceeded similar amounts in the past – UAH 286.5 billion in 2018 and UAH 425.7 billion in 2019.
Read more in the Growford Institute study.