Ukraine parliament approves 2017 budget with 3% GDP deficit

Ukraine’s parliament approved the second reading of the 2017 budget early this morning. It included some minor, last-minute changes but the spending plan was maintained with a 3.0% of GDP deficit target. “You will witness large-scale decentralization,” Prime Minister Volodymyr Groysman assured the public at the session.

Most notably, the budget included the populist maneuver to double the minimum wage to UAH 3,200 per month. To accommodate this, both revenue and spending rose by UAH 15.1 bln, or nearly 2%. Extra revenues are expected from VAT (additional UAH 7.0 bln), personal income tax (additional UAH 5.5 bln), and dividends from the NBU (additional UAH 4.0 bln).

The increased minimum wages are expected to generate UAH 14.8 bln in payroll tax for the State Pension Fund, in what will save the equivalent sum of the pension fund state subsidy. Also the higher minimum wages are expected to save UAH 4.7 bln in housing subsidies. The Health and Education ministries gained higher wages for teachers and doctors.

On the top of the state budget law, parliament also voted on a package of legislation introducing changes to the budget code and tax codes that complement the spending plan. More state revenue will be drawn from higher excise duties on alcohol and tobacco, ammonia transit rates and radio frequency taxes. 

Starting 2017, local budgets will be responsible for financing secondary and vocational schools, as well as certain social payments. A 2% charge to the pension fund on cash foreign exchange operations was eliminated. Parliament also approved positive changes that simplify and streamline tax administration for businesses.

The 2017 spending plan is based on a 3% yoy of real GDP growth forecast, 8.1% yoy inflation and UAH 27.2/USD average exchange rate. Nominal GDP is projected at the level of UAH 2,585 bln.

Alexander Paraschiy: It’s become tradition to hold the vote early in the morning, when politicians can’t make their populist pitches and condemnations in front of television cameras. The final spending plan is more or less in line with numbers previously reported to the public. The revenue target still looks realistic even after it was revised to accommodate the higher minimum wage. It’s positive that budget was approved before the new year, that decentralization is continuing and tax administration reform is progressing.

Cabinet officials have stated that the budget’s approval and Privatbank nationalization were the last tasks needed to fulfill in order to receive the next IMF loan tranche, according to the unnamed sources of the rbc.ua news site. While the latest IMF memorandum from September contained other demands from the Fund, we believe that indeed these two steps will enable Ukraine to receive a USD 1.3 bln IMF tranche as early as January.