The Government has submitted to the Parliament of Ukraine proposed State Budget for 2018 supported with the package of legislative amendments, thus initiating a broad discussion on the budgetary framework. Local self-government reform and decentralisation of power are identified as the Government’s priorities. Endorsement of the State Budget for 2018 can either facilitate continuation of decentralisation and re-enforce the achievements of the recent years in running the reform, or nullify them, thus taking a step backward.

The analysis of the proposed amendments demonstrates significant risks for local self-governance in 2018.

1. Regarding subventions for infrastructure development in amalgamated territorial communities (ACs)

The Law of Ukraine “On Voluntary Amalgamation of Territorial Communities” provides for the state financial support of voluntary amalgamation in village, settlement, town territorial communities through granting funds in the form of subventions for establishing relevant infrastructure to amalgamated communities. It is worth noticing that the current legislature does not define the techniques and criteria for estimating its total amount. The estimations were based on the amount of the first AH infrastructure subvention totalling to 1 bln. UAH for 159 AHs in 2016, where the average amount per one rural resident of these AHs was 1107 UAH.

Taking into account the limited financial resources and maintaining reasonable state support of AHs, the minimal estimated subvention for 2018 based on the subvention amount for 2017 per one rural resident, amounts to 764 UAH. Accordingly, the estimated funding for supporting AHs in 2018 should not be less than 2.5 bln. UAH.

2. Regarding the distribution of additional subsidy among the local budgets

Due to the burden on local budgets, the State Budget provides for an additional subsidy to cover the expenditures for maintaining educational and healthcare facilities, transferred from the State Budget, to the amount of 16.5 bln. UAH. However, this estimation includes only oblast budgets, with further distribution of funds by oblast state administrations. This undermines the principle of decentralisation, creates risks of corruption in the process of subsidy distribution, and makes local self-governments (AHs and towns of oblast significance) dependent of the oblast authorities.

3. Regarding State Regional Development Fund

The planned amount of the State Regional Development Fund is 8.1 bln. UAH, which constitutes 1% of the total revenue amount of the State Budget for the planned year. It is for the first time that the planned SRDF amount meets the requirements of Part 1, Article 24-1 of Ukraine’s Budget Code. However, as it has already happened before, the planned amount may be changed with significant portion of funds shifted to the subvention for social and economic development, where the distribution procedure is not transparent and is performed manually.

4. Regarding the mechanism of horizontal equalisation

The draft law on amending the Budget Code of Ukraine (Draft Law # 7116 as of 15.09.2017) proposes to increase the percentage of funds withdrawn from the local budgets (reverse subsidy) from 50% to 80%, thus restricting fiscal development and discouraging local councils from increasing their budget revenues.

5. Regarding subvention for offering municipal services concession rates to certain categories of people

The draft law on amending the Budget Code of Ukraine (Articles 89, 91, 102 Of Draft Law # 7116 as of 15.09.2017) provides for handing over the expenditures of municipal services concession rates for certain groups of population, to local budgets. These expenditures are not supported with sufficient resources which were provided to the local budgets in the form of subvention to implement national social protection programs. This will result in additional burden for local budgets estimated to exceed 7 bln. UAH. Handing over of the expenditures related to the state’s social obligations to the level of local governments infringes on the principle of subsidiarity and restricts local self-government authorities.

6. Regarding handing over the expenditures to fund public higher educational establishments and vocational education

The draft of the State Budget for 2018 proposes to hand over to local budgets the funding of higher educational establishments (accreditation levels I-II, 426 facilities – see Attachment 10 to the draft Law) with the total amount of 6.3 bln. UAH over to local budgets.  Transfer of spending powers without sufficient financial resources will result in local budget deficits, problems with financing of these facilities and worsening of the quality of higher education services.

The issue of funding vocational education at the level of towns – oblast capitals at the cost of relevant local budges also remains unsolved. Vocational education is the issue of the regional level, and the solution lies within the authority of oblast state administrations and oblast councils.

7. Regarding ensuring direct fiscal arrangements with amalgamated territorial communities

In distribution of budget transfers among the local budgets which have direct fiscal arrangements with the State Budget, the proposed State Budget for 2018 takes into account only 22 new AHs out of 47 where elections were held in April this year. The estimates also do not cover the AHs in which the elections will be held on 29 October 2017 (201 AHs) and in December 2017 (over 60 AHs). Failure to take into account the amount of budget transfers to newly formed AHs in the proposed State Budget may affect the process of decentralisation and cause mistrust in the reform.

8. Regarding excise tax on fuel

The draft law proposes prolongation of the 13.44% excise tax on fuel produced in Ukraine and imported to Ukraine which was introduced on 1 January, 2017, to 2018-2019, to be credited to local budgets.

However, due to the changes in the mechanism of excise fuel tax allocation, local budgets failed to receive the funds in 2017, namely, there was a three months delay in funds receipt, resulting in late crediting of funds to the budgets (in July – September local budgets did not receive about 1.5 bln. UAH in due time).

9. Regarding concession fares for public transportation services for certain groups of people

The responsibility of covering the costs related to offering concession fares to certain groups of people was shifted to local budgets, which results in losses incurred by local self-governments and growing debts to service providers. The estimated losses incurred by local budgets in relation to the provision of services guaranteed by the Government, will be 2.5 bln. UAH.

10. Regarding crediting lottery license fee to the budgets of AHs and towns of oblast significance

The draft law on amending the Budget Code of Ukraine (Draft Law # 7116 as of 15.09.2017) proposes crediting the lottery license fee to State and local budgets (amendments to Articles 29, 64, 69). However, the draft law does not provide for crediting of this fee to the budgets of towns of oblast significance and AH budgets (provides only for the budget of the city of Kyiv, the budgets of the towns of rayon significance and settlements).

In this regard, the largest coalition of NGOs “Reform Reanimation Package” calls the Cabinet of Ministers of Ukraine and the Parliament of Ukraine for actions to prevent the negative consequences of 2018 State Budget for local self-governance, namely:

1. Increase the defined amount of infrastructure subvention for AHs from 1.9 bln. UAH to 2.5 bln. UAH.
2. Establish strict procedure of re-allocating the additional subsidy for maintenance of health and education facilities handed over from the state budget, amounting to 16.5 bln. UAH among the budgets having direct fiscal arrangements with the State Budget (including AHs and towns of oblast significance budgets).
3. It is essential not to suspend Article 24-1 of the Budget Code of Ukraine related to the formation of the SRDF total amounting to no less than 1% of the estimated State Budget total and not to repeat the practice of 2017, when the SRDF funds were split into subventions “with manual distribution”, like the subvention for social and economic development of some territories.
4. Changing the mechanism of local budget horizontal equalization is possible only in case of comprehensive solution to the problem, including ensuring sufficient funds to cover for the state obligations related to social benefits, compensations, and guarantees defined by the Laws of Ukraine, appropriate finding of education and healthcare through issuing subventions to local budgets from the State Budget, and prohibiting local governments to place funds to bank deposit accounts.
5. The proposed State Budget for 2018 must provide for the necessary amount of subvention to offer concession municipal service rates to some categories of people. It is essential to prevent shifting the burden of paying the outstanding amounts for such services for the preceding years.
6. The proposed State Budget for 2018 must provide for the financial resources for the local budgets to cover the funding of higher educational establishments (accreditation levels I-II) totalling to 6.3 bln. UAH
7. Include funds for vocational education to oblast budgets, as defined in the Concept of Local Self-Government and Territorial Organization Reform in Ukraine.
8. Make direct fiscal arrangements between all capable AHs in which elections were or will be held in 2017, and the State Budget.
9. Improve the mechanism of crediting the excise fuel tax to local budgets, including imposing of excise tax on retail fuel sales and crediting it to the budgets of AHs, towns of oblast significance and oblast budgets (with further reallocation to other budgets). This will ensure timely receipt of funds, cost allocation and motivation of local governments to effectively use the revenues from this tax.
10. Ensure transition to targeted financial aid to citizens or provide for subvention to local budgets for offering concession public transport fares to certain categories of population.
11. Ensure crediting part of lottery license fee defined by the Cabinet of Ministers of Ukraine, to the municipal budgets of Kyiv and Sevastopol, to municipal (towns of oblast significance) budgets and the budgets of amalgamated territorial communities.