NV: Last week, Forbes reported that the Finance Ministry was preparing to raise VAT and the war tax, which could be raised from 1.5% to 5%. Are these proposals really in development?
Zheleznyak: It’s true. I’m one of the sources directly cited in this article. But the final parameters will be known after June.
I’ll explain how this happens technically to provide some clarity. I’ve been talking about the lack of money since September 2023 when I saw the state budget. It’s very simple to understand.
NV: Funding for the military or just tax revenue in general?
Zheleznyak: Both. We had lower defense spending last year, for many reasons; the total defense spending that we cover with our own revenue was UAH 2 trillion ($49.6 billion). This year, we expect to get UAH 1.6 trillion ($39.7 billion) in revenue. As we can see, there is a gap of UAH 400 billion ($9.9 million). If nothing changes (and we have changes, expenses will be higher, mobilization will increase, inflation will be higher, we need more [money] because there was a delay with [supplies of Western] weapons), we’ll have this gap of at least UAH 400 billion.
You heard this figure from the finance minister [Serhii Marchenko] in a recent interview where he said: “Look, we’ve already gone into the military budget in advance, and we already have a gap of UAH 200 billion ($4.95 billion).” The head of the parliamentary Budget Committee [Roksolana Pidlasa] also spoke about this figure when she commented on mobilization. We don’t know how many people will be mobilized, 200,000, 100,000 or 300,000 people, but in any case, each soldier costs about UAH 80,000 ($1,985) per month. Consequently, the gap between expenses and revenue will amount to UAH 400 billion plus UAH 300 billion ($7.4 million), UAH 720 billion ($17.3 million).
Therefore, this isn’t news for those who follow this topic. It’s clear this deficit had to be covered either at the expense of administrative efficiency... These are all well-known illegal markets for tobacco, alcohol, fuel, gambling, smuggling, and “my favorite” — Energoatom [nuclear energy operator]. If we plug holes in budgetary expenses and revenues, a large part of this money could be found, or we’ll have to raise taxes. There are no other options.
Well, the only option is to print money, but that would violate [arrangements with] the IMF and, frankly, it’s a “death spiral” [of inflation and expenditures] that quickly leads to what we see in Argentina, basically.
That’s why we have the IMF program. A meeting is taking place in Warsaw today. We’ve completed everything according to the IMF up to the fourth review [of the program]. Now we’re getting the fourth review, which will take place in late June. After that, the government, together with its partners, begins to work on how we can balance the budget this year and, even more challenging, next year. After all, this year we at least have international support.
Read also: Ukraine’s budget short $5 billion for weapons procurement – Finance Minister
NV: Do I understand correctly that state administration wasn’t put in order, corruption schemes weren’t blocked, and the only option left is to raise taxes?
Zheleznyak: Yes. I don’t like to quote myself, but I’ve been talking about the thesis since last September — that we’ll have a problem, and we need to put things in order. We’re now in late May. What have we done? Nothing. The Economic Security Bureau hasn’t been rebooted, with the law being idle for about a year. Both the customs office and the Accounting Chamber haven’t been rebooted.
NV: Why doesn’t the finance minister talk about this?
Zheleznyak: Because his mandate ends with budgeting. He said that “I don’t manage either the customs office or other bodies, and even more so I cannot remove the law enforcement officers from there.” I have few complaints against the Finance Ministry, they constantly emphasize behind the scenes that this is a problem.
NV: How does this “behind the scenes” look like in practice?
Zheleznyak: It means that at a meeting with the president, someone dares to open their mouth and say that we have a problem with, for example, idiotic decisions by [Deputy Head of the President’s Office Rostyslav] Shurma, or some other populist policy proposals. We don’t have money for that. The Finance Ministry sometimes does this. To be honest, it’s often them.
Even if the government submits the [tax hike] bill in July, knowing how “fast” parliament works on such unpopular decisions, these tax raises could be passed in August (which I don’t believe, but would be a very optimistic scenario), we have four months left to close the gap of at least UAH 400 billion. Do you think these will be popular measures to find UAH 100 billion ($2.5 billion) is revenue every month?
This is a postponement of the problem that had to be solved. It was obvious in September last year. But now they’ve brought it up to the point (and they did that because they tried to maintain their approval ratings) that the same government, I think, will find it very painful to make such decisions. But they have no other alternative.
I have little hope that the G7 will accept the idea of using the profits from frozen Russian assets to raise a loan of UAH 50 billion ($1.2 billion). This would help us to partially close the problem, but this is an optimistic forecast. God willing, it might happen. But so far, this is an optimistic scenario.
Read also: Ukraine secures significant EU and IMF support in 2024 borrowing - Finance Ministry
NV: So, when might the tax hike actually happen?
Zheleznyak: It will happen immediately once you hear that the IMF board has approved the fourth review [of the Extended Fund Facility program], this is the second half of June. I think active work will begin in July.
Forbes forgot to add an important part. The package of these measures will consist of two parts, even three, to be honest. There will be changes to the Tax Code, the Budget Code (this is how money is distributed, there will be nothing popular there either), and amendments to FY 2024 budget that reduce [projected revenue from] non-core taxes.
NV: Who should take responsibility and communicate on this topic? For example, President Volodymyr Zelenskyy initially avoided commenting on mobilization and the topic was passed on to the military. Who will take political responsibility for tax increases, and does it matter?
Zheleznyak: I think it’s important. I think it’s a responsibility... It’s clear they’ll again try to remove the president from this story. It won’t work, and they’ll pay for it again with falling approval ratings. We’ve already seen their propensity to bury their heads in the sand during the initial discussion of mobilization.
In theory, the issue of taxes is a matter for the prime minister and the finance minister. It’s their responsibility.
I had a meeting with the Defense Ministry on Friday [May 24], where they showed me the situation with the financing of military procurement. I don’t know how much this data can be shown to the general public, but if they come out and explain the situation now, I think it will be easier to make these changes. Because to be honest, it was a bit of a shock to me.
I think we have very little political leadership on this issue. Have we done much as a country, or as a parliament, or as a government, or as the President’s Office to plug the holes in the budget? No.
Read also: Ukraine meets IMF targets, awaits further funding
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Read the original article on The New Voice of Ukraine
Section: Nation
Author: Eric Malinowski
