The plight of local communities whose funding has been blocked by the State Treasury reveals a dire public finance crisis that shows no sign of improving
Earlier, regional communities often complained of a lack of funding provided by the central government for the functions delegated to them. Today, these communities appear to have no funding at all. Local governments in Western Ukraine – many in opposition to the government - were the first to publicly report that the State Treasury had blocked allocations for them, while other cities and towns kept quiet and waited patiently. However, The Ukrainian Week’s sources claim that the practice of patching holes in the central budget at the expense of local needs has been in place for some time under Yanukovych’s presidency, and escalated after the Family’s Serhiy Arbuzov and Yuriy Kolobov took over the finance and economy ministries.
Recently, though, even the Party of Regions’ “core” south-eastern regional communities have broken their silence about the milking of local budgets by the Azarov-Arbuzov Cabinet that has mounted to an unprecedented scale as the regime has failed to push through laws to band-aid the budget (see Patchwork Solution). Opposition MPs claim that 70% of city and town mayors reported constant delays in allocations from the State Treasury, while 60% said that this was a systemic practice and delays of up to 30 days have been a norm.
Instead of trying to remedy the situation or explain what is going on, the Treasury has denied that any funding blockages have occurred. In response, several regions launched campaigns displaying billboards that say “Treasury, give our money back”.
In fact, though, the Treasury is not the main troublemaker; it is merely a central executive body whose work is supervised by the Family’s Finance Minister Yuriy Kolobov. The problem of blocked local government accounts actually stems from a Budget Law passed hastily and without due discussion by the previous parliament on its final day. In addition to being passed via a violation of parliamentary procedure, the law also carries a number of important amendments that only a well-trained puppet legislature would support. The Budget Law entailed growth of 3.4% of GDP in 2013 despite circumstances that clearly indicated an inevitable decline in GDP – the question was how low it would plunge. As a result, the consolidated budget deficit over the first four months of 2013 hit UAH 18.9bn or three times that period in 2012. According to the latest data, budget revenues in June 2013 were 7.5% below the June 2012 revenues while the Budget Law entailed an increase of those.
Local governments’ public protests against being milked by the central government are simply a symptom of an increasingly devastating cash deficiency. Indeed, it seems that the legislature pushed through the Law on Treasury Notes to cover up this disastrous deficit. Meanwhile, the looming underperformance of the 2013 budget and the shrinking economy are creating more risks for ordinary people. Hospitals, schools and roads that need fixing are already underfinanced. In September and October, we may see massive payment delays or barter payments reminiscent of the 1990s. There is virtually no other way for enterprises to pay their employees’ salaries if they receive their VAT refunds from the state in treasury notes rather than cash.
The government has maintained a consistent course to this present situation ever since Yanukovych came to power. It was his government that submitted an unrealistic draft budget last year which the pro-presidential parliamentary majority passed without due discussion under pressure from the Presidential Administration.
Meanwhile, as towns report the blocking of tens of millions allocated to them, the Family’s Prosecutor General has recently been allocated UAH 113.9mn for luxurious renovations of its office at Moskovska Str. in Kyiv – an outrageous amount to fix a public building that may signal corruption with future subcontractors. Regular renovations of the Prosecutor General’s other offices in Kyiv will cost the taxpayers another UAH 10mn. The Family-supervised National Bank of Ukraine (NBU) will reconstruct its office in Chernivtsi Oblast for UAH 32mn. It has also concluded a contract to buy goods (at overblown prices) worth UAH 10.69mn, including computer mice worth UAH 400 (USD 50) each, headphones worth UAH 480 (USD 60) per set, and more. This list may grow longer even though the pro-presidential majority pushed through amendments to tender laws – again in violation of procedure – that made most public procurements secret. According to Nashi Hroshi (Our Money), a website investigating fraud in public procurements, the law helped the government hide over UAH 175mn from public oversight in the first six months of 2013 alone.
While Kyiv’s top officials under the right protectorate feed on the budget, and schemes to pump money out of the state swell in scale and impudence, budget troubles are likely to exacerbate. The government may try to solve these problems at the expense of local authorities, businesses that are not linked to the regime and public sector employees. However, this will obviously not solve the budget deficit issue. None of these measures can fully offset the damage already done by the government through its leeching of local budgets and embezzlement and abuse of revenues. Nor will they help to stimulate the country’s business activity, which has been shrinking since August 2012.
During the 3rd Lviv Security Forum, the director of German Marshall Fund's office in Ankara discussed the current state of relations between Turkey, USA, and Russia and perspectives of Ukraine-Turkey dialogue