Speech of Minister of Finance Natalie Jaresko at the press conference on the budget legislation package, amendments to the tax legislation and public spending regulations, December 15
Dear journalists,
as you know, on Friday the Government submitted a comprehensive legislation package to the Parliament including the amended draft budget for 2016 as well as a number of important draft laws impacting the revenues and expenses of the state budget. This package includes the draft of the new edition of the Tax Code as well as a special law introducing a number of important changes regarding budget spending.
We know there are opinions that we submitted this legislation package too late. I want to remind that the first draft of the budget was prepared on September 15 in line with the law requirements. Although it was withdrawn from the Parliament for corrections, it was an existing document and it was published on the website of the Ministry of Finance from the very beginning. It was the draft budget which we would have presented to the Parliament, if our society had not expected a tax reform from us.
A tax reform had been long overdue in Ukraine. An important element of the tax reform is the reduction of payroll taxes, first of all – the single social contribution. But this reduction – which we actually offer in our tax reform – will result in a significant, by UAH 108 b, increase of the deficit of the Pension Fund. To cover this deficit while maintaining the balance of the state budget, we, apart from the budget and the tax reform, had to do an important, difficult and comprehensive job to increase the effectiveness of public spending and to reduce it.
That is why, despite months of sleepless nights, it took us so long to elaborate this legislation package – we had to give our citizens not a single draft law detached from reality and its possible impact on the economy of Ukraine, but a systemic and balanced legislation package delivering qualitative and systemic changes in the revenue and expense part of the state budget.
The legislation package which we agreed with the Government and submitted to the Parliament has the following objectives:
1) It should reduce the tax burden on the economy;
2) It should secure funding for all public priorities, first of all – defense, pensions and social welfare;
3) At the same time, it should help comply with the budget deficit equal to 3.7% of the GDP as agreed with the IMF and thus deliver up to the conditions for further cooperation with the IMF under the EFF program.
To reach these objectives, we must also:
4) increase the effectiveness and accuracy of public expenses and the quality of the services delivered by the state to citizens and business;
5) based on the previous point, we must reduce the costs of the state for each tax payer, make the state “leaner” for its citizens.
The proposed changes to legislation are meant to contribute to all these objectives.
Our legislation package contains 7 draft laws including the draft budget for next year, the draft tax reform elaborated by the Ministry of Finance and agreed at the recent meeting of the National Council for Reforms, the draft law on gambling business, amendments to the Tax Code, the draft law on a number of structural reforms in the economy and others.
Draft law No. 3000 on the state budget for 2016;
Draft law No. 3627 on amendments to the Law of Ukraine "On the management of state-owned objects" (in the part related to the transfer of a part of the net profit (revenue);
Draft law No. 3628 on amendments to the legislation of Ukraine related to the stabilization of the financial situation in the country and improvement of single regulations on social policy;
Draft law No. 3629 on amendments to the Budget Code of Ukraine (adjustment of the Budget Code to the amendments in the branch-related and tax legislation);
Draft law No. 3630 on equal taxation conditions and fostering economic activity in Ukraine;
Draft law No. 3631 on amendments to the legislation of Ukraine related to the adoption of the Law of Ukraine "On equal taxation conditions and fostering economic activity in Ukraine";
Draft law No. 3632 on the de-shadowing of the gambling business and securing budget revenues with the aim to fulfill the public commitments in social welfare.
So, what should we know about the key features of this legislation package? I want to tell about those which we have not mentioned so far or have not explained them in detail yet.
1. Draft budget for 2016 – it is based on the following macroeconomic forecast:
• real economic growth - 2%;
• inflation - 12%. According to the forecast of the National Bank, inflation is expected to slow down to 12% due to the high comparison value in 2015 as well as due to the lower impact of the main inflation factors in the current year: devaluation of the UAH in the beginning of 2015 which is already almost completely absorbed in the current prices and the increased energy supply tariffs;
• average exchange rate of the UAH to the USD - 24.1 (or 24.4 in the end of the year);
• nominal GDP – UAH 2262 b;
• gas price – USD 225 for 1000 cubic meters;
• budget revenues will amount UAH 601 b (+16% compared to the budget for 2015);
• budget expenses – UAH 674 b (+16% compared to the budget for 2015). At the same time, the main factor contributing to the increase of budget spending is the necessity to increase funding meant to cover the deficit of the Pension Fund resulting from the proposed reduction of the payroll tax from the average 41% to 20%. Without the changed deficit of the Pension Fund and the increased defense spending all other expenses shall be reduced approximately by UAH 70 b.
The above steps and data will enable us to make the deficit of the state budget together with Naftogaz 3.7% of the GDP (UAH 84 b) compared to 5.8% of the GDP expected this year.
2. The budget is based on the draft of the tax reform proposed by the Ministry of Finance which was agreed last Tuesday at the meeting of the National Council for Reforms. Since you already know the details of the compromise draft of the tax reform, I will not refer to them now.
3. The third important element of this legislation package is the increase of the social standards for all citizens.
• The social standards will rise twice in the course of 2016 – on May 1 and December 1 totaling 12.5% which is in line with inflation. We are also increasing all basic kinds of social welfare to the most vulnerable groups of citizens. This money will be directed to citizens who will spend it to buy goods and services and thus will contribute to economic development.
• The subsidies alone meant to compensate the increased energy supply tariffs will rise from UAH 24.4 b in the current year to UAH 35 b next year.
4. Another important fact about the budget for next year is that we propose steps to increase the effectiveness and accuracy in public spending.
• A major problem today is that public spending is extremely ineffective. That is why we propose a number of structure reforms meant to increase effectiveness in this area and thus to reduce public spending and to improve the quality of public services. To do this, we propose the following:
• verification of the recipients of social welfare – we must check if social welfare payments and pensions really reach citizens instead of “ghost recipients”. For example, in the current year we have already verified a number of recipients and detected that in Severodonetsk (Lugansk region) 46 thousand internal refugees were registered as per August 2015 including 30 thousand pensioners. At the same time, our verification helped us detect that only 15 to 17 thousand refugees live in this town. Thus, verification can help us check who in fact receives social welfare payments as well as check if the respective recipient really needs help from the state. We assume that verification alone will help us save at least UAH 5 b for the state budget;
• more active implementation of electronic procurement will save further at least UAH 2.5 b;
• social welfare payments shall be made more targeted and directed to those only who really need them. For instance, UAH 10 per day are provided for each child from the state budget to finance meals at public schools, but the quality of these meals is so poor that many parents gives their children some sandwiches to school anyway. It would make sense to spend this money for better meals, but only for children who have no support, i.e. to physically challenged children and orphans;
• we also propose to implements economic incentives meant to significantly improve the quality of public services in education, healthcare and culture. For example, 373 schools with less than 10 children respectively and 564 schools with 10 to 19 attending children respectively operate in Ukraine. What quality of education can we talk about regarding these schools where one teacher is in charge for all disciplines and all age groups? This situation leaves the affected children without any chance to receive higher education after school, because their knowledge level is just uncompetitive.
That is why our Government proposes to put such schools together to establish better equipped schools in district capitals or in major villages where parents could send their children by a regular dedicated bus.
Own revenues from culture events will help receive additional financial resources.
5. The fifth important element of our draft legislation package is the increase of the financial resources of local communities as well as further decentralization. This process shall be supported by the following steps:
• a tax equal to UAH 25000 per year should be implemented for (і) luxury residential property (above 300 sq.m. for apartments and above 500 sq.m. for houses) and (іі) new luxury and premium-class cars (below 5 years) with the price above UAH 1 m;
• if necessary, local councils should have the right to implement a property tax equal to 3 minimum wages per sq. m. (up to 2 minimum wages per sq.m. are allowed at the moment);
• abolition of tax exemptions for commercial property and warehouses. Tax revenues alone resulting from the tax reform should increase the resources of the local budgets by UAH 13 b – this not including other revenues and own revenues of the local councils.
In total, the financial resources of the local budgets in 2016 should increase by UAH 41.5 b (i.e., by 40%) compared to 2015 thanks to the expected economic growth and due to inflation.
Also, we will increase spending for the infrastructure of 159 united communities by UAH 1 b and provide funding for the State Regional Development Fund which is the source of capital investments for the communities. The total funding for this will be equal to UAH 5.7 b and should come from the sale of seized illegal assets.
6. Element number six accounts for our significant spending meant to support the real economy sector.
We plan to finance the following areas:
UAH 5.8 b – purchase of medicine;
UAH 3.5 b – road construction;
UAH 1.2 b – space industry;
UAH 1 b – funding for investment projects to be selected by the Ministry for economic development and trade;
UAH 600 m – purchase of school buses;
UAH 100 m – energy efficiency measures.
The above spending will be supplemented by the following:
• USD 800 m (approx. UAH 20 b) for road reconstruction coming as a loan from the World Bank;
• EUR 400 m (approx. UAH 10 b) for agriculture coming as a loan from the European Investment Bank;
• UAH 5.7 b to be directed to the State Regional Development Fund – these are also funds to be deployed as capital investments meant to support the real economy sector.
We must also keep in mind that the reduction of the payroll tax from 41% to 20% (including the abolition of 3.6% paid by employees) should provide a substantial financial boost for economic development as well.
7. Finally, our legislation package offers an important step meant to improve the budget discipline in Ukraine.
• Why is it so important? Unfortunately, the state budget has for many years been a hostage to political processes and cycles. Usually, this resulted in unrealistic budget revenues plans migrating from year to year. Below is the short statistics:
• when the economy was stagnating (2012-2013), planned budget revenues were, on the average, 7.1% higher compared to the actual revenues;
• when the economy was growing (2007-2008, 2010-2011), planned budget revenues were, on the average, 6.8% higher compared to the actual revenues. In another phase of economic downturn (2009, 2014) planned budget revenues were, on the average, 10.8% higher compared to the actual revenues;
• the above means that the budget deficit had to be covered by making new debts or by resorting to administrative methods in budget management in the end of the respective year;
• to protect the country from bloated public spending in the future, we propose to set a clear list of cases when the state budget can be amended in the course of the year. For instance, these cases can be related to changes in the deficit, debt figures or in macroeconomic forecasts. The Cabinet of Ministers should have the exclusive right to make amendments to the budget, and this right should only be valid, if a budget surplus is achieved (for 3 quarters of a year) or if the targeted budget revenues are not achieved (in the end of the respective quarter). MPs can only be entitled to make amendments to the state budget if approved by the Ministry of Finance and only as a part of redistribution of funds within the actual public spending;
• this will help avoid the uncontrolled increase in public spending and hence the increase of the budget deficit in the course of the respective year resulting in higher public debts;
• the above regulation is also a condition necessary to receive the third tranche from the EU amounting EUR 600 m.
Dear journalists, I tried to present you the most important, in my opinion, features of the draft budget for 2016 and the draft laws submitted in one package with it.
I want to emphasize once again that the aim of this package is to:
• reduce the tax burden on the economy;
• reduce public costs for each citizen. As a result of this, the total public spending in Ukraine should go down from 53% in 2015 to 43% in 2016;
• increase the effectiveness of public spending and improve the quality of public services to citizens;
• finance all public priorities, first and foremost – defense, pensions and social welfare;
• make all the above steps in a way to secure the balance of the state budget and to reduce its deficit to prevent the further increase of the public debt.
Thank you for your attention. I will be pleased to answer your questions.