Despite another year of full-scale war, Ukraine has managed to preserve relative fiscal stability over the first nine months of 2025, but Russia’s fourth year of its full-scale invasion against Ukraine forces the counrty to increase defense spending faster that the incomes can realistically jump.
Strong support from international partners, together with higher tax and non-tax revenues, has partially offset the pressure from rapidly growing defence needs, the Center of Public Finance and Governance at KSE Institute wrote in the Q3 2025 Fiscal Digest.
However, as reliance on concessional loans increases, public debt is mounting and risks related to security and energy shocks are becoming more acute.
Ukraine’s revenue growth bolstered by taxes, military levy
Total tax revenues rose by 18.1% y-o-y to $35.7 bn in 9M 2025, driven by a higher military levy rate, an expanded base that now includes micro and small businesses under the simplified regime, and higher excise rates. Stronger wage and price dynamics further supported collections. Non-tax revenues grew by 23% y-o-y to $20.9 bn, with military assistance and other external inflows remaining the core source. Grant financing reached $7.6 bn, confirming its crucial role in sustaining Ukraine’s fiscal stability and defence capacity.
Ukraine’s defence spending drives majority of budget outlays in wartime
Defence and security expenditures continued to dominate the budget, accounting for 70.5% ($61.7 bn) of total spending in 9M 2025. Total expenditures rose by 16.7% y-o-y to $87.5 bn, driven mainly by a 29.1% increase in defence and a 15.2% rise in security outlays. Actual spending on core programmes – military salaries, procurement, modernization and repair – exceeded initial allocations by an estimated $20 bn, forcing two mid-year budget amendments in July and October to close the gap.
Non-military sectors see uneven funding as social spending drops
Non-military spending showed mixed dynamics. General government functions grew by 9.6% (up $0.6 bn), largely due to higher debt-servicing costs, while economic activity and healthcare each rose by 2.9%, to $2.5 bn and $3.6 bn respectively.
Social expenditures, by contrast, fell sharply: total social spending dropped by 14.4% to $6.3 bn, reflecting reforms that narrowed eligibility and shifted several pension obligations from the state budget to the contributory system.
Transfers to the Pension Fund fell by 16.8%, and support for IDPs and low-income families decreased as stricter criteria reduced the number of beneficiaries.
Fiscal deficit widens as domestic financing remains constrained
The fiscal deficit reached $22.1 bn including grants (up 9.6% y-o-y) and $29.8 bn excluding grants (up 10% y-o-y), as defence-driven expenditure growth outpaced revenues.
Domestic financing remained constrained: gross domestic bond issuance totalled $9.2 bn (3.3% lower y-o-y), while net domestic financing was just $0.4 bn because most funds were used to refinance existing debt.
External concessional borrowing therefore remained the backbone of deficit financing, even as gross external loans fell to $24.9 bn – 27.2% less than in 9M 2024 – with most resources provided through the ERA Initiative and the EU’s Ukraine Facility, complemented by IMF support under the EFF.
Ukraine’s public debt climbs amid increased external borrowing
Ukraine’s state and state-guaranteed debt rose by 24.7% in 9M 2025, reaching $194.2 bn by end-September. External debt grew by 32.7% to $141.6 bn and now accounts for 72.9% of total debt, reflecting heavy reliance on international borrowing.
Domestic debt increased more moderately – by 8.3% to $45.5 bn – as domestic instruments were used mainly to roll over existing obligations rather than fund new spending.
Next steps: managing fiscal stability under sustained wartime pressure. Ukraine has demonstrated that, even amid full-scale war, it can mobilise revenues, implement reforms, and manage a large deficit.
But the combination of high defence needs, slower external assistance, and rising debt leaves little room for policy error. Further escalation of hostilities could require even higher military spending, while persistent attacks on energy infrastructure risk weakening economic activity, dampening tax revenues, and increasing import and reconstruction costs.
Policy priorities center on disciplined spending, stronger budgeting, broader tax base
To safeguard fiscal stability, Ukraine needs to maintain strict expenditure prioritisation, strengthen medium-term budgeting, and improve the efficiency and transparency of public spending, especially in defence and social sectors. Continued reforms to broaden the tax base, support growth, and ensure fair burden-sharing will also be critical.
For international partners, the main task is to provide predictable, timely, and coordinated concessional financing, closely linked to realistic policy commitments rather than political cycles.
Reducing delays in disbursements, supporting energy resilience, and backing Ukraine’s long-term debt sustainability will be decisive for preserving both fiscal stability and defence capacity.
Key challenges for Ukraine’s fiscal stability:
Military escalation and rising defence costs, which continually push spending above planned levels.
Weakening economic activity and pressure on tax revenues, which still provide over half of domestic budget inflows (54.8% in the first nine months of 2025). Attacks on the energy sector threaten production, tax collection, and may force higher spending on energy imports.
Delays in external financing caused by unfulfilled political commitments, already observed in 2025, which limit the government’s ability to fund priority programmes on time.