You're reading: Slovak economist criticizes Ukraine’s bloated public expenditures, corrupt taxation

Ivan Miklos, a 54-year-old Slovak economist, calls himself "an architect of Slovakia's reforms" that made the 5.4-million strong nation the world's largest car producer per capita, while back in 1989 it wasn't making any. He says Ukraine should go the same direction – become friendlier to foreign investors and benefit from the taxes they pay.

That’s how Slovakia
became a country with fivefold higher gross domestic product per capita
compared to Ukraine. Almost all local banks are foreign-owned, while global
automakers Hyundai Kia, Peugeot Citroen, and Volkswagen brought better-paying
jobs to the Central European country, tells Miklos, who is currently a member
of parliament in Bratislava from the Slovak Democratic and Christian Union, a
minority party that has seen better times.

Serving as Slovak deputy
prime minister in charge of finance in 1998-2006 and 2010-2012, Miklos was
among those who pushed forward a major tax reform in 2005-2006 that introduced
a 19-percent flat tax rate for businesses and individuals.

Previously, Slovakia’s
value added tax was 14-20 percent, while corporate income tax stood at 25
percent and personal income tax was as high as 38 percent for some income
brackets. “Increasing taxes to cut the fiscal deficit is not a good way for you
either,” he said in an interview with the Kyiv Post. “You should rather
cut the special rates and all the exclusions to broaden your tax base.”

Miklos follows the events
in Ukraine closely and visited Kyiv for the third time this year. He expects
the country’s fiscal deficit to reach 12 percent of GDP by the year’s end,
while the manageable deficit rate is considered to be 3 percent. However, the
Ukrainian government doesn’t know the real deficit, he says. “Unless you
use strict and transparent methodology, like those used in the European Union,
you don’t know it,” the economist explains.

“We introduced the
ESA95 (harmonized European methodology for assessing the state of public
finance) in 2003 and when we recalculated our budget, we found that our deficit
was much higher,” Miklos says. “The 2002 deficit figure in the official
statistical yearbook was 3.4 percent, but when we recalculated according to
this strict methodology it was 12.3 percent.”

Cutting public
expenditures is critical for creating a state budget with smaller deficit.
Ukraine spends as much as 53 percent of GDP to pay salaries to the employees of
government agencies and state-owned businesses as well as on various social
programs, including energy subsidies. Meanwhile, Slovakia’s public spending
doesn’t exceed 41 percent of what the economy produces annually.

“You have huge
overemployment in the public sector, and these are all poorly paid
people,” comments Miklos. “Cancel many institutions, reduce the
number of employed and use the money saved on raising the salaries of those who
keep their jobs. Otherwise, you won’t have an effective public
administration.”

Ukraine’s public pension
expenditures is 18 percent of GDP, which is too high, while monthly pension
payments are way below the living standard. Miklos thinks Ukraine should raise
the pension age that now stands at 55-60, while in Greece, the subject of a
global bail-out program, it is 67. Moreover, instead of having only a state-run
pension fund country should popularize private pension funds that would allow
people to save as much as they want for life after the retirement. In developed
economies, pension funds are a major source of long-term investments into
various securities, which drives economic growth.

Miklos, who led
Slovakia’s privatization program in 1991-1992, adds that Ukraine shouldn’t
hesitate with selling the rest of the business assets belonging to the state,
like the banking mammoth Oshchadbank and railway monopolist Ukrzaliznytsya.

He referred to Latvia’s
economic policy in 2008-2009, when the Kyiv Post asked him to suggest measures
that could be applied to stop people’s panic, which has contributed to the
almost 50-percent hryvnia depreciation this year.

“Latvia applied very
severe measures, much more severe than the recommendations of the International
Monetary Fund,” he explains. “The Latvian economy collapsed then and
the IMF suggested to devalue the currency to achieve macroeconomic
balance.”

Instead, Latvia reduced
the public salaries by 25 percent, shut down 30 percent of state agencies and
achieved the desired balance, though the rate of the Latvian currency against
the euro stayed the same.

The Cabinet that did
these reforms was reelected. Once the government puts enough effort into
explaining the unpopular changes that improve the economic situation, it may
secure itself from populists, who don’t care about the economy but criticize
their opponents in order to get more political power, admits Miklos, who
studied the art of money-making in Bratislava’s College of Economics and London
School of Economics.

Kyiv Post associate business editor Ivan Verstyuk can be reached at
[email protected].