Look out! Government in dire need of revenue
Neither the fiscal nor calendar year – and the two coincide — started out well for Ukraine. With rising unemployment claims on top of the usual budgetary stress, a collapse of revenue from suffering industry and sliding consumption, Ukraine is seeing red.
And there’s no clear way out.
In the first 10 days of January, the state budget received only Hr 1 billion in revenues, which accounts for 10 percent of what was expected for the entire month. In 2008, the budget received Hr 400 million more in the same period.
These early figures alarmed the country’s leaders.
“If these tendencies continue for the next two weeks, we will have a very difficult, unprecedented situation with the fulfillment of the 2009 budget,” said President Victor Yushchenko in one of his first public appearances this year. “The country will not last long with revenues inching in at such a rate,” Yushchenko added.
Ukraine is required to have a no-deficit budget this year and freeze social spending increases as a condition for receiving a $16.5 billion loan from the International Monetary Fund. In violation of the agreement, parliament adopted a 2009 budget with revenues of Hr 239 billion (roughly $30 billion at Hr 8/$1) and expenditures of Hr 267 billion.
To make matters worse, the country started the year with official wage arrears of Hr 43.9 million to government employees, despite the fact that the 2008 budget received 2.8 percent more revenue than planned.
The first categories of state employees hit by the shortage of cash in the state coffers were teachers, medical workers, house maintenance and utilities service personnel and transport workers.
“We still haven’t received salaries for December and I don’t know when we are going to get them,” said Svitlana Nesterova, deputy director of Kyiv-Mohyla College in Desnyanskiy district of Kyiv.
Many university students have yet to receive their full state scholarships for December.
“We were paid only Hr 270 out of the Hr 530 scholarships for December, and I don’t know whether we’ll get scholarships for the next several months,” said Kyrylo Katyshev, a student from Ostroh Academy National University in Rivne Oblast.
The next blow may come to Ukraine’s pensioners.
“Currently pensions are paid on schedule, but unfortunately, in February everything can change,” warned Liudmyla Denysova, labor and social policy minister.
Victor Pynzenyk, Ukraine’s finance minister, said the pension fund needs a loan of Hr 5.5 billion from the state budget to be able to meet its payment schedule early this year. In the first half of January, the pension fund paid out Hr 4.6 million, or 35 percent, of the due payments.
Payments to the state pension fund are a separate tax that every business pays in Ukraine for each worker employed. But as layoffs materialize, the collections of this tax are falling.
Pynzenyk said customs alone failed to pay 55 percent of what was expected to the budget since imports collapsed, following a sharp decline in consumption.
In the first 11 days of January, imports stood at $207 million, down by 62 percent on the same period last year; at the same time exports decreased by 45 percent year-on-year, and stood at $382 million.
The State Tax Administration, responsible for nearly 60 percent of revenues to state and local budgets, is also alarmed.
Serhiy Vlasenko, STA deputy head, said tax receipts are falling sharply, yet he remains optimistic. Government has moved in recent weeks to hike taxes and keep its social safety net – weak as it may be – functioning. Businesses fear, however, increased pressure from a revenue-hungry government and say that heavy taxes will stifle commerce even more.
“To fill the budget, the Tax Administration will take as much as possible from business,” said Kostyantyn Kuznetsov, an economic expert. He said fines will become common, and tax increases should be expected. The government has already started amending tax law to help themselves out of the economic crisis.
On Dec. 25, parliament approved new excise taxes for cars, upping them 1.5- to 10-fold, depending on the volume of the engine. Annual taxes for car owners were also increased. Industry participants said the impact will be negative and quick.
“My attitude is very negative. The financial crisis has already caused a drop in car sales, and these measures are very rough,” said Oleh Nazarenko, director of the Ukrainian Association of Car Dealers and Importers.
Alcohol, tobacco and gasoline excise duties have also been raised. Beer excise went up by 3 kopecks per liter to 34 kopecks, excise duty for hard liquor is set at 27 kopecks per liter, up from 21.5 kopecks. Gasoline excise nearly doubled and is now 110 euro per ton. Cigarettes are now taxed at the rate of Hr 32-Hr 50 per 1,000 sticks – still a small fraction of European taxes.
But the parliament didn’t just go after big traders. On Dec. 24, it also passed the first reading of a law to substantially increase taxes for small market traders. If the law remains unchanged in the second reading, small traders may be paying up to Hr 15 per square meter of trading space, up from the current Hr 3.5. The new law also requires them to pay for public spaces, such as passageways between rows and public toilets.
The draft outraged small market traders.
“We think the law draft aims to totally destroy bazaars,” said Olena Varnakova, head of the Chernihiv entrepreneur trade union. However, the Tax Administration’s Vlasenko said this particular tax increase was compensation for cancellation of other taxes for small entrepreneurs, and would not be a great burden for them.
Burden or not, the Cabinet succumbed to the pressure of small market traders, and this month proposed to drop the old initiative and instead decrease taxes to 18 kopecks per square meter of trading space. But the bill is yet to be debated.
Other tax initiatives floated by the taxing body include replacement of the 25 percent profit tax with a new 2 percent gross revenue tax, and a decrease of the value-added tax rate from 20 to 18 percent.
“This will make tax management more transparent and will destroy schemes for tax evasion,” Vlasenko said. Other experts disagreed, however. They said taxing turnover will have the opposite effect.
Businesses will simply add “this 2 percent to their product prime cost,” said Volodymyr Kotenko, a partner at Ernst & Young. As a result, “costs will increase” for consumers, he added.
Kotenko said the Tax Administration’s best bet is to simplify taxes to encourage businesses to bring their revenues out of the shadows. “The current tax legislation is equivocal and can be interpreted in many ways,” Kotenko said.
Other welcome changes would be tax reductions and amnesty for businesses that avoided paying taxes in the past, he added.
