The official statistics make even cabinet functionaries look up in surprise. Labor and Social Policy Minister Ivan Sakhan says that, according to the State Statistics Committee, Ukrainians spent UAH 20 million more on various purchases in the first half of 2002 than they earned from various sources. He attributes this paradox to the growing shadow remuneration of labor. As it is, Ukrainian personal incomes amounted to slightly under UAH 70 billion in the first six months of the year, while their disbursements reached almost 90 billion. Considering that official statistics rely on company sales reports, the shadow share of these incomes may well be larger by a whole order of magnitude. It is common knowledge that private businesses in Ukraine, especially medium and small ones, prefer to leave most goods and services sold out of their tax returns.
Businesspeople prefer to operate in the shadow primarily because of heavy payroll taxes along with the discomfort of registration and reporting procedures. The absence of constant and honest state control over even high-yield markets makes it easy for them to start in shadow businesses. Most Ukrainian businesses decide to run the registration gauntlet only after getting firmly to their feet. Even so their employees more often than not receive their pay under the table in separate envelopes containing sums other than those entered in books and records, so as to keep the declared expenses as low as absolutely possible.
Mr. Sakhan treated the shocking statistic with his inherent optimism. “Today, the average salary in Ukraine is officially established at 398 hryvnias. Considering how much people get off the record, it is safe to assume that the actual amount is 50-60% higher. In other words, the actual living standard is higher.” One might as well ask the minister of labor whether this means that the state is gradually putting up with being cheated by its citizens. 250-300 hryvnias is an official salary only at the spending units, meaning that the amount does not actually and significantly increase due to various additional payments. True, considering the shadow money turnover at budget-financed institutions, such meager official pay does not call forth any special sympathy.
Also, allowing for the large shadow money flow (even according to the statistics committee’s standard), the officially established poverty level has to be revised. Of late it has been in the limelight with not only organizations living off international grants but also the political leadership of Ukraine. As an experiment, the Ministry of Social Policy recalculated the poverty rate parameters, proceeding not from official personal incomes but from expenses. Minister Ivan Sakhan, relying on the findings, related other unexpected news: Ukraine has the same poverty rate as Poland where slightly less than a quarter of the population are below the line.
Mr. Sakhan believes that the staggering scope of shadow payroll transactions is above all quite a good reserve for increasing pension fund returns. “Pulling wages out of the shadows will make it possible to increase pensions without increasing the payroll tax burden,” he says, adding that there is a direct connection between the amounts paid as an average pension and an average salary. The government has long admitted that the output and retail growth reflected in official statistics over the past several years are largely explained by the legalization of numerous markets, while production growth actually started much earlier than recorded by government, and that this growth continues, following its own laws, ignoring the stimuli and obstacles dictated by the state.
Still, Ukrainian businesspeople place most of their hopes in the cabinet’s proposed reductions of value added, profit, and individual income tax rates. Premier Anatoly Kinakh hopes the bills will be passed before the end of this year. Most current lawmakers have some way or another dealt with private businesses, and many of them certainly know about shadow payroll techniques first hand. Now seems the time to stop deceiving oneself, as money flows led out of the shadow would more than make up for all those theoretical state budget losses due to lower taxes.
