Ukraine MinFin says radical spending cuts needed for tax reform

The Ukrainian government stands to lose UAH 60 bln in budget revenue in 2016, or a 12% yoy drop, if the Finance Ministry’s tax reform proposal is approved in its current form, Finance Minister Natalie Jaresko said during an Oct. 16 press briefing. Therefore, a respective reduction in budget spending is required to fulfill that plan, she stressed, which will also fulfill the Ukraine’s commitment to the IMF of a state budget deficit of 3.7% of GDP in 2016 (vs. 4.1% in 2015E). In this context, Jaresko invited journalists, experts and politicians to identify those spending cuts that the government can undertake next year, stressing that defense and debt servicing are off limits but all other budget items can be potentially revised.

Jaresko also highlighted that alternative tax reform proposals assume a UAH 150-200 bln decline in budget revenue, which would demand an even more radical decrease in budget expenditures, or about 25% in one year. Global experience suggests that this is not possible, she said.

Alexander Paraschiy: We estimate that even without any tax reform (which includes a sizeable cut in the payroll tax), Ukraine’s budget will lose over UAH 60 bln yoy in the next year due to: a reduction in central bank profit distribution (about UAH 30 bln); the abolition of interim imports duties (nearly UAH 24 bln); the loss of one-off revenue injections such as this year’s 3G license sale (UAH 9.0 bln); and a potential reduction in taxes on natural gas extraction (nearly UAH 5.0 bln). The invitation for the public to discuss potential cuts in the most sensitive spending items looks like an attempt to demonstrate the difficulty in cutting taxes next year, we believe. All those discussions will merely prove the poor prospects for implementing real tax-cutting reforms anytime soon (except for a cut in the gas production tax, which is a commitment to the IMF). Instead, we are likely to see MinFin insist on introducing tax-raising initiatives as outlined in the tax reform drafts – namely, the abolishing of tax exemptions for the agricultural sector.