Budget Revenues

The consolidated budget revenues increased from 25% of GDP in 1999 to 28% of GDP in 2000. In 2001, the revenue-to-GDP ratio dropped to almost 26% (see Table 6.1). After

Fiscal Policy and Attempts of Public Sector Reform

Ma³gorzata Antczak, Magdalena Tomczyñska

1998 1999 2000 2001

Consolidated budget revenues 27.7 24.8 28.4 25.6

Consolidated budget expenditure 29.7 26.3 27.8 26.4

Fiscal deficit (+) 2.0 1.5 -0.6 0.8

Deficit without privatization receipts 2.5 2.1 0.8 1.8

Public debt 51.5 56.3 43.5 35.5

Source: Ministry of Finance, Ministry of Economy, CASE-Ukraine “Ukrainian Economic Outlook”, own calculations.

Table 6.1. Ukrainian Fiscal Statistics in 1998-2001, percent of GDP

the period of continuous decreases of real consolidated budget revenues (1997-1999), there was an impressive improvement (by over 21%) in 2000 (see Table 6.2). State budget revenues increased even stronger, by 23% that year (The Cabinet of Ministries of Ukraine, 2001). The most important factor influencing the fiscal stability in 2000 was the improvement in budget management. In comparison to the previous years, the execution rate of budget revenues (compared to planned ones) improved significantly. The execution rate of consolidated budget revenues reached the level of 116% in comparison to 96% in 1999 (see Figure 6.1). The significant improvement in income tax collection in 2000 was the most important factor staying behind this. In spite of meeting the revenue target set in the 2001 budget law, real revenues decreased slightly what (in line with a real expenditure increase) became reflected in a fiscal deficit at the level of 0.8% of GDP.⁴⁸

Tax revenues

During 1999-2001 total tax revenues, expressed in percent of GDP, were decreasing, despite rapid economic growth. When we look at the real change of tax revenues of the consolidated budget – deflated by the GDP deflator – it comes out that tax revenues fell by nearly 5% in 2000, yet rose by over 7% in 2001. However, this real growth of tax revenues in 2001 took place almost exclusively due to the improvement of personal income tax collection. This fact indicates general weakness of Ukrainian tax system. It also has serious adverse impact on the budget, as total tax revenues constitute nearly 70% of all revenues of the consolidated budget.

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48According to the Ministry of Finance methodology: including privatization receipts into the budget revenues.

Figure 6.1. Execution of Consolidated Budget Revenues in 1999-2001

100.6

96.0

116.1

0 10 20 30 40 50 60

1999 2000 2001

UAH billion

50 60 70 80 90 100 110 120

Budget Law Execution Execution rate in %

Source: Ministry of Finance of Ukraine.

The figures for the year 2001 probably reflect some positive changes in the sphere of tax policy that happened in 2000. However, frequent fluctuations in fiscal policy make any predictions of significant improvement in the tax collection very risky.

Corporate income tax receipts were falling in real terms both in 2000 and in 2001. This was the effect of continuous prevalence of the numerous tax privileges, such as tax exemptions for agricultural producers or the famous ‘experiment’ for enterprises of the metallurgical sector.⁴⁹

The poorest collection was observed in the value-added tax. During the analyzed period the government was unable to collect planned amounts. The execution rate of VAT worsened from 98% in 1999 to 89% in 2001. The VAT to GDP ratio declined over time from 6.2% in 1998 to 5% in 2001, and VAT receipts fell in real terms by over 12% in 2000, and were almost unchanged one year later⁵⁰. It should be remembered that VAT constitute one third of tax revenues and one fifth of total consolidated budget revenues. The broad tax amnesty enacted in 2001, implicitly enhanced nonpayment of this tax during the course of the year and the accumulation of arrears. VAT arrears constitute more than half of total tax arrears, and this can be potentially threatening to the future fiscal stance. Thus, the improvement of collection of this tax is crucial for the future fiscal position of Ukraine.

Only receipts from personal income tax were following a different trend, and reflected positive developments in the economy during 2000-2001. Personal income tax collection increased from 3.7% of GDP in 2000 to 4.2% of GDP in 2001 (see Table 6.3 in the Appendix). PIT receipts rose by 9% and 26% in real terms in 2000 and in 2001, respectively.

This was probably the effect of the introduction of simplified taxation for physical persons.

More detailed discussion on this subject is presented in section 6.2.1.

Non-tax revenues

Non-tax revenues constitute more than 25% of total budget revenues. In 2000, the non-tax revenues increased enormously in comparison to 1999 (in real terms). The execution rate of non-tax revenues amounted to 130% as a consequence of high capital revenues.

Capital revenues were three times higher than planned in the budget law for this year (capital revenues were 1.5 times higher than expected in 2001). Proceeds from other non-tax revenues were also higher than expected in 2000 and 2001. The most important type of non-tax revenues were privatization receipts, which recorded an impressive growth in 1999-2000. After unexpected increase in privatization receipts in 1999 (execution rate of 114%) the target of privatization revenues was not met in 2000 (execution rate of 87%). In 2001 only less than half of planned privatization receipts was collected, which caused a decrease in total revenues and fiscal deficit. This trend was a consequence of the slowdown of the

49More on the 'experiment' can be found in Chapter 2.

50Deflated by GDP deflator.

privatization process and substantial overestimation of this item in the budget plans⁵¹. However, it is agreed that six regional electricity distribution companies (oblenergos) sold in April 2001, were privatized in a transparent manner. The sale of several high-profile enterprises (including 49.9% stake in Ukrtelekom, for which government expected to collect about half of the total privatization receipts planned for 2001) and further sales of oblenergoshave been temporarily suspended.

Tax arrears

Non-payment of taxes still remains a problem, although its extent is not as dramatic as it used to be in the second half of 1990s. Since August 2000 until January 2002, tax arrears had declined twice (see Figure 6.2). The biggest reduction was noticed in the corporate income tax arrears, which have decreased three times since August 2000. There was also a significant reduction in the excise tax arrears and VAT arrears. Arrears accumulated for gas-transit charges were almost eliminated. In the second half of 2001, the total tax arrears stabilized at the level of UAH 8 billion with increasing VAT share reaching UAH 3.8 billion in January 2002⁵².

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51The budget privatization receipts were smaller than expected also because of overestimation in book values calculation as it was in the case of Pipes plant in Kharkov and Crimea sodium plant. As a result of this overestimation in 2000 the privatization receipts were actually smaller by almost UAH 600 million. On September 12, 2000, a new book value calculation methodology was implemented. Following Western standards, the new methodology is based on market-oriented pricing mechanisms. To enhance transparency of the privatization process, ex-post review of operations in 2000 was carried out by independent experts.

The comprehensive information has been placed on the website of the State Property Fund.

52 VAT arrears were almost equal to unrealized VAT refunds at the end of 2001.

Figure 6.2. Tax Arrears in 2000-2002, in UAH billion

5.6 5.8 6 6.2 6.3 6.5 6.6 6.6

5.6 5.7 5.8 6.1

4.5 5.1 5.5 5.9 5.7

4.7 3.8 3.7 3.5 3.5 3.7 3.6 3.8 2.4 2.8 2.8 2.8 3.3 3.3 3.3 3.9

3 2.8 3.2 3.3 2.7

3.1 3 3 2.6

2.11.2 1.5 1.3 1.2 1.4 1.3 2.8

0 2 4 6 8 10 12 14 16

Jan-00 Mar-00 May-00 July-00 Sept-00 Nov-00 Jan-01 Mar-01 May-01 July-01 Sep-01 Nov-01 Jan-02

Others Gas transit charge VAT Excise tax CIT

Source: State Tax Administration of Ukraine.