Tax reform package is stalled, no budget in sight for Ukraine (04/13/97)

Tax reform package is stalled, no budget in sight for Ukraine

by Roman Woronowycz
Kyiv Press Bureau

KYIV - With the first quarter of 1997 complete, Ukraine still has no approved budget for the current year. What's worse, at the moment no consensus exists among the branches of power as to when, and most importantly how, a budget will be passed.

With the process at a standstill and no resolution of the budget crisis in sight, President Leonid Kuchma asked the Verkhovna Rada on April 8 to extend the emergency budget, based on 1996 expenditures, from its original April 1 deadline through June.

What has stalled approval is a package of seven tax reform bills called the "Economic Growth '97" package, whose author, Viktor Pynzenyk, last week resigned from his post as vice prime minister for economic reform because he did not see any chance for further progress on economic revamping in the present government.

Of the seven bills, only one has been approved, while four have gone through only the first of three required readings, and two have been returned to the government for further revisions.

The package would lower income tax rates from 51 to 32 percent, write off debts accumulated by state-owned enterprises, reform unemployment and disability compensation, and establish a value-added tax, among other things.

At present, only the value-added tax bill has passed the legislature. The VAT, approved on April 3, will continue to be levied at a rate of 20 percent on goods, services and trading operations that do not come under exemptions.

One reason for the delay in passage of a budget by the Verkhovna Rada is that the government and the president have insisted that the tax reform package pass the legislature before the budget is revisited. The budget package went back to the Cabinet of Ministers for revisions in December and has never been returned, and the government insisted that the Verkhovna Rada concentrate on the tax reforms. But national deputies, mostly leftists who hold key positions in committees reviewing the tax bills, have taken their time.

Prime Minister Pavlo Lazarenko, attempting to jump-start the stalled budget process, appeared before the Verkhovna Rada on April 8. He told deputies they have been lax in working out the glitches in the tax reform bills. "Even if separate articles of the bills needed to be reworked, and some truly did, two months have passed since the bills went through their first readings. They could have been reworked and problems resolved," he commented.

He offered a new schedule for approval of the tax reforms he believes are needed for a 1997 budget by the end of April. Most important, however, he excluded the property tax bill - from which a substantial amount of revenue is expected to help balance the budget - from the abridged version of "Economic Growth '97" that he asked the legislature to pass.

He explained that the most important of the tax bills required for a budget is the corporate income tax bill. He put forward a schedule by which the bill would come to the Parliament floor for a second reading within a week and for final approval by April 22-23.

He also asked the deputies to expedite the bill on personal income tax and a bill on changes to existing tax laws, both to be approved by the end of April. Mr. Lazarenko suggested that in this way the 1997 budget could be implemented by July 1.

This, however, would not solve the budget problem as simply as the prime minister would have it. In order to approve the budget quickly, Mr. Lazarenko has suggested that the Parliament write the new tax laws directly into the budget.

Verkhovna Rada Chairman Oleksander Moroz, speaking to the legislature after Mr. Lazarenko's presentation, questioned the constitutionality of developing the budget in that way. He explained that the present 1997 budget which was passed on December 16 in its first reading would have to be withdrawn and a new one presented, which would require that the procedure begin anew.

In order to simplify what has turned into a complex process without a foreseeable end, National Deputy Viktor Suslov, chairman of the Finance and Banking Committee, proposed that the budget deputies passed in its first reading in December continue to be allowed to move through the legislature to approval and that the tax reform package become part of the 1998 budget, which the legislators are scheduled to begin reviewing in May. "This is the only version that can get through the Parliament by the end of April," he told the newspaper Kyiv Post.

But that will not solve the budget crisis and could spur an even greater one. As the prime minister mentioned in his speech before the Verkhovna Rada, Ukraine will not be able to balance its budget without the aid of international financial organizations such as the International Monetary Fund and the World Bank. However, the IMF has made extension of a $3 billion aid package conditional on a 1997 budget that includes substantial tax reforms. The IMF has not yet said if it would accept a budget with the partial tax package that Mr. Lazarenko has proposed.

Without some sort of tax reform, the economy would plunge again into a crisis as severe as in 1993. According to a Kyiv Post report a group of government advisors, led by the noted economist Anders Aslund has said that, without a budget by July, Ukraine would be denied $1.2 billion in Western loans - which it is counting on to cover the budget deficit. This would force the National Bank of Ukraine to print money to pay off debts, re-igniting inflation to 32.4 percent for 1997. If the tax reform package fails in the Verkhovna Rada, the group estimates that inflation would reach 55 percent by the end of the year.

That, at present, is of less concern to the average person on the street. The most pressing worry is that, without a budget, no government pensions and wages will be disbursed in a country that already owes its workers almost $1.5 billion in back wages.

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