• Українською
  • Public Finance Reform

    The key purpose of this reform is to provide proper funding of the state's functions in the context of an effective distribution and use of financial resources.

    The main factor of successful achievement of this purpose is an effective and transparent operation of the public finance management system.

    Why change anything?

    Though Ukraine's public finance system has a number of positive properties, it is still characterized by significant shortcomings that undermine social and economic wellbeing and create noticeable obstacles to the consolidation of Ukrainian economy.

    For example, an under-performing system of allocation and use of budget funds results in an under-funding of top-priority objectives facing the Government. Another problem is associated with fiscal policy, which has long been unpredictable in the medium term. As a consequence of this unpredictability, taxpayers do not know what taxes will be introduced in the near future, public institutions do not know the scope of funds that will be available to them in the medium term, and people do not know what purposes budget funds will be allocated for and what public services they can count on.

    Lack of an integrated system of strategic planning prevented appropriate budgeting and resulted in a weakening connection between budget programs and the country's development priorities.

    These and other factors stop investment from flowing in, result in ineffective use of limited resources and people's dissatisfaction with public services.

    What is the reform about?

    1. Modifying the budgeting approach

    A radical shift in approaches to the management of budget funds is a prerequisite for the country's achievement of its strategic priorities.

    Now the country's budget is based on revenue and actual opportunities rather than spending and preferences. This change in the approach to funding budget programs made it possible to initiate systemic reforms in a number of sectors, including education and science, health care and social security.

    Key principles applied during budget planning:

    • Realistic. All government spending should be supported with revenue, which is a foundation for a balanced budget.
    • Transparent. Projected revenues are checked and acknowledged by independent experts and representatives of the civil society.
    • Prioritized. Concentration on specific areas instead of dissipating funds on hundreds of programs in different areas.
    • Focus on future growth. Through this reform, the Government has shifted to the medium-term budgetary framework. Fiscal policy predictability and multi-year projections will enable systemic profound reforms, improve investment appeal and business climate.

    The new budgeting approach will strengthen the connection between strategic priorities of public policy, budget spending and key spending units, produce consistency of the fiscal policy and fiscal discipline, align the approaches of the legislature and the executive in determining the medium-term fiscal policy, and increase the budget process participants' liability for decisions they make.

    2. Developing the program-based budgeting method

    The program-based method is a budgeting approach centered on outcomes to be achieved by using budget funds instead of on the amount of funds the Government needs to perform its functions.

    Further improvements to the program-based method are an integral component of the budget reform intended to increase the key spending units' liability for their performance, provide information to the society about the scope and quality of public services, and require a more efficient use of funds by key spending units.

    In 2018, the Ministry of Finance of Ukraine created a legal foundation for the introduction of a medium-term budgetary framework and further enhancement of the program-based method. Improvements were made to certain rules of the Budget Code that govern relationships arising out of execution of budgets, reporting on their execution, control of budgetary compliance, and the issue of liability for its violations.

    3. Improving fiscal risk management

    Fiscal risks are factors that can reduce budget revenues and/or cause additional spending and, as a result, increase the budget deficit and public debt compared to targets.

    Lack of a comprehensive system for managing such risks is a key factor affecting the stability of public debt and the effectiveness of resource allocation based on public policy priorities. Ukraine's public finance is especially sensitive to fiscal risks associated with state-owned enterprises and the management of state property, public debt and government guarantees, changes in the country's macroeconomic situation.

    In 2017, the Ministry of Finance prepared and incorporated Information on Fiscal Risks and Their Potential Impact on the 2018 National Budget in the 2018 budget documentation for the first time. In Ukraine, introduction of a comprehensive fiscal risk management system to minimize their impact on the National Budget figures started in 2018.

    4. Verifying government benefits

    The government should only provide welfare benefits to those who are in real need of them, and the system for their allocation should be more effective, fair, and efficient. To avoid abuse and wastefulness, the Ministry of Finance of Ukraine is introducing verification of government benefits.

    Verifying subsidies. The purpose behind verification of utility subsidies is to identify those granted unlawfully, including to persons who have purchased durable goods worth UAH 50,000 or more, a vehicle, apartment, land lot etc., and persons getting several subsidies at a time. Besides, verification also identifies the so-called "dead souls" (dead people still accounted for living). In 2017, spending units acknowledged over UAH 3 mln in violations as a result of verification of utility subsidies.

    New model of funding of Ukraine's health care system. The county will shift from maintaining a network of state- and community-owned health care institutions (buildings, beds, personnel regardless of the scope and quality of medical services provided to people) to paying for their actual operating results.

    Making spending on higher education more transparent. In practice, government funding of the training of experts and specialists is driven by the need to maintain a higher educational institution instead of being based on the actual demand for such professionals. There is an annual shortage of applicants for government-funded places, while public spending on higher education does not go down. As a result, UAH 1.2 bn in public funds have been used ineffectively in the past 4 years alone.

    In 2019 and subsequent years, the Ministry of Finance of Ukraine will continue improving and simplifying receipt of government benefits, legislatively regulating major legal and organizational foundations of their verification, enhancing their targeting, and preventing budget losses by verifying information submitted by individuals for the award, commitment, and/or payout of all types of government benefits.

    5. Enhancing public internal financial control 

    Introduction of managerial accountability, when managers of different levels are fully aware of and responsible for effective management of public finance, is a key precondition for making public finance management more transparent. For this reason, key objectives of the Strategy of Reform of the Public Finance Management System (PFMS) include improved managerial accountability and effectiveness of internal controls and internal audit in government agencies.

    The PFMS Reform Strategy identifies 3 major objectives in the area of public internal financial control (PIFC):

    • supporting the operation of the Central Harmonization Unit (CHU) within the Ministry of Finance
    • making internal audit more effective
    • introducing internal controls consistent with PFMS implementation

    Ever since harmonization of public internal financial control was transferred to it in January 2017, the Ministry of Finance has achieved consistency in promoting public internal financial control as an integral part of the systemic reform of public finance management by, for example, evaluating (reviewing) the status of public internal financial control, improving legal regulation based on European best practices, designing and implementing the advanced training program for internal auditors, carrying out pilot PIFC projects etc.

    Plans required for further development of the PIFC system include:

    • amending the regulatory framework of internal audit by introducing strategic planning, signing internal audit declarations, creating audit committees etc.;
    • continuing the advanced training program for internal auditors, holding respective training events, considering the introduction of national certification of internal auditors;
    • introducing government agencies' reporting to the Ministry of Finance on organization of internal controls;
    • carrying out pilot projects on internal controls and internal audit;
    • improving internal controls and internal audit guidance; offering up-to-date clarifications and consultations;
    • conducting external quality assessment of internal audit at ministries, other CGAs and Oblast State Administrations to propose recommended improvements;
    • automating internal controls and internal audit processes by creating and introducing an interactive PIFC portal (as part of the EU4PFM Agreement Project).

    6. Accounting and audit reform 

    Ukraine's cooperation with international organizations and financial institutions, its operations on foreign exchange, securities, and investment markets call for a substantial reform and development of finance management mechanisms nationwide and locally. This drives the need to continue upgrading the accounting system to make information about publicly funded entities' economic position open and transparent. Central and local government agencies need such timely and accurate figures to make real-time and informed decisions on financial management.

    To make public spending effective, it is necessary to build a budget execution accounting system based on the needs of financial management nationally and locally. This system is primarily designed to provide timely consolidated information to support medium- to long-term budget planning and continuous effective control of the use of budget funds.

    Accurate information about the outcomes of budget execution can be obtained when and if a single accounting and reporting methodology for budget execution and accounting at publicly funded institutions adapted to IPSAS (the International Public Sector Accounting Standards) is formed and a single integrated system of primary accounting is introduced. This will provide not only utility but comparability of financial information and a consistent interpretation of economic figures.

    An imperfect regulation of the auditing market in Ukraine caused problems with assuring the quality and reliability of financial statements of enterprises and banks. In turn, this raises bankruptcy risks for such enterprises and banks, undermining trust of potential investors and the general public, and impeding the attraction of investment into the national economy.

    The Ministry of Finance of Ukraine has created a model of reform of the auditing regulatory framework based on European laws, international standards, and global best practices. It was essentially reflected in the draft Law of Ukraine On an Audit of Financial Statements and Auditing. This draft Law proposes an optimally balanced system of public supervision and self-regulation of auditing that was supported by international organizations, regulators, and representatives of this profession, because creation of a clear and thought-through legislative foundation is the first critical step towards building an effective system of regulation of auditing that should ensure a better-quality audit of financial statements for the benefit of the society.

    7. Improving inter-budget relationships 

    The Ministry of Finance of Finance is actively involved in the decentralization of governance by creating adequate material and financial conditions in which local government agencies can properly exercise their own and delegated powers, offering fiscal instruments to accumulate their own resources, and reducing their financial reliance on central government.

    With this reform, budgets of amalgamated territorial communities are gaining equivalent budget powers as those of cities of oblast subordination and rayons, beginning to interact directly with the country's budget and directly getting intergovernment transfers.

    Further enhancement of inter-budget relationships will pivot on the medium-term budgetary framework principles and improvement of the program-based method locally.

    8. Making the budget more transparent 

    Public funds are funds from the budget, that is taxpayers' money. This is the money of Ukrainian citizens, who are entitled to control it. 

    The Ministry of Finance of Ukraine started and continues implementing e-Data, a revolutionary project with an IT platform intended to create complete transparency in public finance.

    The single web-portal for tracking the use of public funds, spending.gov.ua, was fully launched in 2017. Now every Ukrainian has open access to and can check public payments.

    Ukraine's improved ranking in the Open Budget Index, from 46 points in 2015 to 54 points in 2017 (36th out of 115 listed countries) demonstrates the success of the public payments transparency policy.

    9. Monetizing subsidies 

    Subsidy monetization to be introduced in Ukraine is an important and responsible step of the social welfare reform. The move from an obsolete subsidy award model to subsidy monetization is a precondition of energy efficiency and sparing consumption of energy resources.

    Household-level monetization is the ultimate phase of subsidy monetization designed to reform public policy in the area of welfare benefits, their improved targeting, and stronger control of spending in this area.

    Subsidy monetization and the award of "real money" started in March 2019.

    What has the reform changed already?

    • Legislation has been passed to introduce the medium-term budgetary framework consistently at all levels of the budget system.
    • The updated Medium-Term Strategy of Public Debt Management has been adopted for 2018–2020.
    • In 2018, public debt and government-guaranteed debt fell to 60.9% of the projected gross domestic product (compared with 71.8% of GDP in 2017 and 80.9% in 2016). At the end of 2018, Ukraine's public debt to gross domestic product was about 52.2% based on preliminary estimates.
    • Open Budget was commissioned in order to openly show budget figures. The National Budget has become more transparent.
    • In October 2018, Ukraine reached out to the international capital market with USD 2 bn of long-term Eurobonds and demonstrated it could raise funds against the backdrop of an unfavorable market environment.
    • The draft 2019 National Budget was proposed by the Government to the Parliament in due time and, for the first time in more than 10 years, adopted by the Verkhovna Rada before December, as required by the Budget Code.
    • In December 2018, the respectable international rating agency Moody's upgraded Ukraine's sovereign rating in the national and foreign currencies to steady (from Caa2 to Caa1).

    Goals and objectives for the current year

    The Government's 2019 priorities for the implementation of the public finance management system reform include:

    • reforming the civil servant compensation system;
    • drafting and proposing the 2020–2022 Budget Declaration to the Verkhovna Rada of Ukraine;
    • continuing the implementation of the Medium-Term Strategy of Public Debt Management and updating it for 2019–2021;
    • elaborating laws in the area of public finance control to improve their quality and efficiency nationwide, regionally, and locally;
    • standardizing and making uniform approaches to a public finance audit of the execution of budget programs, investment projects and the audit of nationwide (regional) target programs, preventing abuses of national (local) resources.

    Documents and useful links