Ukraine Cabinet approves 2014 draft budget

Макроэкономика 13.09.2013 Ukraine's Cabinet of Ministers approved the 2014 draft state budget with a deficit at 2.7% of GDP, the Finance Ministry reported on September 11. The spending plan was calculated based on a 3% GDP growth forecast and 8.3% inflation estimate. The state debt is targeted for 32.4% of GDP by the end of 2014. The plan targets privatization revenue at UAH 17 bln. Alexander Paraschiy: The Cabinet's approval of the state budget occurred in quite a strange way this time around. Apparently, none of the Cabinet meeting participants saw the spending plan draft. So all that we know from news reports is that the authorities provisionally voted in macro-parameters, which were already released during Cabinet budget discussions in the spring. Still many questions on the 2014 budget are up in the air. Among the most important is how the authorities will cope with the president promising to reduce the VAT tax to 17% from 20% in the context of a full-fledged fiscal crisis and approaching presidential campaign. It's particularly strange to see the state debt target at 32.4% of GDP. Already in July of this year, the debt reached 38.7% of GDP and will be only growing in view of the expected state collections shortfall in 2H13. In regards to the budget's macro-parameters, we believe they are far too optimistic when boosting the tax base forecast. In particular, inflation is projected at 8.3% despite deflation occurring every time after a record grain harvest, which is expected this season. As for GDP growth, we do not see any sign of an external market revival for exports. What's more, the record grain harvest will create the effect of a high statistical base that will undermine GDP statistics in 2014. We believe GDP growth will not exceed 1.5% while inflation will rise 3% in 2014.