Page 30 - RusRPTAug24

30 I Cover story bne August 2024
Tax hikes or printing
That leaves taxes and printing as the only other possible sources of fresh funding. The Rada is expected to vote on budget changes in the next few weeks.
One of the easiest and most effective tax hikes would be to increase value- added tax (VAT) and the military levy. Proposed changes include raising the VAT rate from 20% to 22-23% and the military levy from 1.5% to 5%, affecting all Ukrainians, including sole traders. These hikes could generate up to UAH190bn ($4.6bn) annually, but still fall short of the required funds.
But even if the tax changes come into effect from early September, they will only bring in UAH 60-70bn ($1.4-1.7bn) by the end of the year.
The other option is to simply print more. In the first six months of the war, the government was running a $4bn a
month deficit and turned the printing presses on to fund it. However, that almost led to a financial meltdown, until Ukraine’s international partners stepped in and launched their extensive financial aid packages.
Printing money looks like it is back on the agenda, as even the proposed tax hikes will still leave a hole of at least $8bn in the budget. Agreements with the International Monetary Fund allow for limited monetary issuance as a last resort, but not on this scale.
Printing money obvious carries the danger of setting off a spiral in inflation rates. After miraculously bringing inflation down over the last two years, despite heavy spending to fight a war, inflation has started rising again more recently.
The government predicts an acceleration in inflation in the coming months. Consumer inflation fell to its
lowest level in recent years of 2%. But annual inflation rose in May to 3.3%, still below the NBU's target range of 5%, but inflation pressures are already building.
The sluggishness of prices rises have been the result of the economy's changed structure during the war; suppressed consumer demand did
not match the gradual recovery of domestic supply, including the large harvest of 2023 and high imports that are outstripping exports. In addition, Ukraine's impaired power supply is also pushing prices down.
But turning on the printing presses again could outweigh all these factors and stoke fast inflation that will just make the budget shortfall problem worse.
As detailed by bne IntelliNews report on the lack of men, money and materiel, there are several new international aid
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