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The government introduces the inter-budget relations reform

“After many consultations we [the government] decided to start the inter-budget relations reform vital to the regions. We will not wait for the constitutional reform and start the new budget planning, possibly for 2015, on the new basis, given that the parliament supports us”, said Aleksandr Shlapak, adding that the reform is based on Poland and Germany experiences.

Aleksandr Shlapak named six general lines of the inter-budget relations reform. The first one is providing budget autonomy and financial independence for the local budgets. “On condition that our suggestions are accepted, the local budgets can start creating their own budgets independently, without relying on the central budget”, said Mr Shlapak. He added that having a sound income base for local budgets, as well as estimated figures of dotation and subvention costs provided by the state budget, the regions could start creating their budgets. The only requirement is to adopt the budget until December 25 of the current year. “In case if the state budget will have different core figures, the local budgets will have to adjust”, he said. Besides, the government offers the budget-funded institutions to choose the financial services on their own: the Treasury or the commercial banks. Aleksandr Shlapak also noted that the government facilitates the procedures for the administration of guarantees introducing the principle of implied invitation. 

The second important line of the reform is to stimulate the communities to unite into efficient territorial communities. According to the Minister, the reform offers transition to the two-level system of inter-budget relations: “The first level is regions, the second level is the cities of region sub-ordinance, districts and territorial communities.” He added that territorial communities established before October 15 will receive the support of the central budget starting from January 2015. 

The most important step in the reform is to fix the solid income and to extend the income basis for local budgets. Aleksandr Shlapak noted that the “basis tax for the local budgets is personal income tax.” “We will enable the local budgets to use a range of important resources, which will significantly increase the income on the local level. 10% of tax on profits will provide additional 4 billion UAH. It is administration services payment, it is 100% of the government fees. Concerning the ecological tax, up to the date 35% of it falls under the local level and 65% is paid to the central budget.  We suggest leaving 80% of ecological tax on the local level”, said Mr Shlapak.

In his view the local communities will have the right to determine the amount of the excise goods tax: “We [the government] will only determine the above margin”. Mr Shlapak pointed that communities at the local level will have the right to determine and organize the real estate tax collection: “Taken together, it will give the budgets 16 billion UAH income.”

“As a result, in addition to personal income tax and real estate tax, we will transfer a range of other taxes to the local budgets. We believe it will significantly increase their financial independence”, he stressed. 

Another important element of the reform is introducing the new transfers and enhancing responsibility of the ministries for the implementation of governmental policies. Aleksandr Shlapak said that the reform provides for only one basic dotation to the district budgets, the cities of region sub-ordinance, circuits and territorial communities. Besides, the medical and educational subvention will be introduced, as well as specific state medical programs subvention, personnel trainings subvention, and reverse subsidy from local budgets to the state budget. “With the help of these subventions, in other words these are the assets that belong to the local budgets, they will be calculated in specific ministries and departments, and not in the Ministry of Finances, as it is done today”, said the Minister. He added that the new budget amendments include the principle of assets retention meaning that the unspent money from subventions will be retained for the next year developments. 

The final line in the budget reform is a new mechanism for budget regulations and leveling system. According to Aleksand Shlapak, “as to the leveling system, all participants will be divided into three groups”. “The first group covers those who have the income per person index of more than 1. These are mainly big cities, 6 large regional budgets, 70 cities of region sub-ordinance, 26 circuit budgets. Thus the excessive income will be transferred to the central budget, but taking only 50%, and not 100% as was the case earlier. For those with 0,9 to 1,1 index – there will be no changes. For them the basic subvention equates to the leveling subvention. For the third group – those are regional budgets, 39 cities of region sub-ordinance and 25 circuit budgets, - we will add 80% of resources”, said the Minister.

“We understand that this is just a first step in the inter-budget relations, but it is important for us that it changes the entire philosophy of these relations: with regards to the independence of the local budgets, the relations between specific ministries and the local budgets, the possibility of independent budget creation, and many other issues”, summarized the official. He said the in September the draft project of the reform will be filed to the parliament. Then it will be discussed and negotiated by the parties during two or three months. “We will carefully consider suggestions and provide the parliament with the amended project for the final review”, added Aleksandr Shlapak.


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