Anti-Population Budget Devours the Safety Net as Ukraine Nears the Economic Abyss

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Ukrainians have to turn to their own resources

January 1, 2015
Anatoly Shariy
Translated from Russian by J. Hawk

When discussing last week’s actions by Ukraine’s Cabinet of Ministers, one naturally has to mention the budget. However, the budget has been adopted, so it is too late to really discuss it. It’s like talking about a death sentence once it has been carried out. You can argue it was an unacceptable mistake a hundred times, but cannot reverse it.

On the night of December 23, the government of Ukraine proposed to the Verkhovna Rada the so-called “budget packet”, which included about 50 legislative projects which would make radical changes to many legal codes of Ukraine, including concerning the budget, taxation, customs, and others.

The harsh, and in some places an openly anti-population budget caused not only discussion and disagreement, but also open resistance by the majority of people’s deputies. And we are not even talking about members of the opposition, but the governing parties.

What the government has proposed is an increase (and this during a raging crisis) of the tax burden, the introduction of new taxes on “little Ukrainians”, while at the same time radically cutting budget expenses, including the elimination of practically the entire “welfare state.”

The increase in excise taxes, the refusal to compensate grain traders for the VAT tax, the legalization of gambling, the introduction of estate tax, of housing tax, of retirement income tax, the complete elimination of all tax benefits and discounts to teachers, instructors, the disabled, children with birth defects, Chernobyl victims, and veterans of the Maidan.

Consequently on December 26 the Budget Committee of the Verkhovna Rada received over 300 amendments. In the view of the people’s deputies, such a budget could not be adopted.

But two days later they adopted it anyway. By a hand vote, after a reading of Yatsenyuk’s promises to lighten the impact of the budget in the course of its implementation, the budget for the entire year was adopted.

Incidentally, many of these radical changes were introduced by Yatsenyuk after his “consultations with international financial organizations.”

And there is a lot to consult about.

Ukraine’s foreign debt as of December 1, 2014, reached 1 trillion 33 billion 898 million 479 thousand hryvnia. The rapid devaluation of the hryvnia means the debt has become unmanageable.

Yatsenyuk’s government has been asking the West for money since March, and it has not been especially choosy when it comes to creditors. We’ll take any money, from anyone, on any conditions.

As a result Ukraine’s foreign debt has increased by 3.833 billion USD and its growth is not about to stop. The declarations that Ukraine cannot survive 2015 without another 15 billion USD merely confirms it.

The Cabinet of Ministers is also entering the New year with huge salary arrears. It is increasingly difficult to dismiss the discontent as the product of “Kremlin-paid provocateurs”, because the level of arrears is so huge.

As of December 1, the arrears had reached its 2003 level. The arrears in education were 192.2 million hryvnia, health care—184.4 million, science—123 million, and in art—18 million. To be sure, one can assume that 60% of the arrears concern territory no longer controlled by Kiev, where the Ukrainian government, in its infinite wisdom, had stopped paying salaries altogether.

But what about wage arrears on the wholly controlled regions, such as the Kiev region (124.3 million), the Kharkov region (123.7 million), the Dnepropetrovsk region (101.5 million), or the Lvov region (73 million)?

And the wage arrears are showing an interesting dynamic. In Kiev the arrears increased over the course of 2014 by a factor of three, on the Donbass by 9 times, but in the Dnepropetrovsk region by a factor of 14.5? What is the reason for that? Is the war an excuse on which everything is blamed?

Will the situation improve? No doubt it will, but not in Ukraine. And the Cabinet of Ministers itself is confirming it.

On December 22 the government adopted resolution no. 709, which amends the resolution no. 404 adopted on August 27, 2014.

On that date the wise Arseniy Yatsenyuk adopted forecast of Ukraine’s socioeconomic development for 2015. They adopted two scenarios: a pessimistic one and an optimistic one.

We wrote about them earlier, while noting at the time such forecasts are not worth the paper they are written on. And, by way of confirmation, the Cabinet of Ministers has “corrected” its own predictions.

Thus the best-case scenario GDP growth was supposed to be +0.3%, while the worst case scenario was +0.2%. Now the worst case scenario is -4.3%, while the BEST is -2.0%.

The optimistic inflation estimate in August was 10.9%, and the pessimistic one—13%. Now the optimistic estimate predicts inflation of 17.2%, while the pessimistic estimate predicts 17.9%.

This really speaks volumes, doesn’t it?

These numbers are clearly rigged and are entirely meaningless. They mean nothing at all, they are taken out of thin air.

And, even though the December forecast is actually the more realistic one, it won’t make things better for Ukrainians. If anything, it will only get worse.

Happy New Year!

Translator’s Note: 

What Shariy hints at but does not fully explain is that such forecasts are important when determining Ukraine’s eligibility for foreign loans, by both public (IMF, EU, US) and private lenders. But to secure loans and credits, and to secure them on non-usurious terms, one has to create the impression Ukraine is not doing all that badly, so as to persuade the creditors Ukraine is capable of actually repaying! Which creates a tremendous incentive for the Ukrainian government to “gild the lily”, so to speak. Consequently, even the pessimistic scenarios from December are actually wildly optimistic, because it’s hard to see exactly what the sources of growth for Ukraine’s economy are going to be. Ukraine has lost the bulk of its Russian markets (both due to the Russian government sanctions and the ruble devaluation, both of which are components of Russia’s import substitution strategy), while at the same time failing to secure European or US markets for its products. Yatsenyuk even went as far as boasting about the drop in Russian trade by half as his accomplishment. As to the Western creditors, they are facing the unenviable choice of letting Ukraine default now or continue propping it up, though even the $15 billion that Yatsenyuk is asking for is no guarantee Ukraine will not default later. And this while Greece is once again teetering on the brink of default and exiting the Eurozone.

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