Almost half of the expenditures of the 2023 state budget are Western aid

The government expects next year GDP growth of 3.2% and inflation at the level of 28%

On November 3, the Verkhovna Rada adopted the draft law in its second reading  №8000 «On the State Budget of Ukraine for 2023». Of the good things about the 2023 budget, in the entire history of Ukraine, this document was adopted the earliest compared to all previous ones. In everything else, this is a wartime budget. More than UAH 1.1 trillion (43% of all state budget expenditures), which is more than 18% of GDP, has been earmarked for security and defense purposes. The document envisages that hostilities will continue throughout the next year.

Basic numbers

Before the second reading, the government partially took into account the conservative scenario, that is, the highest risks of the continuation of active hostilities. The main revision after the first reading was a reduction in expectations for GDP growth in 2023 from 4.6% to 3.2%.

The main indicators of the 2023 state budget:

• nominal GDP – 6.27 trillion UAH;
• GDP growth – 3.2% y/y;
• revenues – 1.3 trillion hryvnias;
• expenses – UAH 2.6 trillion;
• consumer inflation – 28%;
• price index of industrial products’ producers – 32.2%;
• trade balance – $15.3 billion;
• export of goods and services – $61.3 billion (+7.2% y/y);
• import of goods and services – $76.6 billion (+1% y/y).

“We have increased the amount of expenditures on pension payments, liquidation of the consequences of Russia’s armed aggression (construction, repairs, buying housing for people), on scientific and technical activities, on preferential mortgage loans for IDPs. Just before the second reading of the draft state budget, the expenditure part increased by UAH 66.8 billion”, notes Prime Minister of Ukraine Denys Shmyhal.

Among the main items of the budget:

• import VAT – UAH 394.9 billion;
• domestic VAT (including budget compensation) – UAH 222.5 billion;
• personal income tax – UAH 143.9 billion;
• corporate income tax – UAH 110.7 billion;
• rent for gas production – UAH 73.9 billion.

Even despite the expected multibillion-dollar infusions, the Ukrainian economy will show minimal growth rates (the National Bank predicts GDP growth in 2023 by 4% y/y) and domestic demand will remain weak. The average monthly nominal salary in 2023 will be UAH 18.3 thousand (+30.2% by 2022 due to inflation), but its real growth is only 0.4%. The minimum salary will be UAH 6.7 thousand.

Hope for the West

In 2023, the structure of financing the state budget deficit will not differ significantly from the current year. The state budget deficit in 2023 will roughly amount to 20.6% of GDP, or 1.6 trillion UAH ($38 billion). In the structure of state budget expenditures, 46% is international aid: in the conditions of war, Ukraine will not be able to cover such a huge deficit on its own. Other borrowings should amount to UAH 170 billion, of which domestic – UAH 90.7 billion.

The deficit of the state budget is planned to be covered with the help of international partners – the EU, the USA, the IMF and other donors. According to IMF estimates, in 2023, Ukraine may need $3-5 billion in external financing per month. The amount depends on the nature of hostilities and the macroeconomic situation in the country. An agreement in principle has already been reached on the allocation of $1.5 billion per month by the United States and the European Union next year to support Ukraine. At the same time, we should expect the reformatting of part of these funds from loans to grants.

The estimated size of the state debt will be UAH 6.4 trillion, or 102% of GDP, by the end of 2023. However, Ukraine has postponed a significant part of payments on the external state debt, so the question of financing payments will arise only in 2024.

Financial support from international donors led to an improvement in expectations for the hryvnia to dollar exchange rate: the average annual rate is 42.2 UAH/dollar, and by the end of 2023 it is 45.8 UAH/dollar (in the first reading – 50 hryvnias/dollar). Although under the conditions of active hostilities, no one can guarantee the stability of the exchange rate of the national currency. There is also a risk of untimely receipt of Western aid.

Total lack

The financing of non-military expenditures provided for in the state budget, in fact, can be considered as minimally necessary. In 2023, 17% (447.4 billion UAH) of funds will be allocated to social programs and pensions, 7% (176.1 billion UAH) to medicine, and 6% (156 billion UAH) to education.

“The main feature of the state budget project is savings on virtually everything, except for defense and security. 40% of all funds will be directed to this direction. The rest of the costs will be financed by donors,” says deputy director of the Center for Economic Strategy Maria Repko.

According to World Bank estimates, a quarter of Ukrainians will live in poverty by the end of 2022, compared to just over 2% before the war. And by the end of 2023, their share may increase to 55%. The Ukrainian authorities officially expect unemployment at the level of 30% by the end of the current year.

In 2023, the Fund for Elimination of the Consequences of Armed Aggression will operate. Its funds will be directed to the construction and repair of public buildings, critical infrastructure facilities, housing for refugees, purchase of transport, etc. However, the size of this fund is insignificantly small compared to the losses – UAH 35.5 billion, of which UAH 16.1 billion was added after the first reading. Funding for infrastructure restoration may increase if hostilities cease.

According to the words Eric Nyman, the managing partner of the HUG’S company, the Fund for the Liquidation of the Consequences of Russia’s Armed Aggression will be primarily full due to the revenue of the National Bank of Ukraine. In general, the expected size of the NBU’s revenue, which the regulator transfers to the state budget, increased by UAH 51.6 billion compared to the first reading – to UAH 71 billion.

However, the volume of the fund cannot be compared with the size of the damage caused by the war. According to estimates of the Kyiv School of Economics (KSE), direct infrastructure losses in monetary terms as of September 1, 2022 constituted $127 billion. This is a very moderate estimate, and the Ukrainian authorities at different times called much higher figures – from $350 billion to $1 trillion.

Business support

In the conditions of war, the state budget cannot a priori be oriented towards business support, but part of the budget expenditures for the construction and restoration of infrastructure can be considered as investments. These include:

• Road fund – UAH 64.3 billion;
• Fund for liquidation of the consequences of armed aggression – UAH 35.5 billion;
• subventions to Kharkiv and Dnipro for the completion of the metro – UAH 6.1 billion;
• The State Fund for Regional Development – UAH 2 billion.

In turn, a certain part of military expenses involves the purchase of products from national producers. Thus, it is planned to allocate UAH 355.1 billion for the purchase, modernization and repair of weapons, equipment, means and equipment.

It can be predicted that, depending on the nature of hostilities, the 2023 state budget will be revised, as happened this year. The next year promises to be extremely difficult, which will certainly affect the implementation of the state budget.