The Budgetary Trap

Ukraine entered 2015 with a budget law and changes to the tax code. I mostly agree with expert assessments, including from the Board of VoxUkraine, that the approved package of laws is far from perfect, largely because it undermines the government’s reform credibility, wastes a window of opportunity for radical changes (like elimination of energy subsidies) and is based on an insufficiently conservative macroeconomic projection. It should be taken into account though that the new government had very little time to prepare relevant documents.

I would like to comment on the process of budget approval in parliament, as it reveals that the new team lacks experience in political management and communication, which may become an important obstacle to reform.

One of the major problems in political management is the lack of coordination and cooperation between the government and the Parliament, which is connected with a lack of political leadership. The budget package received slim support in the Parliament – it was approved by 232 MPs, only 7 MPs over the necessary simple majority despite the coalition having 76 votes over majority. This indicates a significant problem taking into account that the government is new. I don’t think that the reason for weak budget support was that many MPs are against reform. Based on their own comments (Igor Lutsenko from Batkivshchyna, Svitlana Zalishchuk from PPB, Sergiy Leshchenko from PPB) they were very dissatisfied with the management of the discussion from the government side. Problems included inconsistency between the tax code and budget, not enough time for studying documents, the draft budget was irrelevant because of many changes in the tax code, and nobody had seen the actual document. It seems that MPs consider themselves as only a tool for passing what was prepared by the government.

It is necessary to work with MPs, discuss with them, to convince them about government proposals. It is important to be as honest as possible with parliament and the general public and tell them what needs to be done and what is possible in coming weeks and months.

It would be much better for the government to announce that the budget should be treated as provisional due to time shortages and a new higher quality document will be prepared by the end of February. In reality what was passed is indeed only a provisional budget which will be reassessed by the middle of February.  The government should have said this.

I consider it very dangerous how the budget and tax code were communicated. Pavlo Rosenko, Social Policy minister, said,  that “we can either vote for the current budget proposal or for increasing the pension age and social insurance system, abolishing state student scholarships and lump-sum child allowances.”   How can this minister pursue necessary changes in the social system (including increasing the pension age, for example) if he uses this kind of blunt rhetoric during his first weeks in office? Also the argumentation from Economy Minister Aivaras Abromavicius that the budget and tax code need to be passed because Ukraine needs money from the IMF is quite dangerous. Reforms and changes, including fiscal consolidation, are inevitable and necessary for domestic reasons and not only to satisfy foreign partners.