I propose the readers turn their attention to what are in fact the notes I made in the margins of documents I had to work on recently: the draft budget, program of social and economic development for Ukraine in 2001, Cabinet resolutions, and other governmental decisions that are now in the public limelight. All these documents are currently being debated by society, so there is no need to recall their content. In my opinion, the documents need to be more transparent, something Ukraine’s fledgling civil society definitely lacks.
WE LACK HONESTY AND TRAINING BOTH IN FINANCIAL AND BUDGETARY MATTERS
Comparing the present budget draf t to those of previous years, the only conclusion which I can make is that the governments lack honesty and training in drawing up budgets. All these years the former governments did their best to hide the budget deficit, a practice which gave them an easy ride in Verkhovna Rada. Later, however, budget implementation reports, as has been the case for the last three years, unfailingly aroused keen interest with Prosecutor General Office investigators.
For almost ten years now, the public and lawmakers have been given supposedly balanced budgets and in some cases ones even promising a surplus. But the actual standards of financial management in Ukraine, or, rather, complete lack of them, have brought to naught the best intentions of officials, leading eventually to budgetary fiascoes, hryvnia slides, mounting state debt, growing pay arrears, and falling incomes for Ukrainians.
Outside the budget sector, this has resulted in fantastic debts to Russia, coal companies, heavy losses in the agricultural and utilities sectors. It finally led to rash printing of money by the National Bank to save state coffers from going dry.
Now the government is offering more of the same, saying the draft budget for 2001 is “deficit-free” and “shows increased expenditures on social programs.” In reality, the government is banking on sources of non-tax budget revenue such as receipts from privatization, sales of Defense Ministry property, interest on capital, land leasing, etc., which are targeted at UAH 17 billion (!), or 30% (!!) of total budget revenue. This is nothing but an attempt to conceal the budget deficit by claiming additional revenue sources.
Can we really speak of any effective budget management when the government, on the one hand, plans to fund education, health care, and culture from local budgets, while, on the other, decreasing the size of local budgets and increasing the central one?
So far, I am forced to conclude that the budget enacted by lawmakers in the first reading bodes no good for Ukraine, with some of its articles being obviously harmful. Unfortunately, the economists have started to blow the whistle on the budget only after its first reading.
BUDGET’S ANTI-SOCIAL “SOCIAL ORIENTATION”
Concerning this “socially oriented budget,” let us be specific about how it defines this social orientation. This depends not on the amount of money earmarked for specific social programs, but on existing prices. When prices grow (with all the state’s financial mechanisms for some reason contributing to such growth) the least protected categories soon find themselves in the worst situation, i.e., those Ukrainians who have only fixed money incomes and no other additional sources to supplement their own budgets like students, pensioners, servicemen. And this renders anti-social any “social orientation” accompanied by price hikes.
STATE REPAYS ONLY PART OF ITS DEBTS
The government says it has fully paid off pension arrears and is raising pensions. The public, however, knows perfectly well what kind of measure this is, economic, social, political, or plain pie in the sky.
On the surface, it seems to be economically correct to first settle debts and then move on to attain growth. It seems logical, but...
Debts can be repaid from various sources: by raising production, with the resulting increase in payments to the Pension Fund and the budget; by attracting loans; or by getting receipts from the sale of state property. Under any of these scenarios, consumer prices in theory should remain the same as at the moment of the emergence of pension arrears. The hryvnia in 1997 to 1999 was 1.80-1.90 to the dollar, having lost three times in strength against the dollar. In Ukraine the government paid off its pension arrears after consumer prices had risen.
The government could have indexed pay for public sector employees and pensions back in mid-2000, with the budget and the Pension Fund running a surplus at the time. Now, the government intends to use the money unpaid due to higher prices and devalued wages, pensions, and student stipends to settle its future arrears.
This approach will hardly change anything in the condition of Ukrainians and that is why they will continue to be discontented.
WE WILL ALL SOMEDAY BE PENSIONERS
The pressure the president had exerted on the government worked: the Cabinet has passed resolutions to raise pensions as of December 1. But only by a mere 12-13 %.
First, the government had got the money needed for pension increases much earlier; second, Pension Fund revenues (which exceed its monthly expenditures by UAH 300 million) makes it possible to raise pensions double the proposed figure. By contrast, the government plans to allocate as of December 1, the additional UAH 100 million monthly for this purpose, raising pensions by a total of 24% merely in April.
Does this correspond to price increases? money to buy food and pay their utility and rent bills. Food prices have grown during the ten months of 2000 by 35%, even more have utility rates and rent, rendering the proposed 24% pension increase grossly inadequate. Incidentally, prices on clothing and durable consumer goods have grown insignificantly, by a mere 5 to 7%. But pensioners seldom buy such items.
The government should have considered these figures and recognized that prices have increased by 35 to 38%. Had the pensions been compensated by the increases, the government could start talking about the social protection of pensioners. With respect to the low-income group, what does the government mean by speaking about raising that miserable UAH 21 minimum pension ($4 US) to UAH 34 ($6)?
It is necessary to get back to the Pension Fund budget for 2001 and to see to it that expenditure for pensions is to grow, rather than non-pension expenditures to pay salaries to Pension Fund staff, renovate offices, purchase equipment and cars, as well as for any other items the Fund officials might think of.
Having a surplus of revenues, the Pension Fund loans them out to the Finance Ministry for terms of up to several months. From the officials’ point of view everything is fine as the money does not lose in value. The Pension Fund’s revenue and expenditure are supposed to be in complete balance and its funds be spent on paying pensions to Ukrainians, not for any other purposes, no matter how important they might seem.
INFLATION IN UKRAINE
For 2001, the government projects inflation at 18%. For Ukraine the government from raising real incomes and pay (incidentally, the latter have not risen in the last ten months despite some growth of production). Neither will the government be able to concentrate economic resources on its targeted sectors. Yet, considering this year’s government and the National Bank monetary policy, the forecast price hikes are too low, and everybody knows it. Expect hard times again next year.
ACHIEVEMENTS AND FIASCOES OF 2000: RESULT OF TRACK RECORD OF FORMER GOVERNMENTS, OR WHO IS PUSHING UP PRICES
No difference of opinion is possible about the fact that both last year’s achievements (growth of production) and failures (hryvnia fall and lack of cash flow) were caused by the poor performance of former government officials and were due to objective realities of that period. There is about a six month interval between, for instance, a decision to issue money, to allocate it for some purpose or another, and the price hikes (the result of using the issued currency to pay for social programs, not as effective investment in industry).
The devaluation and collapse of the hryvnia in 1999 and last year’s 40% monetary emission, which triggered at least 30% price increases, were, on the one hand, the roots of inflation and, on the other, led to the buildup of shadow (gray) capital coupled with legal and illegal foreign loans and growth of production.
Again, the government is laying the foundation for further price hikes in 2001, just as the NBU will again nately, the money mass has again increased by 40% and not to the benefit of the banking and production sectors of Ukraine’s economy.
In sum, the liabilities of commercial banks to the NBU are smaller than the liabilities of the NBU to commercial banks. This is evidence that the NBU has borrowed more money from the commercial banks than extended as loans to them, lending its money for fiscal, not production, purposes.
Should next year’s government track record remain the same, it will face the negative results flowing from the government’s own decisions.
WHY IS THE BUDGET BAD?
Because it:
a) is unrealistic and fraught with problems involving its implementation,
b) will produce the same high inflation caused by the inefficient buildup and allocation of the money mass,
c) is based on openly draconian taxes, and
d) is allocated not for the benefit of Ukrainians.
NOT TALK BUT A WARNING
No matter how benevolent our ministers might look, they remain protectors of the interests of their ministries, their staff, their standing in the government, which sadly does not always correspond with the interests of all the other members of the social process. It is only too natural when the government is criticized. Yet, we would be much better off if the officials made public their strategies in advance, stopped living behind closed doors, and were more open in discussing their plans.
