Speech of Minister of Finance Nathalie Jaresko to be delivered to the Parliament during the presentation of the draft Law on State Budget for 2016

12/11/15

Dear Chairman, dear Prime Minister, dear Members of Parliament,

today I want to present you the draft Law on the state budget for 2016 and to tell you about its key features.

The amended draft State budget for 2016 is based on the following macroeconomic assumptions: real economic growth in Ukraine next year - 2%, inflation - 12%, average exchange rate of the Hryvnia – UAH 24.1 for USD 1, exchange rate of the Hryvnia in the end of next year – UAH 24.4 for USD 1, the average gas price – USD 225 for 1000 c.m., nominal GDP – UAH 2 trillion 262 billion.

The state budget revenues are expected to be UAH 601 b meaning increase by 16% compared to the state budget in 2015. The expenses will be UAH 674 b which is 16% higher compared to 2015. The budget deficit will go down to 3.7% of the GDP – which is UAH 84 b – compared to 4.1% of the GDP in the current year. This figures are in line with our agreements with the IMF related to the reduction of the consolidate and state budget’s deficit in Ukraine. I just want to remind that we have to cover the budget deficit by revenues from privatization or by making new debts. This, in turn, would increase the debt pressure on our country, since we would have to pay more in terms of the interest rate. Thus, this year we will pay almost 5% of our GDP to cover the due interest rates. So, our objective when cutting the budget deficit is to reduce the debt burden on our country and to release resources for other budget needs as well as to reduce inflation and devaluation pressure on the Ukrainian economy.

We have to emphasize that next year the total public expenses will be reduced from 53% of the GDP in 2014 to 43% of the GDP in 2016.

Now I want to touch upon several points of the state budget.

State budget revenues.

The first thing which we pay attention in regard to the budget revenues is that in 2016 we are going to lose ad-hoc revenues amounting almost UAH 40 b (which is equal to 1.8% of the GDP) which we enjoy in 2015. For example, next year the National Bank of Ukraine will reduce its revenue transfers to the state budget. Also, we will abolish the import surcharge starting from January 1, 2016. We implemented this surcharge in 2015 to stabilize our balance of payments, this surcharge was supposed to generate revenues for the state budget amounting UAH 17.6 b.

My second point is the impact of the compromise draft of the tax reform and the amended Tax Code which served as a basis for our draft of the state budget. Our tax reform will seriously impact the revenues as well as the expenses of the state budget via the following mechanisms:

- we are drastically reducing the payroll tax from the average 41% to 20%. For the Pension Fund it means a loss of UAH 108 b next year. These will be the losses of the Pension Fund, but we will have to cover them from the state budget, because we just do not have any other options to finance the Pension Fund;

- we also propose to abolish – or at least start abolishing – a number of intransparent and ineffective tax exemptions, especially those for agriculture for which we intend to grant a transition period.

We also plan to implement the below amendments to compensate the loss of revenues for the budget:

- legalization of gambling business and amber production;

- to curb the consumption of harmful products by our citizens as well as to comply to our commitments stated in the Association agreement with the EU, we propose to increase excise rates for beer, strong alcoholic beverages and tobacco products;

- to enhance social justice, we propose to impose taxes on luxury residential property and luxury cars;

- transfers from state-owned enterprises will also influence the budget revenues. Anticipating a question on this remark, I want to explain our logic for this step: the overwhelming majority of state-owned enterprises are extremely ineffective. Most of them do not declare their real profit and hence do not share it with the state. The Government is working on amendments to corporate governance at state-owned companies as well as on further privatization deals for ineffective and non-strategic enterprises. Till all these changes take place, we propose to increase the share of the net profit of state-owned companies to be paid to the budget, which is currently equal to 30%.this step should bring approximately UAH 6 b to the budget.

The third important factor is that next year the budget revenues will also be increasing due to inflation and the increase of the GDP.

Budget spending

The share of the GDP which is distributed via the state budget should be reduced thanks to a higher effectiveness and accuracy of expenses and the reduced deficit of Naftogaz. In 2014-2015 this share was equal to 53% of the GDP, next year we want to reduce it to 43% of the GDP. This means that every citizen will have to pay less for the services of the state and that the role of the state in economy will be significantly lowered.

As far as the expenses are concerned, I have to remind once again that the key contributor to the increased spending next year is the funding of the deficit of the Pension Fund meant to compensate the loss of revenues due to the halved payroll tax.

Despite the lower revenues of the Pension Fund, we have no right and do not intend to cut the pensions of our citizens. That is why we will be compensating these missing revenues of the Pension Fund directly from the state budget.

Next year we will also increase our defense and security spending. To comply with the law requiring almost 5% of the GDP for defense spending, we need increase the defense and security budget to UAH 103.6 b compared to UAH 97 b provided this year. The defense budget breakdown is as follows:

UAH 90.6 b will be provided for defense and security in cash (general needs – UAH 86.9 b, special needs - UAH 3.7 b);

UAH 5.3 b will be provided as state warrants to companies to finance defense programs;

further UAH 7.7 b are to be covered by seized funds and revenues from the sale of assets received through corruption;

One more part of the budget where we are going to increase the expenses is social welfare. Next year we want to increase the social standards for our citizens by 12.5% which corresponds to the expected inflation. We will also significantly, from UAH 24.4 b this year to UAH 35 b next year, increase our subsidies to the citizens to compensate the increased energy supply tariffs.

In total, additional social spending increases the budget expenses by approximately UAH 50 b. To keep the budget deficit at an appropriate level and to stick to the realistic budget, we propose a number of steps to reduce the other expenses of the country by approximately UAH 70 b (which is equal to 3.1% of the GDP).

First, we will reduce the price of our public debt. We have already done several steps to achieve it: (і) we restructured our foreign debt in 2015; (іі) we are reducing the deficit of the public financial system to reduce our need for new loans.

Secondly, we are going to increase the effectiveness of public spending. One of the tools for this is the verification of the social welfare recipients and pensioners meant to detect “ghost recipients” or manipulations. We assume that this verification will help us save at least UAH 5 b. We also propose to optimize public spending and to improve the quality of public services in education and healthcare.

Third, we want to make social welfare more targeted. We want our financial support from the budget to reach only those who really need it (today, a substantial part of social welfare is directed to prosperous citizens or to those who can support themselves). I want to make it clear once again: such a reduction does not mean lower social support for our citizens. But we want the money provided to the state budget by tax payers to be used much more effectively.

Local budgets

Finally, I want to mention that the fiscal decentralization is also delivering a positive effect.

The actual financial resources of the local budgets will be more than UAH 40 b higher next year, which is a 40% growth compared to 2015. Important: this sum does not include transfers from the state budget to the municipal level as well as the own revenues of local communities.

The tax reform will provide additional UAH 13 b to the local budgets in 2016.

We also expect a significant increase of the financial resources of local communities to be used as capital investments, since we are increasing the State Fund for Regional Development to UAH 5.7 b (compared to UAH 2.9 b in 2015). This sum includes additional UAH 1 b to develop the infrastructure of united communities. This sum can be used by 159 budgets of communities united so far.

These are the key, though not complete, data on the draft Law on the state budget for 2016 developed by the Ministry of Finance. We ask the Verkhovna Rada to support this draft law, since it will help us keep the balance necessary to receive international financial support and secure stability, consistency and economic growth for the entire country as well as for each citizen.

Thank you for your attention.

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