Another UAH 500 billion for defence and security: Why the Parliament amended the state budget for 2023

Another UAH 500 billion for defence and security: Why the Parliament amended the state budget for 2023

Where and from whom will the additional funds come from to cover the rising costs

Another UAH 500 billion for defence and security: Why the Parliament amended the state budget for 2023

On 21 March, the Verkhovna Rada adopted government Draft Law No. 9105, which was labelled 'urgent' as it amended the law on the state budget for 2023. The main point of the document is to increase state treasury expenditures by almost 19%, or half a trillion hryvnias. Most of this amount will be spent on defence. The increased expenditures will be covered by increasing the tax pressure and attracting even more international aid.

Mind has been looking into how the state budget has been transformed and whether it is final.

How have the parameters of the state budget for 2023 changed? The main changes envisaged by the Draft Law No. 9105 are as follows:

  • state budget expenditures have been increased by UAH 487 billion to UAH 3,076 billion. At the same time, only the general fund expenditures have been revised, while the special fund has not been touched;
  • state budget revenues will increase by only UAH 60 billion, to UAH 1,390 billion. Again, we are talking only about general fund revenues;
  • the maximum state budget deficit by 2023 will increase by UAH 419 billion to UAH 1,720 billion;
  • the amount of loans to be issued at the expense of budget funds in 2023 will be reduced by UAH 6.9 billion, to UAH 51.7 billion;
  • the amount of state guarantees for loans attracted and for financing programmes related to the enhancement of the state's defence and security, on the contrary, has been increased by UAH 10 billion, to UAH 30 billion;
  • the maximum amount of public debt to be reached by 31 December 2023 was reduced by UAH 229.5 billion to UAH 6197.1 billion.

What the additional funds will be used for? About 96% of the increased state budget expenditures will be used to strengthen Ukraine's defence capabilities. It is almost UAH 468 billion.

Given that the initially adopted version of the state budget for 2023 (the Verkhovna Rada approved the first version of the budget in November 2022) planned UAH 1.14 trillion for security and defence, this expenditure category will exceed UAH 1.6 trillion, or about 25% of the forecast nominal GDP for 2023, after taking into account the amendments.

In particular, the following defence and law enforcement agencies received the largest increases (the percentage increase in spending and the total amount of spending are indicated below):

  • Ministry of Defence – by 43.4%, to UAH 1.23 trillion;
  • Ministry of Internal Affairs – by 46.8%, to UAH 309 billion;
  • Defence Intelligence of Ukraine – by 39.8%, to UAH 16.2 billion;
  • The Foreign Intelligence Service – by 149.4%, to UAH 5.5 billion;
  • Security Service – by 41.9%, to UAH 31.6 billion;
  • Department of the State Guard – by 43.9%, to UAH 3.2 billion.

The expenses of the administration of the State Service of Special Communications and Information Protection were increased by 7.8 times to UAH 36.4 billion. The MPs also increased funding for the National Anti-Corruption Bureau. It will receive 4.2% more, or UAH 1.3 billion. At the same time, the expenditures of the Ministry of Finance (general government spending and lending) were cut by 7.9% to UAH 367.4 billion, including the expenditures on public debt service by 15.4% to UAH 276 billion.

Main changes in the expenditure part of the state budget according to the Draft Law No. 9105

Expenditure item Dynamics, % Final amount for 2023, billion UAH
Ministry of Defence +43,4 1230
National Guard +106,2 97,1
Ministry of Internal Affairs +46,8 309
National Police +25,2 85,9 
Defence Intelligence of Ukraine +39,8 16,2
The Foreign Intelligence Service +149,4 5,5
Security Service of Ukraine +41,9 31,6
Department of the State Guard +43,9 3,2 

*data from amendments to the text of Draft Law No. 9105

Where will the money come from to increase state budget expenditures? The revenue side of the state budget has been revised less radically than the expenditure side. In particular, the planned tax revenues for 2023 have been increased by 3.6% to UAH 1.2 trillion.

In particular, the budget revenues from the personal income tax (PIT) will increase by 25.3% to UAH 180 billion, while the revenues from the domestic VAT (including refunds to taxpayers) will increase by 2.3% to UAH 228 billion. In terms of non-tax revenues, MPs increased the share of net profit to be transferred to the budget by 3.6 times, to UAH 26.3 billion.

Debt financing was also on the Parliament's agenda. The plan for domestic borrowing (placing military bonds) was adjusted by +299%, to UAH 362 billion. External borrowings will increase by 11.2% to UAH 1.8 trillion.

Have the revenue plans been implemented? According to Danylo Hetmantsev, Chairman of the Parliamentary Committee on Finance, Taxation and Customs Policy, Ukraine will seek funds for its growing defence needs from its international partners.

"The state budget deficit (its new size is UAH 1.72 trillion – Mind) will actually be smaller because it does not yet take into account the full amount of planned grants. It is non-refundable funding that goes to the budget revenues," Mr. Hetmantsev explained.

NBU Governor Andriy Pyshny also said at a briefing on 16 March that Ukraine would be able to receive more than the planned $38 billion in 2023. By the way, the preliminary agreement with the International Monetary Fund (IMF) on a $15.6 billion loan announced by the National Bank late on 22 March is very timely.

At the same time, given the increase in personal income tax revenues in the amended budget by almost UAH 37 billion, it can be assumed that MPs, together with the government, clearly intend to step up the fight against shadow incomes of individuals and businesses. Foremost, we are talking about salaries in 'envelopes', which the government regularly promises to 'whitewash'.

The plans to receive more than UAH 26 billion from the profits of state-owned enterprises are questionable given the problems in the economy and the damage the war has caused to all businesses, both public and private. Even in 2021, the share of profitable state-owned companies was 28%. At the same time, almost 50% of the enterprises still owned by the state are not physically operating.

As for the overall impact of increased state budget expenditures and the budget deficit on the economy, Andriy Pyshny is quite optimistic. He assures us that this was a completely predictable measure. Therefore, it will neither destabilise the hryvnia, nor accelerate inflation. And the National Bank does not intend to turn to the 'greenback emission' either.

"Back in January, in its macroeconomic forecast, the NBU pointed out that we were taking into account the risks of an increase in the budget deficit and additional costs that would be required to finance the war. Thus, in this case, it is an expected step. We have an agreed position with the Ministry of Finance and the IMF to prevent the monetization of the state budget in 2023," Mr. Pyshny assured.

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