State Budget: Draft, Expenditures and Lies of Politicians

On the 20th of September Minister of Finance Oksana Markarova had presented the draft state budget for the year2020 in the Verkhovna Rada. From that moment on the draft state budget, as usual, became a favorite topic for Ukrainian politicians, media and experts to manipulate and lie about. And every year the main ideas are the same: the government officials explain how the spendings in their spheres  will grow, and the opposition criticizes them.

VoxCheck and UA: Ukrainian radio within the project «Percent of Truth» analyzed the state budget and its composition, checked top myths about it and gathered some useful relevant data.

What is state budget? What are the types of the state budget?

Imagine your personal or family budget. You probably know your income for the next month: salary, pension, scholarship, rental income, etc. You also plan how you will spend this money — on rent, utilities, food, clothes, entertainment, vacation etc., or save it.

The same logic applies to the state budget. 

State budget is a plan of gathering and spending the financial resources of the state, according to which the fulfillment of its tasks and functions is ensured by the state authorities and local self-government bodies during the budget period. To put it simply, this is an estimated amount of money to be received and spent by the authorities during the next year.

It’s not that easy, though. In fact, Ukraine has around 8,300 budgets!

Budget system of Ukraine consists of  three levels:

• First and highest level is represented by the state budget which defines the direction of the expenditures and the sources of income of the government bodies;
• Second level includes local budgets — the budgets of regions and districts. State budget and local budgets interact with each other;
• Third level consists of budgets of territorial units, villages and their conglomerates, and towns. By the way, territorial unit budgets are the newcomers to the budget system. They first appeared in 2015 after the launch of the decentralization reform. 

The state budget, together with the local budgets form unified, or consolidate budget. It is necessary to analyze economic and social situation in the country and  predict its development tendencies. Consolidate budget separates local budgets from the state budget and gives a clear  understanding of the current status of the budgets on each level. 

What does the state budget consist of?

Both state and local budgets include the future revenues and expenditures of the respective government bodies.

Revenues consist of:

• Taxes. In the previous article we have already mentioned that dues and taxes are an important source of income for the state. These resources cover everything that is considered «free» by the public: pensions, scholarship  etc. In general taxes make up around 80% of the budget revenues.
• non-tax revenues, which are mainly income from the state property. For example, profits of state-owned enterprises.
• income from operations with capital. This is the income from the sale of government assets.
• transfers. Transfers  are funds moved from the state budget to local or vice versa, as well as  money from international organizations. 

The expenditures can be:

• Protected – these are the expenses from the state budget which are financed first and foremost. For example, salaries of “state employees”, utilities, public debt service, pensions and social assistance.
• “Unprotected” — these are all other expenses. Their peculiarity is that they can be cut during the year.

There are also development expenditures — the financing of scientific, investment and innovation activities; and consumer expenditures — for example, it is the cost of functioning of the authorities and state institutions. 

The law of Ukraine “On State Budget” defines the cost of living for different social groups and the minimum wage, out of which the minimum pension is calculated.

How does the state define which areas to fund? 

Every government body or agency draws up passports of budget programs for which they want to receive funding These are the documents in which they determine the amount  of money needed, planned expenditures and expected results.Passports of budget programs are adopted by the Ministry of Finance of Ukraine.

Also, when drafting the budget, the Ministry of Finance relies on the macroeconomic forecast for the coming year, which is determined by the Ministry of Economic Development. This document explains how much the economy can grow (real and nominal GDP growth), how prices will change (inflation), what will the foreign trade be (exports and imports), how will oil and gas prices, and unemployment change. Due to many factors that affect these indicators, the Ministry of Economic Development submits several forecast options, from which the Ministry of Finance selects the main one and the rest are considered as alternative.

How is the state budget approved in Ukraine?

The stages of consideration and approval of the state budget are defined by the Budget Code of Ukraine. Here are the main ones.

• By April 1, the Cabinet of Ministers has to approve the Main Directions of Budget Policy — a document that defines the main goals of the state budget, the macro forecast and the main objectives of the budget policy for the next year.
• Until April 30, the Verkhovna Rada is considering issues in these main directions
• By September 15, the Cabinet of Ministers submits a draft State Budget for the coming year to the Parliament.
• The budget must be adopted in the 1st reading no later than October 20, and adopted in the second reading by November 20 at the latest. After that, it needs to be signed by the speaker of the Parliament, and then by the president.
• If there are any remarks to the budget, the Verkhovna Rada has to adopt it in the third reading by December 1.

By the way, in 2018 Ukraine started planning the budget not only for the upcoming year, but also for the next two years. In order to achieve that, a new instrument —  three-year budget resolution was introduced. The predictability of the budget policy and forecast for  several coming years will allow to undertake fundamental reforms, increase investment attractiveness and improve business climate. Compare it with your own wealth: if you know how much money you will earn in the coming years, you will be able to plan better how to spend it and where to invest.

Top manipulations about the state budget

Each year politicians keep using the same manipulations about the budget. According to our observations, there are at least three main manipulative statements. For example, here’s what politicians said about the budget for 2019 (budget for 2020 has not been discussed yet): 

Comparing nominal budget expenditures/revenues rather than actual

Spendings on the Cabinet of Ministers in 2013 were UAH 334.5 million, compared to UAH 1.883 billion proposed for 2019 , so that’s 5.5 times more (not 6.5 as stated by the speaker). Taking into account inflation rate, the growth is significantly smaller.

Comparing social payments in dollars, not in real terms

If we compare the minimum pension in 2013 (UAH 949) and in 2019 (UAH 1669.2 or 40% of minimum wage) in USD, we will indeed receive the numbers Vilkul mentions. The same goes for the cost of living.

However, such a comparison is incorrect, because we pay for goods and services in hryvnias, not dollars. It means that the main factor influencing the purchasing power of income is inflation, not devaluation (exchange rate influences consumer spending through the growth of prices for the imported goods only). Therefore, the minimum pension in the prices of 2013 will be UAH 606.98. That’s 36% less, not two times less, as Oleksandr Vilkul states.

Situation with the cost of living is quite similar: it was UAH 1.176 in 2013. The cost of living for the upcoming year in the prices of 2013 will be UAH 673.81 and UAH 737.1 (at the beginning and at the end of the year respectively). See the detailed calculations here.

On security and defense expenditures

In 2019, a total of UAH 204.6 billion is allocated to the security and defense sector, and it is truly the largest amount of money allocated to this sector in the history of independence. But in this case it is better to compare budget expenditures as a percentage of GDP. In 2019, this figure is 5.18% of projected GDP, in 2018 the corresponding plan expenditures were expected to be 5.19%. Therefore,  security and defense spending in 2019 is a record only in nominal terms.

Are there any relevant articles on state budget?

First of all, you should read Law of Ukraine “On the State Budget”. Pay attention to the addendums in the end — that’s where the expenses and budget revenues for all programs are listed. And if you want to watch the changes that are being made to the budget in the stages of its adoption, follow the bill on the state budget on the Verkhovna Rada website.

Ministry of Economic Development, Trade and Agriculture publishes a consensus forecast with macroeconomic indicators for budget planning.

The budget execution (who has received money from the budget and how much) can be found onthe website of the State Treasury Service of Ukraine in the Accounting chapter. The state budget execution is controlled by the Chamber of Accounts, and the  State Audit Office monitors the efficiency and purposeful use of budget funds. 

The Ministry of Finance, together with VoxUkraine, have created BudgetPRO, an online guide which explains the main steps of the budget process and the main budget “players” and describes the principles of intergovernmental budgetary relations.

There are also a number of articles on the VoxUkraine website within the Budget WatchDog project that analyze the execution of budget-2019.

Among the experts we recommend the articles of the following: Daryna Marchak from the Kyiv School of Economics, Oleksandra Betliy from the Institute for Economic Research and Policy Consulting, Maria Repko from the Center for Economic Strategy, and Viktor Mazyarchuk, Advisor to the President of the Accounting Chamber.