Local budget revenues will be reduced by a quarter. What consequences can this lead to?

Soon, parliament will be adopting the state budget for the second time in conditions of a full-scale war. All government offices are actively preparing the main financial document by which our country will live throughout the next year.

The Ministry of Finance of Ukraine has proposed an innovation that will significantly worsen the state of local budgets. It is planned to completely withdraw from local communities the personal income tax (NDFL) from the monetary support of military personnel and law enforcement officers. Everything is for the sake of strengthening the country’s defense capability.

Definitely a good intention! But did anyone calculate that such a decision could lead to fatal consequences for the lives of territorial communities? Has anyone calculated the billions of aid that communities provide to the military?

For example, the regional and local budgets of the Lviv region over the 8 months of this year allocated more than 3 billion hryvnia to support military formations and the needs of internally displaced persons.

Thus, the Lviv Regional Administration - 1 billion 230 million UAH, local budgets of the region (Lviv, Yavorov, Novoyavorovsk, Solonka, Chervonograd, Zolochiv, Sambir, Stryi) - 1.8 billion UAH. With these funds, military units subsequently purchased the military supplies and equipment they needed.

Community leaders, of course, were taken by surprise by the news about personal income tax. It is not clear why it is necessary, in such difficult times, to shake the foundation of every strong country - a financially sound and stable territorial community.

It was the personal income tax that formed the lion's share of the income of local budgets, in particular territorial communities. In recent years, one of the main elements of the decentralization reform has been implemented - strengthening the autonomy and financial independence of local governments.

According to various estimates, thanks to this reform, which is called the most successful, the budgets of territorial communities collected from 5% to 120% more local taxes, and communities began to spend them on their own needs.

We have all seen how our villages and cities have changed. There is a motivation to work for results, attracting new business, creating new jobs and, accordingly, increasing tax revenues.

About 60% of own income comes from personal income tax. Money for communities locally! Wasn’t this the slogan behind decentralization? What awaits the community now? I will give a few figures and examples from the near future of life in the Lviv region.

For the Lviv region, the implementation of the proposed innovations will lead to a reduction in personal income tax revenues in the amount of 7.7 billion hryvnia. And this is a quarter of the revenues of the general fund of the regional budget.

It is worth noting that these payments went to local budgets even before full-scale hostilities, at their expense services were provided to military personnel and members of their families. The war in Ukraine has been going on since 2014!

It is also planned to reduce the standard for personal income tax deductions to the budgets of territorial communities by 4%, which is about UAH 770 million. Thus, the volume of all local budgets of the Lviv region will decrease by UAH 8.5 billion, or more than 20%.

By the way, every year the Lviv region asks the central government to take into account the budget indicators of the city of Kyiv when calculating the volume of basic and reverse subsidies in equalizing the financial viability of local budgets. But in vain!

To understand the scale of the problem, it is necessary to find out what the alignment mechanism is. As a result of the implementation of the decentralization reform, local budgets began to receive directly more financial resources.

But despite this, some communities, for objective reasons, cannot finance their needs from the funds they earn and need help. These are depressed areas, mountainous or sparsely populated territorial communities. Therefore, the state has provided a mechanism that makes it possible to provide additional financial resources to such local budgets, that is, horizontal equalization of tax capacity.

Its peculiarity lies in the fact that the funds necessary for the budgets of “weak” communities are obtained from the budgets of “richer” ones. Equalization is carried out by withdrawing resources from richer local budgets to the state budget (reverse subsidy) to provide them in the form of a basic subsidy to poorer local budgets. That is, the mechanism already exists, and it has been successfully tested for years.

According to many experts, the exemption of the city of Kiev (which has one of the richest budgets) from participation in equalizing the financial viability of local budgets violates the principles of unity and fairness of the budget system of Ukraine and leads to significant losses of the financial resources of other territories in terms of basic and reverse subsidies.

Only the current losses of the Lviv region in connection with the above amount to more than 720 million hryvnia. It turns out that some are equal, and some are more equal.

I would like to draw attention to one more thing: if the state takes funds from local budgets, then it must also take over for its maintenance those institutions and institutions that were maintained by the communities. Because after the personal income tax is withdrawn, they will not be able to finance them in the future.

During 2017-2023, the volume of additional subsidies decreased by more than 5 times, and the volume of expenses for transferred powers doubled.

In the context of the withdrawal from local budgets in 2024 of a significant financial resource in the form of personal income tax from the monetary support of military personnel, a decrease in the standard of deductions from personal income tax by 4%, a 30% reduction in the volume of the basic subsidy, as well as an increase in the wage fund by 15% - 16%, progressive inflation processes - up to 12.5%, it will be extremely necessary to increase several times the volume of additional subsidies for the implementation of expenses transferred from the state budget for maintenance of educational and health care institutions for local budgets.

It is also necessary to pay attention to the insufficient volume of educational subventions for the next year in connection with the expected increase in the average salary of teaching staff by 17.4%. To ensure high-quality educational services and pay wages to education workers in full, it is not enough to increase the volume of educational subventions for 2024 in Ukraine as a whole by only 12.8%.

Everyone will agree with me that education is one of the basic foundations of progress and development of our country. But without decent pay for teachers, even during war, we will not achieve the desired result.

Subventions from the state budget to local budgets to support institutions and activities in the healthcare system for 2024 are not yet included in the indicators of interbudgetary transfers for local budgets announced by the Ministry of Finance of Ukraine.

The current 145 million UAH were allocated for the maintenance of orphanages, blood service institutions, the forensic medical examination bureau, medical and social expert commissions, the maintenance of offices for testing drivers for alcohol or drug intoxication, the provision of therapeutic food products for children under three years of age, therapeutic nutrition of children with rare diseases identified by neonatal screening.

And the volume of the mentioned subvention in 2023 provided only half of the need for funds for the maintenance of medical institutions that remained in the financing of the regional budget. The rest were additionally financed through taxes and payments from the regional budget.

The total amount of funds from the regional budget for the Comprehensive Program for Supporting the Healthcare Industry today is more than 1 billion 24 million UAH. Therefore, the complete absence of a subvention will worsen the state of the regional budget and the healthcare industry.

To ensure quality medical services, it is necessary to double the current volume of subventions in the draft state budget for next year. Therefore, I hope that the Ministry of Finance of Ukraine will take these nuances into account when forming the budget for next year.

It is also worth adding that education and medicine services are used not only by military personnel and members of their families, but also by internally displaced persons. More than 200 thousand IDPs are officially registered in the Lviv region, and about 600 thousand people are unofficially registered.

In general, if the personal income tax of military personnel is taken away from communities, then the financial potential of local budgets in the region next year will decrease by a third. Already today, 72% of local budget resources are allocated to wages, energy, social benefits, scholarships, medicines and food.

And if we take into account the growth of average wages in accordance with the growth of an employee’s official salary (17.4%), energy prices and tariffs (12.5%), inflationary processes (10.8%), then local budgets will need about 4.0 billion UAH additionally.

Not to mention the minimum development costs, if the majority of local budgets do not have financial resources for priority expenses without the right to dispose of personal income tax.

There is also an acute question regarding registered military formations on the territory of communities. There are often cases when leaders of both communities and military units conduct “negotiations” on more interesting conditions for registration or re-registration.

And all because of the high personal income tax of military personnel. Today it happens like this: whichever territorial community is ready to allocate the maximum amount of funds to a military formation is where the military is registered.

Such “manipulations” within or at the end of the current year create an imbalance in the relevant local budgets. And the Ministry of Finance or another department should definitely pay attention to this and somehow “regulate”.

In conclusion, I want to emphasize that the issue of the effectiveness and priority of communities’ use of military personal income tax funds, of course, must be considered. During a war, it is unacceptable to spend money on unimportant things that can wait for now. The priority is to ensure our victory and support the Ukrainian Armed Forces.

But the issue of personal income tax is not only about paving stones or roads. The issue of personal income tax is education, security, medicine, that is, basic social security and the creation of living conditions for residents of communities. And when adopting certain changes to legislative and regulatory acts, there must be an objective and fair distribution of financial resources between all local budgets of the country.

Therefore, it may be worth considering the option of transferring some part of the personal income tax of military and law enforcement officers to the state budget. But definitely not everything!