Ukrainian President Yictor Yushchenko's new administration unveils a revised 2005 budget on Saturday designed to rein in his predecessor's excesses without upsetting voters a year ahead of a key parliamentary election. Two months after taking power, the government is scrambling to control a ballooning public sector deficit which economists say could rise to at least six percent of gross domestic product (GDP) if no action is taken to boost revenues or cut spending.
The huge deficit, which some economists say could be even higher than official estimates, is a bitter legacy inherited from former Prime Minister Viktor Yanukovich, defeated by Yushchenko in last year's presidential election.
Finance Minister Viktor Pynzenyk on Saturday proposed adjusting the budget deficit to 5.4 billion hryvnias, equivalent to 1.5 percent of gross domestic product, largely from a selloff of state assets.
He also reiterated an earlier forecast that GDP would grow by 8.2 percent this year, down from 12 percent in 2004.
He said the government was planning to raise more money by scrapping tax exemptions for many businesses and by running state monopolies more efficiently.
Special economic zones, which granted a tax holiday to many businesses in large swathes of the ex-Soviet state, are also likely to be abolished and a more simple tax code is to be adopted as part of a crackdown on mass tax evasion.
In a desperate effort to buy popularity ahead of last year's presidential election, Yanukovich doubled pensions and hiked civil servants' salaries.
"What they did was totally irresponsible. Very few people understand the gravity of what Yanukovich did," said an independent Kiev-based economist, who asked not to be identified.
The pension increases alone, which Yushchenko has vowed not to roll back, cost $3.8 billion a year, or a staggering 5.8 percent of GDP, based on conservative forecasts of econmomic growth in 2005.
"We have gigantic benefits and we must surely have the highest pensions among the former Soviet republics," said Oleksander Paskhaver, President of the Centre for Economic Development, an independent thinktank. "The provisions made by the government are incompatible with its economic capabilities," said Pashkaver, who served as an adviser to former President Leonid Kuchma during his first term in office.
With the government trying to rein in inflation, which was more than 12 percent in 2004, it is all the more vital that the public sector deficit be tamed.
"There is a question whether they can they meet the (social) obligations and keep inflation under control," Paskhaver added.
Prime Minister Yulia Tymoshenko, who is chairing Saturday's cabinet meeting, has her eye on a parliamentary election next year, which offers her a vital opportunity to secure a power base.
Economists say the government still needs to cut back Ukraine's overblown bureaucracy to bring public accounts permanently into balance, a task it is unlikely to take on before the March 2006 election.
"The government will need to finance this deficit and plans to use privatisation receipts for this purpose," said the independent economist.
"But this is a temporary one-shot solution that cannot be counted as a solution for the medium term."
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