Find The Difference: 11 Budget 2020 Features

The continuation of the initiated reforms – yes, there is one, an understanding of how this year will end – no, there is not, an unplanned increase in social standards is desirable, but it is unknown whether it is possible. Such plans of the authorities for the next year are seem to be after the analysis of the draft budget 2020. The Ministry of Finance filed it in time. On September 15, as required by the Budget Code, the document was registered in Parliament.

At first glance, the Ministry of Finance submitted a classic budget calculated on the current legislative base.

However, it’s not so simple.

First, this is a case, where the initial version of the draft budget may differ significantly from the final version. Parliament is passing new laws every day, and what the legislative framework will be in two months is only a guess.

Secondly, the draft budget 2020 has its “twists” that will affect both the budget balance and the lives of Ukrainians. VoxUkraine identified the top 11 differences in the country’s major financial plan for next year from this year’s budget and explained what they are all about.

Difference 1. Ability to further increase the subsistence minimum by 48%

The law on the state budget traditionally lays down the standards of social standards – minimum wage, subsistence minimum – which gradually increase during the year from January 1, July 1 and December 1. In 2020, the subsistence minimum will increase from UAH 2027 in January to UAH 2189 at the end of the year, the minimum wage will reach UAH 4723.

However, unlike in previous years, the draft budget 2020 contains a rather unobtrusive “commission” to the government: “The Cabinet of Ministers of Ukraine should take decisive steps to bring the subsistence level closer to its real size in 2020, which can be estimated at around UAH 4,251”. Increasing the subsistence level will lead to an increase in other social expenditures of the state, such as payments to disabled persons, families in need, orphans and others.

How much it will cost the state budget and where the resource will come from – it remains difficult to say. Concerning the possible “decisive steps” of the government, there is no specificity in the draft budget and accompanying documents. You can safely say that there are several possible sources for a sharp rise in social standards: reduction of expenditures in other areas, increase in tax burden, economic growth, economy unshadowing, inflation.

Difference 2. Much lower privatization revenues

Revenues from the sale of state property are directed to financing the state budget deficit. Since 2014, the situation is unchanged – every year the Cabinet plans to attract from the privatization of 17 billion UAH and annually fails this plan. As a result, the shortfall has to be covered by borrowing. The situation may change next year – the Ministry of Finance plans to receive 5 billion UAH from the sale of state property. The explanatory note to the draft budget states that “large privatization units that were not sold during 2019, energy companies, considering the introduction of a new electricity market and small privatization facilities” are planned to be sold.

Difference 3. No subvention for socio-economic development

Regional development is financed through two main types of expenditures – the State Regional Development Fund and a subsidy for socio-economic development. The last one is not in the budget yet.

 Last year, the Ministry of Finance also submitted a draft budget to the Council without a subvention, but it appeared in it at the time of budget finalization. The disadvantage of subvention is the minimum of incentives for economic development of territories and the maximum of opportunities for political intervention. From year to year, it acted as a “treat” for MPs, and “was given” to get their votes for some important bill.

Difference 4. Subsidies – in cash

Next year, Ukrainians will receive privileges and subsidies for housing and communal services, the purchase of solid and liquid household fuel and liquefied gas only in cash. This approach is to continue the course on monetization of social payments.

In 2019, there were three types of expenditures: subventions for privelegies and subsidies for the purchase of solid and liquid fuels, expenditures for the payment of privileges and subsidies in cash and subvention to local budgets for the provision of privileges and subsidies. The total expenditure is 58 billion UAH. All three types of expenditures are planned to be combined in 2020.

The draft budget for the payment of utility subsidies in monetary form provides UAH 47.6 billion. This is UAH 10.4 billion less than this year. This difference may be explained by this year’s trend. In 2019, government spending on subsidies is still less than planned. The Ministry of Finance explains the failure to implement the plan by reduce of the number of subsidies in the first half of the 2018-2019 heating period.

In addition, it is planned that at the state level these payments will be paid not by the Ministry of Finance but by the Ministry of Social Policy.

Difference 5. The population has to expect a census

The budget contains an article of expenditure “Statistical Observations and Censuses”. Its name has little to say to ordinary citizens, and this year’s expenditures on it compared to other articles are quite modest – UAH 247 million. But next year they will grow almost 14 times – to UAH 3.4 billion. Why so? In 2020 it is planned to conduct the All-Ukrainian population census. The first and last census in Ukraine was conducted in 2001. According to UN recommendations, censuses should be conducted every 10 years. The second census in Ukraine was scheduled for 2012, but was subsequently postponed.

Difference 6. The second phase of medical reform will start next year

Second and third level healthcare institutions are required to join the Health Guarantee Program from April 1, 2020. This will result in a significant change in the allocation of budget expenditures to this area.

The difference is that medical facilities will be funded primarily not through a medical subvention administered by the MoH, but through a financial guarantee program administered by the National Health Service (NHSU).

In numbers, this change looks like this: if in 2019 the medical subventio was 55.7 billion UAH, then next year its size will decrease 3.8 times – up to 14.6 billion UAH.

The subvention expires on April 1, 2020. Healthcare facilities that will not join the medical guarantee program from April 1 will be funded with a new subvention of UAH 1.5 billion.

Budget expenditures for the NHSU are increasing several times – from UAH 19.2 billion in 2019 to UAH 72.3 billion in 2020. Their lion’s share – UAH 72 billion – is intended for implementation of the program of financial guarantees.

For comparison, the main items of expenditures of the NHSU this year are the provision of primary care to the population (UAH 15.2 billion), and two “pilots” to implement a system of secondary medical aid in the level of secondary medical care in Poltava region (UAH 1 billion) and outpatient facilities of secondary specialized health care across the country (UAH 2 billion).

Difference 7. 24 billion less revenue expected from The National Bank

Each year, the National Bank transfers part of its profits to the budget. Traditionally, these amounts are considerable. In 2019, the budget received from the regulator 65 billion UAH, which is 17.3 billion more than originally planned. Next year, proceeds from the NBU are planned in the amount of UAH 40.9 billion. This number may change. In the past, during the preparation of the budget for the second reading, MPs increased it without coordination with the National Bank. However, the final amount will depend on the audited NBU’s 2019 earnings.

Difference 8. Marketable price for gas

As of May 1, 2020, the PSO Regulation – Naftogaz’s special obligations to supply natural gas at a reduced price to the public – will be repealed. From now on, the price of gas in Ukraine should become fully marketable. According to the Ministry of Finance, this means that the state will no longer have to compensate for the difference between the price of imported natural gas and the price at which they sell it to the population.

The state paid compensation to providers of heating (TKE in Ukrainian) when the market price for natural gas exceeded the price for special obligations. This year, global gas prices have fallen below what the government has set, and the need to pay compensation has dropped. Reducing the price in the world markets has allowed to reduce the prices of natural gas in Ukraine.

Difference 9. The budget contains funds for the non-existent Bureau of Financial Investigation

There is no authority body yet, there is no law on it, but there are already funds for its maintenance in the draft budget. This is exactly how the new structure, which is supposed to replace the tax police, is funded. According to the draft budget, next year the Ministry of Finance has planned to spend 1.3 billion UAH to support the Bureau of Financial Investigation. 

The draft law on the Bureau was adopted at first reading. The Bureau of Financial Investigation is expected to be the central executive body, coordinated through the Minister of Finance. The bureau will consist of a central office and territorial offices. The limit of the number of employees, as well as the conditions and amounts of remuneration will be set by the Cabinet of Ministers.

The government has recently decided not to delegate tax police functions to the newly created State Tax Service, but to leave them to the State Fiscal Service, which is being liquidated. This may be explained by the Cabinet’s belief that the new body will accurately emerge, and the reluctance to “make things twice” – to hand over STS functions, and in a short period of time – to the Bureau of Financial Investigation.

Difference 10. The State Road Fund will work for 100% of its ability

The State Road Fund was created in 2018. It finances repair, reconstruction, construction of roads. The launch of the road fund took place in stages – every year it received an increasing share of excise tax on manufactured and imported fuel and vehicles, import duties on petroleum products, vehicles and tires. From 2020, the road fund will receive 100% of this revenue. With this in mind, 13.44% of excise tax revenues from fuel and vehicles to local budgets will cease. In addition, a new source of revenue will be available to the road fund – fines paid by drivers for violations of stop requirements, illegal passage of reloaded or oversized trucks and some other types of violations. 

The volume of the road fund for the next year is planned in the amount of UAH 69.6 billion, which is UAH 19.2 billion more than in 2019.

Difference 11. Absence of balance bills and understanding of how the budget will change before the second reading

From year to year, the budget was submitted to the Parliament (Rada) together with the balance-sheet bills: amendments to the Tax, Customs and Budget Codes that made implementation of the budget . The draft budget 2020 has been submitted to the deputies without these changes. The fact is, that at the moment the MPs have introduced to the Rada and are gradually considering a number of bills on changes to the Tax and Customs Codes. Parliamentarians are shifting approaches to fining and providing state support.

Prior to the adoption of the draft budget as a whole, the legislative framework will be largely updated. In addition, the macro forecast will be refined. The first and last versions of the budget are very likely to be very different documents.