Threatened with disbandment by the president, parliament likely to pass hasty, unrealistic budget for next year
that was officially presented by the government on Oct. 4.
The bad news is that deputies just might rubber-stamp an incomplete and confusing document – just to save their jobs.
That’s the fear of some analysts who say the Hr 52 million 2001 budget may fall victim to a controversial referendum passed in April. That national referendum empowered President Leonid Kuchma to disband parliament if it fails to pass a budget before the new fiscal year.
“There is no question that parliament will pass the budget by the end of this year,” said Viktor Skarshevsky, an adviser on economic policy to the president to the Ukrainian Union of Industrialists and Entrepreneurs. “They don’t want to run the risk of losing their seats in parliament.”
But there are some complicated issues that must be resolved before the budget can be passed – namely adopting a new tax code and revising the privatization revenue forecast, which many say is highly optimistic.
New Tax Code
Disagreement about the proposed tax code emerged even before the draft budget was written and submitted by the government last spring.
According to tax specialists, the new tax code would simplify the system by eliminating some taxes and combining other smaller taxes. It also called for switching from a quarterly filing schedule to a more efficient annual tax period for the enterprise profit tax.
The draft tax code would also decrease the rates of three large budget revenue sources – the income tax from 40 percent to 20 percent, profit tax from 30 percent to 20 percent and value-added tax (VAT) from 20 percent to 17 percent.
While few deny that the tax system needs to be simplified, some question whether the state can stand such huge losses in revenue.
Khwaja Sultan, a senior tax policy adviser from KPMG Consulting Inc., says that some of the proposed tax reductions, such as the reduction in VAT, conflict with international and European standards.
Most European countries set their VAT at around 20 percent to 23 percent, Sultan said. He said a better plan would be to keep it at 20 percent and reduce the tax burden by cutting other taxes.
Scott McLeod, a U.S. Treasury tax adviser to the Ukrainian government, says that the draft has some less-controversial but equally important issues that conflict with international standards.
McLeod noted that the language in the tax code is unclear, leading to confusion among both taxpayers and the state tax service employees trying to administer the law.
With the adoption of the draft tax code stalled due to political squabbles between the government and parliamentary deputies over which taxes should be reduced and by how much, the government has been forced to base the 2001 budget on the old tax structure.
Kuchma said he would not sign a budget based on the old tax code, leading to the government’s compromise – a budget passed on the basis of a “small tax code.”
According to McLeod, the “small tax code” is merely a few amendments to the current tax laws, including the proposed reductions in tax rates. Additional changes would theoretically be phased in throughout the rest of the year.
There are currently three drafts of the “small tax code” before parliament.
McLeod says that one of the drafts does not include one of the easiest and most useful amendments – changing to an annual filing schedule for the enterprise profit tax from the current quarterly system.
Privatization Revenues
The budget became even more complicated late last month when the government announced that it planned to raise $1.5 billion in privatization revenues for the 2001 budget – primarily from the privatization of Ukrtelekom and seven energy-distribution companies, or oblenergos.
The IMF immediately described the optimistic plan as “risky” and “unrealistic.”
So far this year, the state has raised only about $1 billion.
Even the head of the State Property Fund, Oleksandr Bondar, was pessimistic about the forecast. In a recent television interview, he said the privatization of Ukretelekom and the oblenergos is too politicized, and besides, there isn’t much interest from investors.
“I don’t even see the potential buyers,” said Wood & Company Corporate finance associate Mykola Korol. “And the fact that the Czechs, Poles and other economically more advanced Eastern European countries are having difficulty in selling their telecoms is a sign that not every telecom will sell big.”
Zero-Deficit Budget
The government is billing this budget as the country’s second zero-deficit budget. But many analysts say it will be just like the last budget – zero-deficit on paper alone.
You cannot call it a zero-deficit budget if the government has millions in undue VAT and wage arrears, Skarshevsky said, adding that mutual settlements, although banned by the government, will likely surface in the new budget.
Analysts say that the budget process is already complicated by IMF intervention and domestic politics.
“It’s not at all clear what the final budget will look like,” Wood & Company’s Korol said.
But most analysts, including Skarshevsky, Sultan, McLeod and Korol, do agree that some sort of “small draft code” will be passed by parliament and that the budget will probably be quickly revised around it. They also believe that the privatization revenue forecast will need to be trimmed down.
“It would be best for some clear and realistic set of rules to be passed soon for the sake of stability,” Korol added.
KPMG’s Sultan stressed that while a perfect budget is not possible, the main facets of the budget, such as the tax code, must be up to international standards.
