The 2005 budget process in Ukraine has erased all the differences between the law and lawlessness, between good and bad, between civilization and wildness. Trapped by its own pre-election promises, the Yanukovych - Azarov Cabinet is convulsively struggling to match the country’s financial needs with the available financial resources. Yet it still fails.

You ask, we answer

Your author attended a meeting of the budget committee on Tuesday, 14 December 2004, as well as a meeting on budgeting problems in the Verkhovna Rada, which was also attended by Speaker Volodymyr Lytvyn and Mykola Azarov, who is currently holding three posts at once - the Prime Minister’s, vice Prime Minister’s and the Finance Minister’s. Thus, I have heard twice the rhetorical questions of Socialist Oleksandr Baranivsky asking whether the draft can be legitimate if it was drafted by an illegitimate Cabinet. Does the Verkhovna Rada have the right to accept from the Cabinet (minus the Prime Minister) a document defining the financial policy of the state for the next year after it has passed a no-confidence vote in it at its December sitting? Shouldn’t Kuchma observe the formalities, dismiss present Cabinet and appoint acting ministers?

Of course, one can ignore these questions. This will not, however, bring the adoption of a normal budget any closer. Let us remember all the budgeting peripeteia of this autumn. Very little of it actually complied with the law.

On September 14, 2004, the Cabinet submitted the 2005 draft State Budget making us believe that this was the only possible, balanced and feasible budget. But later, on September 18 it issued a notorious resolution on increasing pensions, thus causing an unbridgeable gap in the Pension Fund’s budget. This gap was supposed to be filled by the State Budget, thus increasing its hidden deficit by about ten billion hryvnias. Everyone understood that it was impossible to go back on the pre-election pension promise, regardless of who would win the presidential race - Yushchenko or Yanukovych. After all of that, it is not surprising that the budget process was disrupted soon after it began.

The September pension increase provoked a huge wave of price increases, which, intensified by the expectation of inflation, twice has caused shocks in the banking system. As a result, for the period of December 2003 - December 2004, GDP grew by 12.4%, whereas consumer prices grew by 12.5%, according to the Cabinet’s corrected forecast.

A foreword to the newly drafted budget, which was handed out last Tuesday, provides a detailed explanation of how the Verkhovna Rada had turned down the conclusions and proposals of the budgeting commission both on October 20 and on November 3. It returned the document to the Cabinet for further improvement, thus breaching the Budget Code.

What conclusion did the Cabinet make of that? It may keep on violating laws, like holding the first and the second readings “in a package”, or introduce numerous “tax innovations” in December.

Virtual Financing

The Finance Ministry provides for a budget deficit of 11 billion hryvnias or 2.8% of GDP, which obviously goes beyond any reasonable limits. It initiates an illegal alteration of taxes. (The law forbids any changes to taxation after August 15.) The total wage fund and VAT revenues have been increased. Projected revenues of the 2005 privatization have been almost doubled for three months - from September to December! Yet despite all of these titanic efforts, the Cabinet has failed to bring expenditures and revenues into balance.

The September draft budget laid a great emphasis on debt repayment by various companies, from giants like Naftogas Ukraine to some unknown companies, which took loans back in the 1990s on the security of the government.

A reservation is in order. We are not against strict budget discipline or repayment of the loans to the sate. However, it is insane to represent bad debts as real budget revenues.

The Cabinet pretends that it does not realize this. Even the cars that Yanukovych promises to present to the World War II veterans for the victory jubilee will be one third produced by virtual money - VAT and fines owned by the Zaporizhzhia car factory and its subcontractors to the State Budget. In September 2005, the amount allotted for this purpose was 59.6 million hryvnias but in “real money”, now this amount is 302.9 million hryvnias, 110 million of which are yet to be received from debtors.

It is planned to cover the 6 billion hryvnias debt of the State Savings Bank to its depositors at the cost of the debts of Naftagas Ukraine and the public utility companies. The scheme is as follows. The state owes its citizens the amount of their devaluated deposits. Citizens, who were not paid back their deposits, owe to public utility companies. Public utility companies owe to the Budget and partially to its suppliers, in particular to Naftagas Ukraine.

Now, it is proposed to take the Naftagas debt to the state for natural gas transit and redirect this dubious asset to local budgets as a means to clear off devalued deposits. Local budgets will repay the debts to utility companies, which, in their turn, will pay to Naftagas and the state. The Budget will once again send money to the regions. The state savings bank and the list of its depositors are somewhere in the background.

I may have simplified some things. In actual fact the scheme will be involved and non-transparent, while the results will be so much entangled that even ten Auditing Chambers will not be able to disentangle it. It is clear to everyone that the mutual settlements of the debts is a method of enrichment of the persons directly involved in it.

Pensions: Giving to some, depriving others

According to the roughest estimate, more than a billion hryvnias is needed monthly or 12 billion hryvnias yearly to add 284 hryvnias to the individual pension. The new draft budget allots only 7 billion hryvnias for this purpose, since this is all that could be found. In order to do this, funding for Chernobyl programs, procurement of school buses and procurement of computers for rural schools had to be cut. (At the same time, the Cabinet allocated money for the construction of a gas pipeline to Foros and Sevastopol, as well as construction of housing for Ukrainian diplomats in Moscow.)

Thus, pension programs remain in the risk zone. At the same time the Cabinet reduces the source of revenues of the Pension Fund and infringes the rights of future pensioners.

According to the presidential decree “On a simplified taxation system”, a single tax has been distributed according to the following proportion: 43% to the Budget, 42% to Pension Fund and 15% for social insurance. Of course, such insignificant amounts do not ensure high pensions, but enable the people who pay the single tax to maintain their work record.

Yet the Azorov government seems set to announce another war with them. Since January 1, if the budget is adopted, the entire amount of the single tax will go to local budgets, whereas the Pension Fund and other social funds will not receive a single kopeck. The payers of the single tax will have “to pay for the obligatory state social and pension insurance on the basis of special social legislation regulating the issues of such contributions.”

There could be two explanations: this is either the peak of non-professionalism or the peak of cynicism, since there is no legislation to regulate these issues.

If this rule is not changed, after January 1, 2005 about one million entrepreneurs who pay the single tax will find themselves uncovered by the pension insurance.

Only the Speaker’s order “Let’s vote” can put an end to the discussion of this and other issues. The second reading of the budget draft in the Verkhovna Rada is scheduled for December 21.

Nataliya YATSENKO