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  • Comments on the Draft State Budget Law for 2012 regarding revenues: Is the budget 2012 unique?

    21.09.2011

    On September 15, the Cabinet of Ministers submitted the Draft State Budget Law for 2012 to the Verkhovna Rada[1]. The day before, the Minister of Finance of Ukraine described the Draft as ‘unique’, and so that ‘combines all best practices of budget development in previous years and contains plenty of innovative ideas’[2]. Focusing on revenue part of the Draft budget, we will try to find out whether it is unique.

    According to the Draft the consolidated fiscal revenues will amount to UAH 428.5 bn in 2012, which is by 13.5% higher compared to amended revenue plan for 2011. However, they will decline in relation to GDP to 28.5%, which is generally in line with the tasks provided in the Resolution of the Verkhovna Rada "On Main Directions of Fiscal Policy for 2012". The revenues are expected to increase primarily thanks to the economic recovery based on further growth of internal and external demand for Ukrainian goods. At the same time, the Draft doesn’t fully take into account the risk of a possible second wave of financial crisis. In particular, the consolidated fiscal revenue plan for the Draft were estimated based on less conservative forecast of GDP growth (5.0%).

    There will be no significant changes in revenue structure due to almost unchanged tax legislation. VAT and personal income tax will remain the largest sources of consolidated fiscal revenues (34.2% and 16.5% of total revenues respectively). The role of the latter will be strengthened due to expected growth in wages and measures taken for informal income legalization. The receipts from enterprise profit tax (EPT) - the third largest tax revenue source will increase as well. In particular, EPT will augment by 14.9% (to UAH 53.5 bn) and will constitute 12.5% ​​of total revenues due to growing profits of the companies. The increase in EPT revenues will be partially restricted due to 2 percentage points tax rate decline in 2012 (to 21%).

    Special attention should be paid to the evaluation of the projected VAT revenues, in particular, VAT refunds (UAH 48.4 bn). There is a risk that the Government underestimated funds needed for VAT refunds taking into consideration the official forecast of exports, exchange rate and the effective tax rate. We assume that the planed restriction of VAT refunds is primarily related to VAT administration improvement, the role of which could have been overestimated by the Government. However, underestimation of the tax refunds amount can result in problems with further accumulation of VAT refund arrears.

    The Draft State Budget Law for 2012 is based on the current tax privileges approved earlier by the Tax Code. According to the government estimates these privileges will allow the business to get additional investment resources at UAH 46.9 bn[3]. However, the Draft doesn’t contain any detailed calculations of these privileges or any estimate of their effectiveness. It reduces the transparency of the budget process. Thus, the amount of officially estimated benefits for the business remains questionable. In general, the tax privileges, which are granted for the chosen taxpayers, make distribution of tax burden more unequal among the taxpayers.

    Meanwhile, the government plans to receive additional revenues by increasing the excise tax rates on alcohol from January 1, 2012. Besides, according to the Tax Code the property tax is expected to be introduced from July 1st, 2012. However, these changes don’t guarantee significant receipts to fill the budget. In particular, further increases in excise rates could lead to a reduction in alcohol consumption (and respective deceleration of excise revenues). Moreover, at present there is lack of methodological and organizational measures for the proper and timely introduction of the property tax (in particular, the property register has not been worked out).

    Besides, there are no unique changes regarding non-tax sources of consolidated fiscal revenues. As in previous years, the transfer from the National Bank of Ukraine remains one of the largest non-tax revenue sources. Besides, the amount of this transfer remains unchanged – UAH 9.6 bn.

    While the "uniqueness" of the Draft State Budget Low for 2012 can hardly be proved, the real innovations regarding budgetary process are expected. In particular, the Government intends to develop and submit to the Verkhovna Rada three-year forecast for consolidated fiscal revenues (for 2012-2014). The Ministry of Finance plans to submit to the Parliament a  separate document with the relevant calculations within a month. This is a long-awaited step toward the sustainability and predictability of medium-term fiscal policy. Undoubtedly, the introduction of medium-term budget planning will become significant achievement of the Ukrainian fiscal policy.


    [1] Draft Law #9000 as of September 15, 2011.

    [2] According to the statement of the Minister of Finance during the Presentation of the Draft State Budget Law of Ukraine for 2012 ( at the Government meeting on September 14, 2011).

    [3] According to the statement of the Minister of Finance regarding Draft State Budget Law for 2012  at the Council of Regions meeting on September 15, 2011.

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