Verkhovna Rada passes 2006 budget by a single vote (01/01/06)

Verkhovna Rada passes 2006 budget by a single vote

by Zenon Zawada
Kyiv Press Bureau

KYIV - By a single vote, the Verkhovna Rada on December 20 passed Ukraine's 2006 budget, which was bolstered by a 67 percent increase in government revenue from the prior year, according to Finance Minister Viktor Pynzenyk.

The jump in tax income revealed the progress made by the Ukrainian government to collect taxes and import duties from businesses, said Andrii Dmytrenko, a research analyst with Dragon Capital, a Kyiv-based investment bank.

It also revealed that businesses have started to slowly report more of their profit.

"There was improved reporting from local companies," Mr. Dmytrenko said. "As a result, the tax base increased because companies paid higher taxes."

The 2006 budget plans for $25 billion in revenues and about $27 billion in spending, amounting to an estimated $2.6 billion deficit. Significant amendments are certain, government and private economists said.

The International Monetary Fund recently recommended that Ukraine's budget deficit not exceed 2.5 percent of Gross Domestic Product, a goal which the government's economists will try to adhere to.

They have projected the deficit at 2.5 percent of GDP, but that is based on a very optimistic projection that Ukraine's GDP will grow by 7 percent next year.

The sale of the Kryvorizhstal Steel Company recently did not contribute to the revenue increase because privatizations are not included when accounting for government revenues, Mr. Dmytrenko said.

Instead, it was the Yushchenko government's decision to eliminate the free economic zones - which offered certain companies special privileges over others - that most significantly improved tax revenues, he said.

Rather than drawing in foreign investment, it was mainly Ukrainian companies abused the investor-friendly initiative, Mr. Dmytrenko said.

For example, Ukrainian companies would set up special trading companies within the zones and move their profits from Ukraine to offshore zones in order to avoid taxation, he said.

The Stop Contraband program launched by former Prime Minister Yulia Tymoshenko resulted in an 80 percent increase in import duty collection as well, Mr. Dmytrenko said.

Stop Contraband was among the Yushchenko government's first major initiatives. It was launched in late February in order to stem the flow of illegal imports and exports with the goal of more effective taxation and collection of revenues.

Another noteworthy success of the budget was that for the first time in many years, it was free from the large-scale corruption schemes that former President Leonid Kuchma's government was notorious for, said Ivan Lozowy, president of the Kyiv-based Institute of Statehood and Democracy, which is exclusively financed by Ukrainian business donations.

For example, credits with favored companies without collateral have stopped, he said.

Mr. Kuchma's budgets set aside enormous sums of money for its State Administration of Affairs, a bureaucracy that was directly under the former president's control.

"The parliament didn't control that sizable part of the budget, whose sole purpose was for Kuchma to retain power," said Dr. Serhii Taran, director of the Kyiv-based International Democracy Institute, which is financed by mid-level Ukrainian businesses and the National Democratic Institute for International Affairs.

"Now this sizable part of the budget is absent," Mr. Taran said.

Politically, the 226-0 vote for the budget revealed that President Viktor Yushchenko's Our Ukraine coalition is just barely forming a parliamentary majority.

The budget was fully opposed by the Yulia Tymoshenko Bloc, which is behaving as much of an opponent of Our Ukraine as the Party of Regions and Communist Party.

The Yulia Tymoshenko Bloc's 37 national deputies abstained or were absent from voting.

Incidentally, the votes of two deputies from the One Ukraine faction helped eke the budget through. One Ukraine (Yedyna Ukrayina) is a pro-Tymoshenko parliamentary faction.

Deputies Viacheslav Dubytzkyi and Orest Klympush, both One Ukraine deputies, broke with party lines.

In the March 2006 parliamentary elections, seats will be awarded to a party or bloc proportionate to how many votes it earns. The party or bloc will then assign seats based on their already-announced electoral lists.

If not for Messrs. Dubytzkyi and Klympush, the budget could have derailed, a failure that would have played right into the hands of Russian President Putin.

Opposition parties, such as the Party of Regions and the Communist Party, want to destabilize the government, Mr. Taran said.

"It's very sad that the passing of a budget becomes part of the parliamentary campaign," he said. "And it's very sad that opposition forces are ready to sacrifice a nation's future for their own position during elections."

Under the Yushchenko government, fiscal policy has improved, Mr. Taran said.

While Mr. Kuchma's goal with the budget was to maintain his autocratic power, Mr. Yushchenko's economists have been forming the budget in reaction to everyday problems in the Ukrainian economy, he said.

However, a budgetary or economic strategy for Ukraine is still lacking, Mr. Taran said.

"The situation presents a paradox: despite the fact that the Orange Revolution's leaders managed to destroy Kuchma's regime, they had absolutely nothing to offer the nation afterwards," he said.

"That is why the budget isn't sound. It's more reflexive, since theirs is no vision of economic development for the future year," Mr. Taran said.

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