The second episode of the podcast is dedicated to the state budget for 2024. Will there be enough money for pensions, salaries and social benefits in the war? Why was military personal income tax taken away from communities? What is the “sin tax”? What happens if funds from international partners are not received on time? What other changes are expected in Ukraine in 2024? These and other topical issues are discussed by Viktor Maziarchuk, Head of the Center for Fiscal Policy Research, and Roman Slobodyan, public finance expert.
Roman
Good afternoon, dear listeners! I’m glad to welcome you to our podcast, and Victor Maziarchuk is with me today. This means that we are going to talk about the State Budget 2024.
Victor
Good afternoon, colleagues!
Roman
What does it mean for us that the State Budget 2024 was adopted on time this year?
Viktor
First of all, it means that the government and the parliament have fulfilled the provisions of the law. And this is very good, because nowadays, compliance with the law is a standard. Previously, in previous years, unfortunately, this was not observed. This is the first thing.
The second is stability. This means that government officials, civil servants, and local government representatives know what figures they need to prepare their budgets with and what to expect. This is also stability for business. Because businessmen will also understand the rules by which they will play. It used to be a common story that along with the budget, MPs would adopt amendments to the Tax Code, change tax rates and procedures, and a few days or a week before the New Year, businesses would be forced to play by the new rules and adapt. MPs were “giving gifts under the Christmas tree”. So, first of all, it’s about stability.
And of course, if it is stability and predictability, then it is also transparency to a certain extent. Why? Because the expert community and journalists can start analyzing this document, the final document, in advance, communicate and communicate their work to citizens.
Will buckwheat be "golden"?
Roman
I understand, thank you, but look, when you analyze the state budget, you open the registered draft law, there are a lot of annexes and an explanatory note. Few people read it. But it seems to me that it contains the most interesting things. Its description contains a lot of indicators and explanations. I think that not all of our listeners have a clear idea of how this works. For example, if we take one of the indicators from this table – inflation. Next year, it is planned to reach 9.7%. What does this mean for us? Does it mean that bread, buckwheat, and sugar will rise in price by almost 10%?
Viktor
Absolutely, Roman. And this is a big problem that our expert community, people who analyze the state budget, including journalists, rarely read the explanatory note to the state budget. And this is a rather detailed argumentation of how the Government of Ukraine, represented by the Ministry of Finance, prepared this document. It contains calculations and arguments as to what exactly is being changed and why this logic is used. If colleagues from the journalistic community read this document, they would probably have up to 50 articles of material in advance. 5-10 articles can be easily written from these appendices. You just take a topic, understand the logic of decision-making, take additional comments, and you’re done.
If we’re talking about the consumer price index, you’re right. For example, if the cost of buckwheat is currently around UAH 28 per 1 kg, then by the end of the year it will cost UAH 31, meaning that prices will rise by 9.7%. If a loaf of bread, for example, costs UAH 26 in Kyiv, we expect it to rise by an additional UAH 2.60 by the end of the year. That is, there will be a price increase. And this indicator stimulates the calculation of other indicators that are directly specified in the state budget.
Roman
I see that you have a very good understanding of prices in stores, you have named all the most common products that can be bought. By the way, this is a favorite question of most journalists when they are interviewing MPs. They ask: “What is the price of buckwheat?”. So here is a big five on a five-point system. But there is another very interesting indicator provided for in the state budget – the minimum wage. We see that this year it has increased twice. The first time, the minimum wage increased on January 1 to UAH 7,100 (previously it was UAH 6,700), and from April 1 it will be UAH 8,000. This means that it will increase by UAH 1,300. It seems that I have an open gestalt with this sugar. Does it mean that I will be able to buy 4 bags of sugar with this money? Will my income/salary really increase, what does it affect? What is this indicator for?
Viktor
If we are talking about the minimum wage, it is a basic indicator for calculating social standards. Many indicators in the state budget, and not only in the budget, are tied to the minimum wage. I don’t know, Roman, why do you need four bags of sugar? Probably to make jam.
Roman
Maybe you don’t have enough glucose.
Viktor
Of course, when the minimum wage rises, people whose salaries are tied to this figure will receive more. Accordingly, they will be able to afford to buy more. The bad thing is that there are a lot of people who receive the minimum wage. Accordingly, their wages will increase. This is the first thing. The second is that when the minimum wage increases, tax revenues also increase.
Roman
Can you say that this is an artificial increase in taxes?
Viktor
It is not artificial.
Roman
Many journalists ask whether this is an increase in tax revenues without changing the current rate.
Viktor
This is a bit of a manipulation, but it is one of the elements. A few years ago, there was also a tool to bring out of the shadows black and gray businesses that paid the minimum wage. If you remember, there was a significant increase in the minimum wage to bring more businesses out of the shadows. Why? Usually, what did they do? They set the minimum wage. The rest was paid in cash. What did the government do? In previous years, it raised the minimum wage very much, and, accordingly, people earn more and pay more taxes. But we’ve moved away from the topic. So, when we talk about the minimum wage, one of the elements is an increase in personal income tax revenues, for example, the unified social tax. The unified social contribution is already tied to the minimum wage in some respects. And this is, in principle, good for the state. Why? Because the state is one of the largest employers. Therefore, there is still a transfer of money from one pocket to another. Because before you pay a person a salary, you have to pay taxes at the same time, which means you pay both the employee and the state.
Roman
It’s a cycle of money in the budget.
Viktor
The cycle of money in nature, the budget system. Absolutely right.
Put aside the panic: what will be the dollar rate
Roman
I actually have a lot of questions about the minimum wage, but we still have a lot of indicators. So I’ll ask only the last question. You’ve probably already guessed which one it is.
Victor
Currency?
Roman
Yes, the dollar exchange rate. I remember many telegram channels, especially last year, were all about “oh, my gosh, the dollar will be 50 UAH to the dollar. What does it mean? You need to open foreign currency deposits. So there is panic everywhere. In fact, we see that the average dollar exchange rate is in the range of UAH 37-38. Could you explain what the exchange rate affects and why these forecasts have not been fulfilled for years. Perhaps we can calm the population down a bit in our podcast.
Viktor
Let’s start with this: the budget does not determine the dollar exchange rate. This is an external factor that the Ministry of Finance takes from other institutions. That is, the Ministry of Finance takes this indicator from the National Bank of Ukraine and calculates other indicators based on it. What indicators can these be?
One of the most important, which is heavily influenced by the exchange rate, is the national debt. We are now receiving a lot of funds, both loans and grants (i.e., free of charge, which we do not have to repay) in foreign currency. Accordingly, if the exchange rate changes, we receive either less or more money. This is the first indicator. The second indicator is export and import operations. For example, exports for the first nine months of 2023: Ukraine sold goods worth $27 billion. What we mainly export is grain, a lot of it. Then oil. Unfortunately, metals and machine building have fallen dramatically. So in this case, if we have an exchange rate of 36.56 hryvnia to the dollar at the beginning of the year and 35.35 hryvnia to the dollar at the end, that means that our national currency has strengthened a little bit. This means that when we export, we get fewer hryvnias for one dollar, which we then use to pay salaries here and buy goods and services here. Business is one part of it. The other part is that we also buy various goods. For example, oil and gasoline. This is a very large figure. We bought $8 billion worth of oil. We bought oil and petroleum products for USD 8 billion in the first 9 months of 2023. We also bought various equipment and machinery, and so on. For 5.5 billion dollars. We bought various aircraft, floating vessels, and machinery for $5.5 billion. As I understand it, a large part of it is probably for the Armed Forces of Ukraine. So in Ukraine, when the exchange rate strengthens and becomes less, it’s better because you can buy more. So it is a certain balance. Given that we have made payments for very large amounts (USD 42 billion over 9 months) for imports, there must be a certain balance. And then, of course, there are taxes, including trade turnover, and all this affects the exchange rate. In other words, the exchange rate is an external factor that affects the budget as well.
Roman
I agree with you, but you also said in your answer that it affects the planned revenues. And usually, if the exchange rate deviates slightly from the one specified in the budget, it affects the budget execution.
Viktor
Absolutely. And last year we had a situation when, because we had planned one exchange rate and actually had another, there were very large shortfalls. And the Ministry of Finance had to cover them from other sources or not make certain expenditures. So far, it is covering them, so it’s okay.
Roman
So, let’s call off the panic for now.
Viktor
Panic is definitely off the table. Panic and betrayal are not for us.
Priority spending: where our money goes
Roman
We don’t need to buy dollars, we use hryvnia. On macro indicators. I hope we have already dealt with the main ones. How can we not move on to another interesting topic – our expenses. I think our listeners are very interested in what our joint funds are spent on, so could you, Victor, name the priority expenditures? We all understand that first and foremost it is defense, because we need to fight the aggressor. But what are the other priorities?
Viktor
Expenditures amount to UAH 3.3 trillion. We understand that last year the government, the Ministry of Finance and the Parliament made several changes to the budget. What is the reason for this? This is primarily due to the war against the terrorist country and what the government was planning. Last year, before drafting the budget, the government had 16 scenarios for the development of the situation. They planned the budget based on this. At first, they planned that the active military phase would end after the winter, then they planned and expected it to end in the middle of the year. And now we all realize that the war will continue until victory. That’s why the government was constantly changing the budget. If we compare the expenditures on the security and defense sector with the previous year, they are slightly lower. But this is primarily because there is an expectation that the war will not last until the end of the year. If, God forbid, it lasts longer, the state budget will be amended accordingly. Parliamentarians are already saying that this is not a problem. They will meet promptly and make changes to the budget. Therefore, the main key aspect is the Armed Forces of Ukraine. I mean the Armed Forces in general, because it includes not only the Armed Forces, but also the State Emergency Service, the Security Service, the GUR, the entire security and defense sector.
There are two major components. The main one, the most important one, is salaries. The next is the purchase of equipment and all related items to ensure that our guys at the front and in the rear have everything they need to drive the enemy out of our territory. The second major block is social security. These are pensions. If you add these two blocks together, it is almost 3/4 or 75% of the total state budget that goes to the security and defense sector and social security. So these are the two key blocks. Then comes healthcare and education.
Roman
That is, the bulk of the state budget is allocated to finance defense and social spending. And in order to finance them, we need to get the money somewhere, to earn it. Because here, as in life, there must be a balance in everything. And I would divide it, perhaps, as follows. The first part is the income that we can finance on our own. In particular, you all know that we cannot finance defense at the expense of international partners. And the second part is borrowing, which means we are looking for funds from partners. And then either borrow or take out a loan, which must be repaid later. But let’s first talk about our first option – what we earn ourselves.
Viktor
There are four main groups of taxes that account for almost 80% of all revenues. The biggest one is classically VAT. Value added tax, or it can also be called consumption tax. This morning, for example, I was going to our meeting to record a podcast and went to my favorite coffee shop, got a coffee, and paid for it accordingly. And I see it on the receipt: VAT – 20%.
There is domestic and import VAT. Overall, VAT will provide 45% of all state budget revenues this year. In terms of numbers, this is almost UAH 800 billion. This is the amount that will be used to pay salaries to the Armed Forces, which is a cash allowance.
The second aspect is personal income tax, including military tax. In general, the budget envisages that such revenues will amount to UAH 300 billion. Of course, this is a lot. To explain it very simply, I like this comparison: personal income tax is a tax on salaries. Or, as the classics used to say, the tax of the working day. Why this analogy? Because you pay a part of your salary that you earned at work during the working day. So every day you get a salary and share a part of it, which is 18%. Plus 1.5% is the military fee. In total, the amount paid from your salary is 19.5%. For example, when preparing for our conversation, I looked at how much the Verkhovna Rada apparatus paid MPs and their assistants in salaries.
Roman
I’d be very careful now, because MPs can also watch.
Viktor
I really hope that they will watch and listen to us, and they will be just as interested in hearing our discussions, figures, and so on. So, in November, from the 1st to the 30th, the Verkhovna Rada apparatus paid 56 million hryvnias to MPs and their assistants as salaries. The personal income tax and military fee amounted to almost UAH 11 million. That is, this amount was taken from the MPs and returned to the budget. This is the so-called working day tax.
Roman
So the MPs are good.
Victor
In this case, yes. Part of their salary was spent to help the Armed Forces defend Ukraine. The key thing that has changed in terms of personal income tax is that part of the money paid by military personnel, this so-called personal income tax (previously, part of it went to the local budget and the state budget) now goes entirely to the state budget. And this is a huge amount of money. That is, the state budget will receive all the personal income tax from the military.
Roman
It means that local budgets are losing money if they have been taken away from them.
What is the sin tax?
Viktor
It’s not that they don’t comply. The logic of the personal income tax is very simple: to force or create certain incentives on the ground to develop business. And the business paid PIT, this tax. Because they pay it on the salaries of their employees. What have local governments done to collect money from military personnel? Nothing. The state actually pays these funds for the military and they go to the local budget. They used to go before. Now they will go to the state budget and will be distributed as follows. 45% will be spent on the purchase of drones and the like from the State Special Communications Service, special equipment. 45% of this amount will be spent on the purchase and development of our national weapons. This is a big problem for us, because last year we bought almost all the weapons we needed abroad. We did not have our own production, localization, and this is billions of hryvnias. And 10% of this amount will go directly to the security and defense sector, to military units, to the territories that pay this tax. In other words, if earlier it was not spent directly, but through the local budget, deputies could give to military units or not, now the percentage is clearly defined, it is specifically indicated what goes to the local level. And in principle, I think this is good.
Another interesting tax is the excise tax. It is called differently. Some people call it a “sin tax”.
Roman
Explain. If you go to church on Sunday and confess, everything is forgiven.
Viktor
You confessed, but then you went to the store, bought alcohol, bought tobacco, and paid the “sin tax” accordingly. Why is it called that? Because it’s an additional payment or an additional tax for goods that are considered harmful-this is the first aspect. And the second aspect is sometimes called the “luxury tax” because the excise tax can be imposed on premium goods, very expensive luxury goods. There is an internal and external excise tax. There will be a lot of it this year. Namely, UAH 184 billion or 10% of all revenues.
And the fourth and last major block is the corporate income tax. Businesses actually pay part of their income to the state so that the state can finance the Armed Forces. You are right to say that we cannot pay the Armed Forces and the security and defense sector from the funds we receive from international partners. Accordingly, these funds, which are paid in the form of taxes, are used primarily to provide the Armed Forces with everything they need.
The difference between loans and grants
Roman
Thank you, I really liked the “sin tax”. This tax includes a lot of things. I think everyone uses, or pays, this tax: it includes fuel, tobacco, and alcohol. It’s a very interesting comparison.
We have already talked about taxes and are now moving on to borrowing. When we need to finance something, but we don’t have enough money. A vivid example is when we go to the store, want to buy something, but our salary is still far away and we don’t have enough money. What do we do then? Either we take out a loan, or we take out an installment plan, or we borrow from friends. In other words, we find these funds somewhere so that we can have this thing or use it right now. It’s the same in the country: we are at war, and of course we don’t have enough money for everything. We have very large expenses, which you mentioned earlier, but which we need to cover as a priority. But we also have a responsibility to pensioners and educators. And healthcare services. We also need to finance all this. And here my next question is very logical: how much money do we need to raise to finance everything we have planned?
Victor
41 billion dollars. US DOLLARS
Roman
Oh, I’ll clarify the details later.
Victor
41 billion dollars. The US needs to be attracted. Is it realistic? It is realistic. Out of 41 billion dollars. USD 32 billion are confirmed. 32 BILLION US DOLLARS ARE CONFIRMED. They are confirmed from different sources: The IMF – $5.4 billion, the US – $8.5 billion, the EU – $18 billion. A number of other countries, such as Canada, Norway, Japan, South Korea, and the World Bank, will provide an additional USD 9 billion. It should be noted that this year the government plans to receive USD 50 billion in loans.
Roman
What is the difference between loans and grants for our listeners?
Viktor
Grants are given to us without any obligation to return them, because they realize that we will need a lot of them in the near future. Objectively speaking, we will not be able to repay everything. The loans will have to be repaid in accordance with the terms on which they are attracted. Usually, we are given loans for a very long period – 10-15 years, at low interest rates with a grace period. That is, we give you, say, USD 10 billion for 15 years at 2.5%. For 15 years at 2.5%, but for the first five years you use these funds free of charge, do not pay interest on them, do not repay the loan principal, and so on.
About Plan B and intentions to "cut"
Roman
This amount is actually very large. Why was I so surprised? I was preparing for the broadcast, I looked at our foreign exchange reserves, and they are less than the amount we have to borrow. You have already partially mentioned the risks. We understand that this year we will have elections in the US and other EU countries, and we already have difficulties with some partners, so to speak, political issues. In particular, as it was in 2022, if you remember. One month we received funds, the next month we didn’t, so we couldn’t plan. And if this year is repeated, i.e. we planned one thing, but in fact we do not receive them or receive them late or the amount is not the same. What will happen then? What is our plan B?
Viktor
Knowing the team that works at the Ministry of Finance, I can say for sure that we have a plan A, a plan B, a plan C and a plan E. I have no doubt about it. This is a very professional team that knows what to do. They are now providing Ukraine with tens of billions of hryvnias in financing. I am very grateful to them for this. So now there are indeed risks that assistance may come on a smaller scale if political battles continue, including in the United States and in a number of other countries. But then it will be very difficult. I will repeat the words of Sergii Marchenko, the Minister of Finance, that we will have to cut.
Roman
Whom to cut, Victor?
Viktor
We have to cut funding.
Roman
Thank God, because I thought someone was going to go under the knife.
Viktor
We understand that the security and defense forces should be provided first and foremost.
Roman
Yes, I agree.
Viktor
Perhaps, if there is a critical situation, they will reconsider the distribution of certain aspects and certain taxes, certain expenditures, subsidies, transfers between local budgets and the state budget. Maybe I don’t want to scare anyone, but if the situation is as critical as possible, the government will simply centralize all budget expenditures and nothing will go through the Treasury that is not related to security and defense. Friends, we are at war. The worst case scenario is just centralization and that’s it.
Roman
What other mechanisms are there? Besides cutting. This is such a drastic method. Maybe there are other methods.
Viktor
There may be some light ones. For example, let’s go back to the story that the Ministry of Finance will issue its own debt obligations. The so-called military government bonds will be bought either by businesses, state-owned banks, private banks, or the NBU.
Roman
Do you think there is still a reserve of funds for the population and businesses to buy securities?
Viktor
Businesses can. Last year, a lot of businesses and banks bought government bonds, and banks received a lot of funding in the form of interest, so they have resources. If they don’t have the resources, they may return to the NBU buying back some of these liabilities, as it is planned to do in 2022. I would like to remind the audience that the NBU bought back UAH 400 billion worth of domestic government bonds in 2022. But this issue needs to be further coordinated, primarily with the IMF. Because we have certain obligations here, we cannot just do this. There may be restrictions on state budget expenditures. When the war broke out, the Ministry of Finance cut a lot of expenditures related to current activities, part of the salaries of civil servants. It will be the same. That is, on the one hand, there will be maximum savings, and on the other hand, maximum centralization, if it is as critical as possible.
Roman
By the way, the Minister of Finance announced at an event that a day of war costs us UAH 5 billion, and this is a very significant amount. And we all hope that the war will end as soon as possible. But, I brought you to this question: will the government’s policy of revising the rates of these taxes be changed?
Viktor
There is no reason to talk about it yet.
Roman
Why do I ask, because a law on additional taxation of banks was recently passed.
Victor
So this is normal. This is a normal story. In previous years, banks received huge profits. Instead of lending to the economy, they did nothing, they just gave money to the government and received huge income from government bonds or deposit certificates from the NBU.
Roman
So, purely theoretically, this can happen with other types of activities?
Viktor
Well, I’m saying that theoretically, if things get worse, the government will look for mechanisms to either reduce spending or increase revenues and borrowing. There are no other options.
Roman
And finally, to summarize our discussion today. From your side, any suggestions or top 3 things you would praise this budget for and three recommendations, warnings, what would be worth paying attention to in the next budget year?
Victor
I would like to end on a positive note. In fact, there is something to thank for and something to criticize. As always, there must be a balance. But to end on a positive note, I would like to thank first of all the team of the Ministry of Finance for providing the state with financial resources in this very difficult time, for the fact that the state is able to pay all social payments, pensions, salaries, military salaries and can buy military equipment. I would like to thank them for complying with the provisions of the Budget Code of Ukraine and submitting the draft law on time so that MPs can pass it in time. This is the first thank you, because budget nights at the Ministry of Finance are very tense.
Secondly, for some reason, everyone mentions only the Ministry of Finance and very often forgets the employees of the Budget Committee’s secretariat. They should definitely be thanked for their professionalism and for ensuring the legitimacy of decision-making and correctly writing out all these processes during this period, so they deserve the utmost respect and gratitude. I will share my surprise. I have seen more than one budget, participated in discussions on more than one budget, but it seems to me that the budget was adopted in the most transparent, correct and professional manner. There was a professional discussion. Whenever MPs wanted to come, they did, and they always had the opportunity to report and justify their position. For this, I am especially grateful to the chairman of the committee, because she ensured the whole process and was constantly actively involved. And thirdly, and most importantly, I would like to thank the Armed Forces of Ukraine and all the defenders of Ukraine for the fact that we can give thanks and breathe in a free country. And thank you, of course, for our interesting discussion today.
Roman
Thank you very much for the program. We are definitely not saying goodbye, we have many more interesting conversations planned. Glory to Ukraine! And see you soon.
Viktor
Glory to the heroes! And goodbye.