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At the same time, a draft state budget currently going through the parliament has evoked heated debates in society – opposition has already dubbed it ‘scary’ while authorities call it an effective means of fighting the economic crisis. Former Minister of Finance Viktor Pynzenyk speaks about the consequences of the administrative reform, the impact of the adoption of the Tax Code, the inflation rate, hryvnia rate and economic partnership with Russia.
Mr. Pynzenyk, you have harshly criticized the recently implemented administrative reform. What structure of the central executive authorities would you recommend instead?
I support the decision to reduce the amount of the public staff, but it should have been a result of a strict division of functions and concentrating each of them in certain departments or bodies. Let’s take the Ministry of Interior. It is a police institution, which is supposed to become the Ministry of Interior Policy responsible for issuing a document similar to a passport and a birth certificate, as well as a border guard service… Today, the birth certificate is issued by the Ministry of Justice and checked by men with guns on the border. The function of forming the state budget should be placed upon the Ministry of Finance. The name of a ministry has to correspond to its functions. Educational establishments should be the responsibility of the Ministry of Education, medical institutions supervised by the Ministry of Healthcare etc. Another issue we have to confront is the problem of the ‘second Cabinet’, the Secretariat of the Cabinet of Ministers. There is no need in such a huge apparatus to provide support to the government, instead it keeps trying to become a ‘Cabinet’ itself. Today, every public official sees themselves as a government. The question is who is responsible for the execution of decisions – an official from the Secretariat or a minister? A responsible person must be undoubtedly a member of the Cabinet, a minister. The task of the Secretariat staff is to solve technical issues, for instance, copying materials, providing support to delegations, organizing meetings. The Secretariat is supposed to provide services to the Cabinet. Judging by its task, it’s clear the Head of the Secretariat cannot be a minister. There is also a problem of the so-called ‘mini-Cabinets’, when the executive branch cannot ensure the carrying out of certain functions as it has not enough power for that. It means there has to be a strict subordination of all public authorities. The so-called coordination has nothing to do with subordination. Subordination means a possibility of giving direct directives. Otherwise, if an order or directive comes from above, but there are no instruments to implement it, if it is not mandatory for some body, there cannot be any reasons to expect its execution. Currently, a part of executive bodies are not subordinate to the executive branch. For example, the State Property Fund, which is an institution of the executive branch, is for some reason subordinate to the parliament, which is not the executive branch. The solution is to group functions, to clearly divide responsibility, to provide for strict subordination of bodies. It is a matter of the system, which this reform has not covered, but which needs to be solved in some way.
If the system reform of the executive branch you are speaking about is not completed, does it mean that in a few years the number of public officials might increase to the pre-administrative reform level?
I am afraid so. In 2000, similar steps were taken, including the staff reduction. But today’s apparatus is even bigger than before the reduction. Interestingly, power might always be dangerous for people. Authorities are supposed to be guided by people’s needs, but they are capable of developing by themselves, regardless of people. So it is highly important to carry out reforms correctly, to have a political will for their implementation.
Which executive bodies do you consider as unnecessary? Could they be eliminated without too much trouble?
Let’s see – why would we need the Ministry for Regional Development? Or the Ministry for Housing and Construction? Economy requires common policies, which in our country are developed by a dozen bodies. They can be united into one ministry, or fundamental sectors can be appointed to corresponding ministries – and there will be no need in the Ministry of Economy at all. Another ministry, which does not have to be autonomous, is the Ministry for Emergency Situations. It should be a part of the Ministry for Interior Policies I have mentioned before. A social block could also be more consolidated. If to ensure clear division of the functions, the Cabinet can consist of 12 ministries.
Under the current circumstances, what are the chances of implementing the reform you’ve been talking about? It has to be implemented. But how soon?
It’s a matter of a year, or maybe ten years. The question is if somebody needs it. It’s good the leaders of the state had a demand for staff reduction, which was implemented. We can speak about all kinds of initiatives, but without the demand they will come to nothing.
The last Cabinet was highly criticized for foreign loans. However, when the current authorities are accused of the same, they say the received funds are not spent, but accumulated on the treasury account. What’s the logic of the state taking loans, which will have to be paid back with interest, but not using them?
There is no logic. If we don’t need money, why would we borrow it? Loans are a consequence of the budget deficit, which remains big. But they are taking more than they need now to cover the deficit. It is a right thing to do to some extent, as they had to revive the treasury account, which, as any other bank account, cannot be without money on it. But today they have about 28 bln (together with the currency account), which they have to pay interest on.
There is an opinion that this money is accumulated to ensure the country survives the first months of the next year which are traditionally hard…
This problem could be solved through budget distribution. The task of the Ministry of Finance is to do a monthly distribution of expenses. Pensions are of course paid on a monthly basis, but some expenses can be made when there is enough money for it.
Will Ukraine be able to break this vicious circle of loans – when we take another loan to pay back the previous one – any time soon?
To borrow to pay back is not a problem. The main thing is to ensure the debt doesn’t grow. This is a problem of deficit, of reducing it, which will have to be faced anyway.
How can it be done?
They will have to cut expenses similarly to the world practices.
What spheres will have their expenses cut?
The budget contains expenses which shouldn’t be there at all. For example, support of well-to-do people. Why does the budget have to pay for the gas I consume? Or payments for a newborn child – this program should cover only disadvantaged people. Rich people can take care of their children themselves. It’s impossible that public mines receive budget support while private ones don’t. Or, let’s say, funds for various investment projects. One of the funds will give 300 mln hryvnias to create new jobs, i.e. a private company will receive budget money to create new jobs. But it has to be done with private funds! There are countless examples of this kind.
You’ve mentioned ways to save money. But the budget deficit can be reduced through additional budget revenues.
Certainly. There are possibilities to ensure bigger revenues if to ensure payment of taxes. This is the way to at least partially solve the problem. But it has currently reached the level when it will be impossible to cover the deficit with growing revenues alone – we’ll have to cut expenses anyway. Moreover, even if we didn’t have budget deficit, the money used to pay for gas consumed by the rich population should be used for other purposes. Society cannot keep well-to-do citizens.
What spheres require major public investments?
Infrastructure development projects. Ukrainians cannot construct roads, but not because we have no experts. I am ready to buy high quality road maintenance equipment but I have no guarantees that I will have access to this order, because all business is done based on the principle of preferences here. Any construction objects can be put up for a tender and cost actually less and built with more responsibility because a construction company will have to ensure the high quality of the road it has built. But we also need clear standards, requirements to a statutory fund etc.
Is the inflation rate of 8.9% mentioned in the budget realistic? What do you think the government could do to bring down inflation?
When a budget is developed, inflation index is always used as a reference to draft all other documents, including the Principles of the Monetary Policy of the National Bank of Ukraine. But with bottomless deficit, there is a constant threat of pressure on the National Bank of Ukraine, when it has to pay pensions but has no money for it… In fact, there is no clearly determined deficit index in the budget. What we’ve got instead is a huge question mark. Article 1 of the Budget stipulates the deficit at the level of 38.6 bln hryvnias. But it doesn’t mean anything, as in the following Articles the government is allowed to add another 5 bln, then to these 43 bln more money (the amount is not specified) for recapitalizing banks. The government might even be allowed to increase the capital of Naftogaz, the amount is not specified either. But there should not be such a phrase as ‘give a right to’ in the budget when no specific data are provided. Moreover, the budget revenues are overestimated I believe, by 10-15 bln. And that’s where we should look for the answer to the question about inflation. With the deficit of 38 bln, we should expect 8.9% inflation rate. But nobody knows the real amount of deficit so far…
One of the mechanisms used to hold back inflation could be blocking social benefits to reduce the amount of currency in circulation…
The problem of inflation might lead to freezing social benefits. However, the deficit and pressure on the National Bank of Ukraine will impact salaries, only not in the public but other sectors. As for salaries, it has been decided to keep them at the same real level with minor changes due to inflation. It is to be noted last year we had a downturn in economy. We have to realize that if GDP is 25 thousand hryvnias, it is impossible to reach the consumption level of 40 thousand hryvnias per capita.
Do you think 7.95 Ukrainian hryvnias for 1 USD, indicated in the budget, is a realistic exchange rate, taking into account the growing negative foreign trade balance?
Social policy reflects the national currency devaluation. Salary adjustment based on inflation rate results in people buying the same amount of goods as before. If national industrial production grows by 4-5%, people will buy more Ukrainian goods. And it will have a positive impact on the exchange rate. As a result, all the risks are limited to the deficit sphere.
Will the new Tax Code, which enters into force on January 1, cause the growth of budget revenues, as authorities hope, or ruin small and medium-scale business, as opposition warns?
A Tax Code is supposed to answer questions, the one we have poses new questions instead. We had a Tax Code, only in the form of laws which have been united into one document today. But we still have no answer why it has been done. I have the following idea about major principles of a Tax Code – everybody has to pay taxes, there should be random control of those evading taxes and low tax rates. The Tax Code is not going to have any serious influence on the budget. But is small and medium-scale business going to survive in the medium-term? What’s most irritating about the Tax Code, some are forced to pay taxes, while others are exempt from them. A simplified tax system has a right to exist where it is too expensive and thus unreasonable to control tax payment. In this case, the best solution would be to introduce a single tax amount. Businessmen that have been working with legal entities might face some problems. But those who work with citizens are not going to have any big difficulties. In fact, small-scale business is supposed to serve citizens’ interests.
What are major differences between policies of Azarov’s and Tymoshenko’s Cabinets?
The present Cabinet started with following in the footsteps of the previous Cabinet with its blind debt policy. It is really bad for economy, a state when you don’t know what steps to expect. This year, some steps have been forced by the International Monetary Fund, i.e. they were caused not by the insight and understanding of the way-out, but external pressure on authorities.
Is Ukraine really in such a bad need of ‘unpopular reforms’ authorities keep speaking about?
There are some obvious things that need to be done, like cutting expenses. But there are some popular reforms too, like not having to pay for rich people. Or take a single pension law which regulates that everybody has their pensions calculated based on the same principle. A 30-year old person cannot have 60 years of professional experience! It’s not right when somebody retires at 60 while another person retires at 30. Society is going to take kindly to this change meant to rectify the situation. Society can understand reforms. To understand the need behind them, people had to hear the analysis of the actual state in the country (without politicizing the problem of placing the blame), vision of a specific action plan in all spheres with social protection necessarily kept at the same level.
Has Ukraine managed to get any economic advantages as a result of closer cooperation with Russia as compared to the previous ‘orange’ years?
I don’t think the situation has changed in any significant way. We have never been partners with Russia. It’s not exactly a common knowledge that Russia has promised to reduce gas rates for Ukraine only for this amount to be added to the amount of Ukraine’s debt to Russia. This scheme will be applied until 2017.
Do you think the creation of a Russia-Ukraine-EU gas pipeline consortium will become a solution to these problems?
I have never supported the idea of establishing this consortium. And the reason is that the interests of a transit country always conflict the interests of a buyer and a seller because the transit party is interested in charging more for its services while the parties on the both sides of the pipeline are not happy about it. Quite naturally, buyers and sellers cannot be partners of a transit country. There is also an option of exchanging our gas pipeline system for the access to Russia’s gas reserves. But what shall we get from it? Are we going to have cheaper gas? No, because Russia has only one institution that sells gas. Moreover, Russia has a gas export duty regardless of what party produces it. The price of $300 is not going to change for us, plus we will invest in gas production in the Russian Federation. Moreover, if we establish a joint stock company with 50/50 stakes, how are we going to pass decisions? Ukraine has no majority stake, while our representatives due to different financial capacities of the parties represent our interests in a formal way only…
Then what can be the way to upgrade the Ukrainian gas pipeline system?
Modernization of the gas pipeline system has to be ensured by activities of the National Joint Stock Company Naftogaz of Ukraine, which, in its turn, requires equal partner relations with Gazprom, liquidation of Naftogaz as a social institution (the latter has to be considered in the budget). But if they want to simply give away the pipeline, they should consider selling it instead. It would be a better choice anyway.
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