Budget-2022: Is It Really Good?

At the end of September, the project of the budget for 2022 was presented. As it usually happens, the budget will be voted in early December without any fundamental changes compared to the draft. Therefore, the figures presented can be already analyzed and conclusions can be made. In general, budget holes are decreased, funds for medicine and science are increased, debt borrowings are decreased. In addition, payments to law enforcement agencies are no longer increasing exponentially. However, despite the mentioned positive factors, the budget may not be as good as it seems.

Main Points

On September 21, 2021, the budget for 2022 was presented. It was prepared at a time when the coronavirus crisis was not severe. According to the presentation, it will have a primary surplus, for the first time in the last 4 years. This means that its revenues will fully cover expenses minus debt servicing. In addition, this is the first budget to be adopted in a series of budgets under the three-year budget declaration.

The Cabinet of Ministers has prepared a draft state budget for 2022 based on the forecast of GDP growth of 3.8%; inflation at the end of 2022 at the level of 6.2%; exchange rate 28.6-28.7 UAH / USD. Revenues are set at 1.2777 trillion UAH, and expenditures will be equal to 1.4657 trillion UAH.

Average salaries, according to the Cabinet of Ministers, will amount up to 15.2 thousand UAH. At the same time, the minimum wage will be increased by 200 UAH (or by 3.3%) next year. Minimum pensions in Ukraine will increase by 93 UAH (up to 2,027 UAH) in July. From December 1, another 66 UAH (up to UAH 2,093) will be added.

The Pension Fund will receive 531 billion UAH; 320.1 billion UAH will be spent on social protection; security and defense sector will receive 319,4 billion UAH; the medical sphere will receive 197.2 billion UAH; educational sphere will receive 185.6 billion UAH; 124 billion UAH will be spent on road construction; culture and art will receive 13.5 billion UAH; expenditures on sports will be equal to 11,3 billion UAH.

According to the draft State Budget for 2022, the planned amount of funding for the security and defense sector of Ukraine will be a record one. Particularly, it will be equal to 5.95% of GDP (in 2021 it was equal to 5.92%, while in 2020 it was equal to 5.45% of GDP). In absolute figures: the state budget expenditures on the Ministry of Defense of Ukraine are planned in the amount of 131 billion UAH in 2022 (excluding state guarantees), which is 13.4 billion UAH more than in 2021.

As it was mentioned before, expenditures on road construction are proposed to be projected at 124.1 billion UAH according to the plan. Out of the planned amount, 78.6 billion UAH will be provided by the Road Fund in 2022, 40 billion UAH is proposed to be borrowed under state guarantees, and 5.5 billion UAH may be provided by international financial organizations and foreign governments.

The main parameters of Ukraine's budget for 2022

Positive Features

The analysis of the document showed the following positive points:

● This is the first budget to be adopted in a series of budgets under the framework of the three-year budget declaration. This fact increases the predictability of Ukrainian development and priorities.

● The state budget deficit will be decreased from 5.5% to 3.5% of GDP (to 188 billion UAH) in next year. The volume of state borrowings to finance the state budget will be decreased by 60 billion UAH. The government's policy will continue to be aimed at reducing the public debt. As a result, it is planned to attract a total amount of 546 billion UAH.

● Priority areas in the draft State Budget for 2022 are education, expenditures on which are increased from 103.7 to 114.8 billion UAH (+22.9%); Housing and communal services (+18.8%); and health care, expenditures on which are increased from 165.8 to 191.2 billion UAH (+ 13.4%).

● It is proposed to envisage expenditures on social security in the amount of 320.1 billion UAH. In particular, funding and subsidies for housing and communal services will be fully provided during the heating season of 2021-2022.

● The budget provides the increase in doctors' salaries according to the decree of President Volodymyr Zelensky. Thus, the "minimum" for doctors was set at the level of 20,000 UAH, while 13,500 UAH for nurses.

● 14 billion UAH will be pledged for infrastructure development and digitalization. In particular, part of the funds will be directed to the all-Ukrainian census during 2022.

The Hidden Side

Despite the positive tendencies, the document has a number of drawbacks:

● The project envisages that GDP will grow by 3.8% over the year, while consumer prices will increase by 6.2%. Comparison of growth rates with inflation dynamics shows that many nominal budget indicators, when recalculated into real values, do not actually grow, but decline. Moreover, unlike the official figures of inflation that may "appear" rather low, the real inflation rate may turn out to be more than 10%.

● Forecast indicators, on which the budget draft is based, were developed during the spring of 2021. Currently, the situation on the world markets has changed, in particular with regard to prices for gas, ore, etc. Thus, the planned figures may turn to be overestimated. The need of additional borrowing may appear in 2022.

● As usual, the social sphere will continue to be financed on a residual basis. In turn, there is a need for rapid economic growth that can be provided by recommended expenditures for the medical sphere within at least 5% of GDP, science (2% of GDP), education (4% of GDP), transport infrastructure, and transit logistics (2% of GDP). The analysis shows that underfunding of these areas can reach up to 200 billion UAH. In addition, the pledged key expenditures may not actually be met.

Besides, even though the subsistence minimum has been increased from 2,270 UAH to 2,674 UAH, it is not a real social indicator, staying far below the actual monthly money that is needed to exist. The growth of minimum wages will be at the level of 3.3%, while inflation will reach 6.2%. This will have a negative impact on state employees and the poorest segments of the population.

● In the draft state budget, many articles were made dependent on the adoption of the "anti-Akhmetov" law 5600.In addition, a significant part of the resource base is tied to loans from international financial organizations that have not yet been received. Thus, the real income of the budget may appear to be lower than expected.

● Despite the fact that debt expenditures will be reduced by 48 billion UAH to 574 billion UAH, the problem will be not the large payments to repay the debt, but an extremely high burden on the budget of payments for its servicing. The government expects to have to pay about 14% of state budget revenues in the form of interest payments.

Compared to the plan for 2021, the same budget article for the next year is increased by 23.4 billion UAH (from 158 billion UAH to 181.4 billion UAH). In other words, next year Ukraine will direct almost 3.4% of GDP for servicing the state debt. Ideally, this sum could cover the additional spending to boost economic development and create the foundations for an economic leap.

● Quarantine restrictions may also affect the fulfillment of the budget 2022. A number of articles in the state budget will require to be adjusted under new circumstances.

Nevertheless, there is progress and positive changes in the budget priorities. In turn, to fulfill the obligations and to guarantee rapid economic development, Ukraine needs further support and investments from international partners. Otherwise, its debts will become a burden due to the annual growth not covering the interest payments.

In other words, although Ukraine will be able to meet its debt obligations successfully, it will lack the funds and budgetary resources to stimulate real growth. As a result, despite the fact that the budget 2022 looks better compared to the previous ones, we will have a 1-year plan without perspectives of future large-scale programs to create “new money” in the economy, directed towards the society and business that has to become the drivers of growth.

Without rapidly developing Ukraine, the sustainable growth of the whole EU region is under the question mark, as well as the credibility of the Monterrey Consensus on Financing for Development.