The Ministry of Finance of Ukraine estimated that the resources of local budgets in 2023 will amount to UAH 605.1 billion, of which UAH 184.2 billion - transfers from the state budget. Today, local budget expenditures are mainly aimed at overcoming the challenges of war and solving social problems of community residents and internally displaced persons, as well as providing assistance to the Armed Forces of Ukraine. To support the financial sustainability of communities, the government has introduced several new mechanisms and instruments.

How did local budgets perform in 2022? What are the key challenges and novelties for 2023? Are there any plans to amend Resolution No. 590 to expand the list of priority expenditures for local budgets under martial law? These issues were discussed by participants of the coordination meeting "Local Budgets 2023: Challenges and Prospects" organized by the USAID HOVERLA Activity in cooperation with the Ministry of Finance of Ukraine and the State Treasury Service of Ukraine. The event was attended by representatives of central government agencies, regional military administrations, international organizations, local governments, and experts.

 

 

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Marat Kyurchevsky, USAID Ukraine Project Management Specialist, noted that local governments have demonstrated their ability to respond to challenges due to the results of decentralization and the support of partners:

“The problematic issues of local budgets became even more urgent during the war, when one obvious need was added - to win. This primarily concerns the assistance of the army, as well as the financing of many issues of the rear: infrastructure recovery, the needs of IDPs, assistance to relocated businesses, current expenses, financing of development and recovery projects. Local self-government has shown itself to be the best in responding to the crisis and has taken upon itself to provide solutions to many problems. Representatives of local self-government bodies gained significant experience during the reform, while the Government and international partners, including USAID, made efforts to strengthen the capacity of local governments in efficient resources management,” said Marat Kyurchevsky.

 

 

“Transparency in governments is key for the building of a democratic society. With a goal of encouraging transparency in governments, today we raise one of the most crucial issues for Ukrainian communities and that is budgets. USAID HOVERLA Team conducts monthly monitoring of the budgets of its 65 partner communities. The analysis has shown that despite the decrease in revenues from local taxes and fees, communities manage to effectively use available resources, quickly adapting to new circumstances. USAID HOVERLA Activity works closely with our partner communities and supports them by conducting thematic trainings, workshops, and consultations as well as distributing the latest legislative updates, and providing an overview of relevant financial documents. We believe that these efforts help local governments, especially in this time of emergency,” Gabriel Abraham, USAID HOVERLA Activity Chief of Party noted.

 

 

In the context of martial law and economic instability, local budgets face a heavy burden. To support them in 2023, the government is introducing a new mechanism - an additional subsidy for the exercise of powers of local governments in the de-occupied, temporarily occupied, and other territories of Ukraine that have been negatively affected. The envisaged amount of the transfer is UAH 24 billion, which will be distributed following the established procedure in several stages. The first stage will take into account the number of IDPs and personal income tax (PIT) revenues for 2022. At the next stage, it will be distributed quarterly, taking into account the actual PIT revenues to local budgets for the quarter.

According to Denys Uliutin, First Deputy Minister of Finance of Ukraine, a fund for the liquidation of the consequences of armed aggression in the amount of UAH 52.5 billion has been created in the state budget to restore the destroyed facilities.

"The money from this fund will be used to restore critical infrastructure, housing, and other priority measures. However, there is a mandatory requirement to receive funds - recovery plans approved by local governments. We understand that the damage is quite extensive, there are not enough funds, and such plans are needed to prioritize reconstruction based on a comprehensive approach."

 

 

The issue of resource support for the single treasury account remains relevant this year. Therefore, the Resolution of the Cabinet of Ministers of Ukraine No. 590 "On Approval of the Procedure for Exercising Powers by the State Treasury Service in a Special Regime under Martial Law" continues to be in force. It sets the priorities of budget expenditures for both the general and special funds, including local budget expenditures for the maintenance and repair of critical infrastructure, the purchase of municipal equipment, the construction and purchase of housing for IDPs, and other important areas.

"Ensuring sufficient liquidity of the State Treasury Fund for the implementation of priority defense sector expenditures is our main task, and local governments can contribute to its fulfillment. Available balances on the accounts of local budgets can be used to purchase government securities instead of placing them on bank deposits. This is beneficial for local governments and provides an additional resource for the realization of our common priority - security and defense," Denys Uliutin emphasized.

Tetiana Sliuz, Head of the State Treasury Service of Ukraine, confirmed the expediency of purchasing domestic government bonds instead of placing available local budget funds on deposit accounts in state-owned banks, as required by law. The Head of the State Treasury Service emphasized that, compared to interest rates on deposits, the purchase of domestic government bonds is more profitable and is a significant assistance to the national security and defense sector of Ukraine. Tetiana Sliuz also noted that to make the process of treasury services for managers and recipients of budget funds and other clients more efficient and effective, the State Treasury Service of Ukraine has implemented a remote customer service system through the Treasury Client - software and hardware complex. This allows managers and recipients of budget funds to reduce time and other expenses for cash management services:

"Unfortunately, we have a significant part of the occupied territories. Not all local governments were able to move to the government-controlled territory. Some fund managers have moved to the government-controlled territory and perform their functions remotely. All social payments, including pensions, are made in the occupied territories following the law. Payments are made with the approval of the Heads of the relevant Regional military administrations. There are cases when representatives of the Treasury were unable to leave the occupied territories, and according to Resolution No. 590, their powers were transferred to other Treasury bodies. As for those local budgets that do not exercise their powers, their funds will be kept until the territory is liberated and the relevant local governments resume their work."

 

 

According to Serhii Solomakha, Head of the Myrhorod city municipality in Poltava Oblast, this year's budget is the same as the last year's - UAH 580 million. Almost UAH 300 million is personal income tax, and another UAH 100 million is an educational subvention. A significant percentage of revenues comes from local taxes: land, real estate, and single tax.

"If we talk about budget challenges, local budget funds will never ensure the full exercise of all powers. The more financial resources there are, the more opportunities we have to use them for development and meeting the needs of citizens. In terms of expenditures, 68% of our local budget is directed to the social sphere, namely education, social protection, and healthcare. It also includes road repairs and infrastructure development. Educational subvention has been reduced this year (about UAH 23 million for our municipality), so we plan to compensate for this from the local budget. I would also like to emphasize the problem of increasing tax debt. In particular, changes to budget and tax legislation have led to a decrease in actual tax revenues to the local budget. As for the remaining funds, almost half of them are used by the municipality to help the military, the State Emergency Service, and the police. Despite all these challenges, the budget remains realistic. And in these conditions, we ensure the provision of quality services to the population in all spheres of life," said Serhii Solomakha.

 

 

The coordination meeting "Local Budgets 2023: Challenges and Prospects" was aimed at discussing issues of local budget implementation, main priorities and challenges in 2023, and suggesting ways to address them.

The presentation of the USAID HOVERLA Activity expert is available here.