Experts: Implementation of budget-2016 is a challenge for the Finance Ministry, its success depends on launching structural reforms

Experts: Implementation of budget-2016 is a challenge for the Finance Ministry, its success depends on launching structural reforms
December 15, 2015.

Kyiv, December 15, 2015. Reducing the share of expenditures on public sector, fiscal decentralization and change of social assistance are the key innovations in the draft state budget for 2016. However, the innovative ideas contained in this document can be fully implemented only when Parliament launches a package of reforms, according to the participants in the debate “The most complicated budget in Ukraine’s history” at Ukraine Crisis Media Center.

Pavlo Kukhta, advisor at the Center for Economic Strategies, considers that a distinctive feature of the draft budget-2016 is introducing a “preventer” in the form of fiscal rules that are the grounds for revising the budget.  “The budget contains a provision according to which it is possible to revise its parameters only in case of 15% deviations of its revenues from the targets. That is, MPs will no longer be able to implement their “wish list”, as they used to. In addition, restrictions are imposed on the changes that affect the size of the budget deficit, the amount of state debt and state guarantees,” said Kukhta.

He noted that the main source to cover budget deficit, which is scheduled at more than 83 billion UAH, is external borrowing. In this way the Ministry of Finance plans to block both the deficit and fund outflows by repaying internal loans. Cooperation with international donors seems one of the priority activities of both government and parliament. In addition, one of the sources of financing the budget deficit is privatization proceeds planned in the amount of 17 billion UAH.

Olena Belan, chief economist at investment company Dragon Capital, stressed the importance of reducing the budget deficit from 4.1% of GDP in 2015 down to 3.7% in 2016. The expert noted a decrease in appetite of the state for closing gaps in the budget by running a “money machine.” “The draft budget for 2016 creates the prerequisites for reducing the monetization of the budget (quasi-fiscal) deficit. We know the consequences of such monetization. First of all, there is pressure on the exchange rate. Next year the government plans to monetize no more than 16 billion UAH of this deficit. This is the money that will be used to pay depositors from the Deposit Guarantee Fund,” said the expert.

Maria Repko, deputy director of the Center for Economic Strategy, reviewed the draft budget in the context of international practice, focusing on such areas as fiscal rules, fiscal decentralization and political consensus. As to the rules, Ukraine, according to Maria Repko, followed the path of European countries, taking into account the previously mentioned restrictions on an increase in expenditures and a ban on the revision of expenditures. Besides, the draft budget provides for an increase in the financial capacity of local authorities – from 5.2% up to 6.5% of GDP. “I wish I saw political consensus, political will, certain common work of the government, the president, the prime minister aimed at making the reform of public finances more efficient, purposeful, focused on the state share reduction and economic growth,” concluded the deputy director of the Center for Economic Strategy.

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