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27 January, 2016  ▪  Oles Oleksiyenko

Reversing the Deep-Freeze

The dangers of further impoverishment

Ukraine continues to live in a state of unresolved revolution. The number of voters unhappy with how the country is developing, compared to the beginning of the Euromaidan has not only not gone down, but continues to grow.

According to one survey run by the Democratic Initiatives Fund (DIF) and the Kyiv International Institute of Sociology (KIIS) in December 2015, 60% of Ukrainians now think that things are not going as they should, compared to 52% who thought so in December 2013. The main reasons given by those who hold this opinion is the decline in the standard of living (69%) and the high level of corruption (57%). For them, a positive signal, in addition to the end of military action in Donbas would be a rise in the standard of living (51%) and seeing the most corrupt officials sued for their crimes (50%).

The decline in the standard of living for most Ukrainians has really been unprecedentedly significant for such a short period of time. Derzhstat, the statistics bureau, reported in December 2015 that consumer prices had gone up 43% compared to December 2014 and by 79% compared to December 2013. And this is just the tip of the iceberg given the specific methodology and the consumer basket that the statistics agency uses. Meanwhile, the indexation of wages and pensions for most Ukrainians was dramatically less over this same period. For instance, government workers and workers at budget-funded institutions saw their wages go up only 25%.

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By November 2015, the newest data available, even the official estimates of the Ministry of Social Policy were that the minimum subsistence wage for the employed was UAH 2,875, for children age 6-18 it was UAH 2,930, and for pensioners it was UAH 2,052. Yet the 2016 Budget used a minimum wage of UAH 1,378 (rising to UAH 1,450 May 1), while the minimum pension is UAH 1,074 (rising to UAH 1,130 May 1), meaning that in both cases, they don’t even cover a half of what the Ministry considers the actual living wage.

What’s worse, even the average government wage is now at the threshold of the subsistence minimum even for those who are employed: in November 2015, wages averaged UAH 3,426 in education and UAH 3,168 in healthcare. And this does not take into account any children that the individual is supporting. Given that inflation is expected to be 25-30% in 2016, according to the minimal scenario proposed by analysts, the 10% wage increase as of December 1, 2015 will do little to improve the situation. With expectations of growing unemployment this coming year, it matters that the minimum unemployment benefit for those sufficiently vested in insurance will be only UAH 1,102.40 (rising to UAH 1,160 May 1), which is barely one third of the subsistence minimum. Those who are not vested will get barely half of that, or UAH 544.

In December 2014, 43% of Ukrainians were ready to suffer a certain level of material decline in order for reforms to take hold, whereas in December 2015, 33% were prepared to do so, only 8% of those were prepared to suffer “as long as necessary,” while 25% said “not more than a year.” Right now, 59% are no longer prepared to put up with material decline at all, and 39% of them say that they are already completely impoverished. The margin of savings and patience among most Ukrainians has been exhausted for 2016.

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Should military action in Donbas finally stop, strong demand for social paternalism on the part of the state will become the priority for most of Ukrainian society. A KIIS and DIF poll in October revealed that Ukrainians expect the state to firstly provide social security (39%), justice and a fair court system (37%), protection from foreign aggression (32%), free healthcare (30%), and guaranteed jobs (29%).

Moreover, only 18-20% of those polled want the state to provide “rods, not fish:” physical safety, law and order, and equal rights with minimal intervention in the economy. Yet only 18% are prepared to pay taxes on all their income, 8% are prepared to actively oversee the government, and only 5% are prepared to participate freely in promoting various ideas or programs. Most Ukrainians are clearly less interested in fulfilling their obligations before their country—and their fellow citizens—than they are in getting benefits from it. This presents a serious threat that populists will manipulate this mood, especially those who are on Russia’s payroll, and that the conditions are in place for them to start tearing the country apart.

If the government fails to provide the conditions for the standard of living to start improving again and for ordinary Ukrainians to feel more confident that things are changing for the better in the near term, the likelihood is that dangerous socio-political processes will begin and the threat to the very existence of Ukraine as an independent state will rise sharply. Still, such conditions obviously cannot be provided through populist “easy steps” that will quickly deteriorate the situation even further.

This means the government will have to look for ways to prevent a social explosion and the triumph of populists and the comeback of once-discredited politicians at a time when budget resources are really limited and the IMF and western partners justifiably insist that they prevent the deficit and the already excessively high public debt from growing.

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Somehow, the numberless calculations of today’s top officials—who were in opposition not long ago—about the tens and hundreds of billions of losses to the state through the corrupt schemes in place during the Yanukovych regime have not translated into effective action to improve the situation over the last two years. The oligarchs and Big Business continue to sell Ukrainian-made goods to their offshore companies at below cost to evade taxes. Top officials continue to cost the country billions in losses to both the state budget and to business by abusing the state procurement system, taking bribes for permits and licenses, covering up for contraband and smuggling, and manipulating the VAT refund system.

To even partly close the loopholes through which the budget and economy are losing hundreds of billions of hryvnia per year is something officials and the political elite have no desire to do, although it’s the absolutely only way to stabilize the situation in the country. Another way to renew social justice could be higher taxes and fees on luxury goods and services, such as expensive cars, high-end gadgets, expensive homes, jewelry and precious metals, premium-class hotel and restaurant services and so on, as well as property taxes that are more differentiated and tied to market value rather than based on the size of the space.

This kind of approach is a workable alternative to all the so-far ineffectual attempts to force unofficial incomes out of the shadows in order to tax them. It’s equally important to set up a more effective mechanism for leveling out tax contributions among different categories of the employed, because it’s highly discriminatory and unfair when barely half of those who are nominally employed are paying the proper taxes and social contributions and supporting all the social and state infrastructure.

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Obviously, the process of shifting at least some part of the expense of education and healthcare from the state budget to alternative mechanisms for legally getting funds from the direct beneficiaries of the services also needs to be started. Dropping the constitutional atavism about “free medicine and education” is possibly even more important than judiciary reform or decentralization because Ukrainians have long ago recognized that neither healthcare and nor education is “free.” The trouble is that, right now, they are being paid for in a distorted fashion that does nothing to prevent the deterioration of these two areas or to improve the quality of the services they provide.

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