An emergency parliamentary session on Dec. 17 failed to pass changes to the tax code and a 2016 state budget needed to gain $1.7 billion in additional lending from the International Monetary Fund and $2.3 billion more from other Western countries and institutions.
Finance Minister Natalie Jaresko offered a financial plan that lawmakers and the government presented as a compromise between the two branches of government.
It didn’t receive a warm welcome in parliament, yet speaker Volodymyr Groysman said lawmakers will work out an agreement to pass the budget before the year-end deadline.
In his opening speech in parliament, Prime Minister Arseniy Yatsenyuk offered the cautionary disclaimer that there has never been and never will be a perfect budget – but said he hoped the budget would at least be effective and fair.
Budget ‘meets’ needs
According to Jaresko, whose presentation followed Yatsenyuk’s speech, “the draft budget meets the main challenges and needs of the state, the nation and business.”
The key priorities of the budget for 2016, she said, were to keep Ukraine’s army in a state of combat readiness, restructure public debt, speed up tax reform that will determine the revenues of the budget, and meet society’s social security needs.
Jaresko promised that Ukraine’s real gross domestic product would increase by two percent in 2016, while inflation would be 12 percent.
Budget revenues and expenditures are to increase by 16 percent compared to the previous year’s budget, to $24.94 billion and $27.97 billion, respectively. It pegged the hryvnia at Hr 24.1 to the U.S. dollar in the beginning of the year, and at Hr 24.4 by year’s-end.
Deficit of 3.7 percent
The budget deficit will fall from 4.1 percent of GDP this year to 3.7 percent in 2016 as stipulated by the IMF.
“The revenue part will be based on the new tax legislation, which includes key elements – a leveling of the tax playing field, fairness and transparency, the withdrawal of tax privileges and exemptions, and the legalization of gambling and amber mining,” Jaresko said.
Luxury tax
She added that the government wanted to introduce a luxury tax on apartments and cars, and would also increase the excise tax on beer, spirits and tobacco.
The minister also vowed that there would be no overstated government spending.
The government plans to increase utility subsidies, defense expenditures, and increase the minimum wage by 12 percent, to $64 per month, according to the planned exchange rate, Jaresko said.
She insisted that in order to keep the budget balanced, it needs to be adopted in a package with another six laws, including the new tax legislation.
“What kind of tax system do we have now? It is complex, inconvenient, subjective and corrupt,” Jaresko said. “Because of the high salary tax rates, it doesn’t allow either business or the middle class to grow.”
Tax fairness
Jaresko said that today teachers with a $170 monthly salary pay 20 percent income tax, while lawyers on $4,000 a month pay 4.5 percent.
“We need sweeping reforms that will decrease taxes for those who really need it,” she said.
Additionally, the payroll tax will be halved – to 20 percent. Corporate income tax and personal income tax will be 18 percent in 2016, and reduced to 17 percent the next year.
Many lawmakers were unimpressed by the new tax legislation presented by the government.
Strong opposition
Oleksandra Kuzhel, a member of Yulia Tymoshenko Batkivshchyna Party faction, said she thought the new tax code would “kill” Ukrainian business.
“Minister Jaresko doesn’t communicate either with employers, or with the trade unions,” Kuzhel told the Kyiv Post. “In the U.S., say, they wouldn’t pass a law on education if it wasn’t backed up by the professional community. If people are against (the new tax legislation), then there’s something wrong here.”
The agriculture sector will be the first to be affected by the “innovations” of the ministry, according to Kuzhel, as Jaresko proposed to eliminate lower value-added tax rates for them. The general VAT rate is 20 percent.
Lacks ‘clear analysis’
Ostap Yednak, an independent lawmaker and a former member of Samopomich party, agreed.
“The new legislation lacks a clear analysis,” Yednak told the Kyiv Post. “They didn’t summarize how much money businesses will have to spend in order to bring their accounting into line with the new system – and this is just one example.” The problem, he said, was a lack of communication between parliament, government and business.
“We don’t need reforms just to prove that we’re doing something,” Yednak said, adding that there was no chance that parliament would pass the legislation proposed by Jaresko in its current form.
Yatsenyuk thanked everyone “for their constructive suggestions”, adding that “each year this discussion is lively and interesting.”
“We will finish the budget and adopt it together,” Yatsenyuk promised.
Groysman echoed the prime minister: “It is important to stop looking for someone to blame, and rather to think what can be done to stabilize the situation.”
“I’m calling on you to find a compromise. A responsible one, not a political, not a populist one,” he said.
