Ukraine parliament fails to approve 2016 budget

Ukraine’s parliament, the Verkhovna Rada, did not approve the 2016 budget at its Dec. 17 extra session amid criticism of the proposed tax code reform. Finance Minister Natalie Jaresko presented the spending plan and reforms, which drew emotionally-driven reactions and refusals to approve the legislation. Parliamentary Head Volodymyr Hroisman suggested creating a working group that should consider all proposals from MPs. Some MPs proposed approving the 2016 budget based on the current tax code and continue working on reforms in 2016.

Alexander Paraschiy: Heated debates over the spending plan and tax reform were inevitable, but the Finance Ministry now faces a real challenge of how to adhere to the 3.7% of deficit to GDP requirement by the IMF amid decreasing collections (the current considerable temporary tax collections will not transfer to 2016) and a payroll tax cut (which is the backbone of the Cabinet’s proposed tax reform). The Finance Ministry has decided that this fall in collections will be partly compensated at the expense of cuts in state employees and partly at the expense of business, who will pay more taxes with the simplified system eliminated.

It’s this approach that made the 2016 budget and tax reform the target of harsh criticism from small business. Now authorities will have to decide whether to push forward with the unpopular changes, disregarding the  opposition, or indeed postpone approving the tax reform until 2016. If agreement with MPs is not reached during the next week, we expect there will be no changes in taxation rules in 2016 (maybe except the IMF-required decrease in gas production tax).  Still, we believe the finance minister will stick to the 3.7% of GDP deficit requirement that was committed to the IMF, regardless of what happens with tax reform.