CEPR-乌克兰战后宏观经济框架（英）

POST-WARMACROECONOMIC

FRAMEWORKFORUKRAINE

RAPIDRESPONSE

ECONOMICS

3

TorbjörnBecker

BarryEichengreen

YuriyGorodnichenko

SergeiGuriev

SimonJohnson

TymofiyMylovanov

MauriceObstfeldKennethRogoff

IlonaSologoubBeatriceWederdiMauro

Post-warmacroeconomicframeworkforUkraine

CEPRPRESS

CentreforEconomicPolicyResearch

187boulevardSaint-Germain|75007,Paris,France

33GreatSuttonStreet|London,EC1V0DX,UK

Email:cepr@

Web:

ISBN:978-1-912179-63-3

Copyright©CEPRPress,2023.

WITHSUPPORTOFCEPRPARIS

FOUNDINGPARTNERS

Post-warmacroeconomicframeworkforUkraine

TorbjörnBecker,StockholmSchoolofEconomics,andCEPRBarryEichengreen,UniversityofCalifornia–Berkeley,andCEPRYuriyGorodnichenko,UniversityofCalifornia–Berkeley,andCEPRSergeiGuriev,SciencesPo,andCEPR

SimonJohnson,MassachusettsInstituteofTechnology,andCEPRTymofiyMylovanov,KyivSchoolofEconomics,andCEPRMauriceObstfeld,UniversityofCalifornia–Berkeley,andCEPRKennethRogoff,HarvardUniversity,andCEPR

IlonaSologoub,Editor,VoxUkraine

BeatriceWederdiMauro,GraduateInstituteGeneva,andCEPR

CENTREFORECONOMICPOLICYRESEARCH(CEPR)

TheCentreforEconomicPolicyResearch(CEPR)isanetworkofover1,700researcheconomistsbasedmostlyinEuropeanuniversities.TheCentre’sgoalistwofold:topromoteworld-classresearch,andtogetthepolicy-relevantresultsintothehandsofkeydecision-makers.CEPR’sguidingprincipleis‘Researchexcellencewithpolicyrelevance’.ItwasfoundedintheUKin1983,whereitisaCharity,andinNovember2019CEPRinitiatedthecreationofanAssociationunderFrenchlaw,inordertoprovideavehicleforanexpansioninFrance.ThemembersoftheConseild’AdministrationoftheAssociationareidenticaltotheUKBoardofTrustees.

CEPRisindependentofallpublicandprivateinterestgroups.IttakesnoinstitutionalstandoneconomicpolicymattersanditscorefundingcomesfromitsInstitutionalMembers,projectsthatitrunsandsalesofpublications.Becauseitdrawsonsuchalargenetworkofresearchers,itsoutputreflectsabroadspectrumofindividualviewpointsaswellasperspectivesdrawnfromcivilsociety.CEPRresearchmayincludeviewsonpolicy,buttheTrustees/membersoftheConseild’AdministrationoftheAssociationdonotgivepriorreviewtoitspublications.TheopinionsexpressedinthisreportarethoseoftheauthorsandnotthoseofCEPR.

ChairoftheBoard

SirCharlieBean

FounderandHonoraryPresident

RichardPortes

President

BeatriceWederdiMauro

VicePresidents

MaristellaBotticiniPhilippeMartinUgoPanizzaMarReguantHélèneRey

ChiefExecutiveOfficer

TessaOgden

Contents

Forewordvi

ExecutiveSummaryvii

I.Introduction1

II.FiscalPolicy2

III.MonetaryandFinancialSectorPolicies19

IV.LabourMarket30

V.RegulatoryEnvironment32

VI.ConcludingRemarks33

References35

RAPIDRESPONSEECONOMICS

Foreword

vI

ThisisthethirdtitleinCEPR’sRapidResponseEconomicsseries,whichisdesignedtopublishresearchonmajorpolicyissueswiththeutmostspeed.

Post-warmacroeconomicframeworkforUkraine,byTorbjörnBecker,BarryEichengreen,YuriyGorodnichenko,SergeiGuriev,SimonJohnson,TymofiyMylovanov,MauriceObstfeld,KennethRogoffIlonaSologubandBeatriceWederdiMaurobuildsonpreviousanalysisforwartimemacroeconomicpoliciesandoffersacomprehensivemacroeconomicframeworktailoredforthepostwarperiod.Thereporthighlightsthesignificanceof

sustainablepublicfinances,soundmonetarypolicy,apredictableandfairregulatoryframework,andflexiblelabourmarketsasthecornerstonesofsuccessfulreconstruction.

TheauthorsacknowledgetheenormouschallengesaheadforUkraine,includingstrainedpublicfinancesandtheneedtogeneraterevenue.Thereportoutlineshowthepolicymixmustworktogethertodeliverastablemacroeconomicenvironmentthatenablestheefficientallocationofresources,fosterssustainableeconomicgrowth,supportshumancapitaldevelopment,attractsforeigndirectinvestment,facilitatestechnologicaladvancements,andcontributestovariousaspectsofthereconstructionprocess.

Overall,thisreportactsasaplatformtofacilitateadditionaldialogueandpolicydiscussionregardingthereconstructionofUkraine.IthighlightsthecrucialrolefortheUkrainiangovernmentanditscitizensinshapingamodernnationwithstrongdemocraticfoundationsandasustainableeconomy.Theobjectiveofthisreportistomakeameaningfulcontributiontotheachievementofthatsuccess.

CEPR,whichtakesnoinstitutionalpositionsoneconomicpolicymatters,isdelightedtoprovideaplatformforanexchangeofviewsonthisimportanttopic.

TessaOgden

ChiefExecutiveOfficer,CEPR

July2023

POST-WARMACROECONOMICFRAMEWORKFORUKRAINE

ExecutiveSummary

Morethan500dayssincethestartofthefull-scaleRussianinvasionin2022,thescaleofdestructioninUkraineisstaggering:millionsofinternallydisplacedpersonsandrefugees,hundredsofthousandskilledorinjured,andmanyhomesinruins.However,eveninthisdarkhour,itisvitaltodevelopplansforUkraine’sreconstructionsothattherecoverycanstartassoonaspossible.Thepurposeofthisreportistoproposeamacroeconomicframeworkforthepost-warperiod(someoftheserecommendationscanbeimplementedearlier)thatcansupportasuccessfulrecovery.Westressthatsustainablepublicfinances,soundmonetarypolicy,apredictableandfairregulatoryframework,andflexiblelabourmarketsprovidethefoundationforthesuccessofhumancapitaldevelopment,foreigndirectinvestment,technologicalleapfrogging,andmanyotherelementsofreconstruction.

Evenwithsignificantforeignaidforpost-warUkraineandaccessto(incomefrom)Russianfrozenassets,publicfinanceswillbestrainedbylimitedtaxrevenues(theeconomyhasshrunk,thelabourforceisreduced,theabilitytoraisetaxeswithouthurtingtheeconomyislimited)andlargespendingdemandstocoverbasicpublicservices,socialsupport,andrebuildingneeds.Tomobiliserevenues,thegovernmentshouldaskforadeepdebtrelief,closeloopholes,broadenthetaxbase,minimisequasi-fiscalrisksfromstate-ownedenterprises,andprivatisetheseenterprises.Onthespendingside,thegovernmentshouldfocusondevelopingmoretargetedaid,consolidatingservices,reformingthepensionsystem,avoidingcreditinterventions,aswellasminimisingtaxbreaks,specialzones,andotherformsoftaxexpenditures.Wealsoadviseestablishingafiscalcouncil,furtheringthedecentralisationreformbyshiftingmoreresourcesandpowerstothelocalgovernments,andcontinuingthedigitalisationofgovernmentservices.

Monetarypolicyshouldreturntoinflationtargetingwithamanagedfloatingexchangerate.Non-performingloansshouldbecollectedinapubliclyowned‘badbank’sothatthecleanedbankscaneffectivelyfacilitatetheflowofcreditintheeconomy.Tominimiseachanceoftheboom-bustdynamicsinthepost-wareconomyandrisksassociatedwiththebankingsystemweakenedbythewar,weadviseusingcapitalcontrolsandmacro-prudentialtoolstocontainpotentiallyexcessivegrowthofcredit,speculativecapitalflows,potentialdollarisationoftheeconomy,andvulnerabilitiesoftheconcentratedbankingsector.Somefinancialrepressionmaybeinevitablebuttherearebetteroptionstoaddresspost-warchallenges.Finally,theNationalBankofUkraineshouldnotserveasadevelopmentbanktofacilitatetherecovery.

Labourmarketpoliciesshouldswitchfromtheapproachthatemphasisestheprotectionofjobstotheapproachthatfocusesonprovidinginsurance.Thelatterwillhelpfacilitateenormouspost-waradjustmentacrossspace,sectors,andskillsinthelabourmarket.Toreducemismatches,thisapproachshouldbesupportedwithremedialeducationandtraining,whichcanbefundedwithdonoraidandbackedwiththeirtechnical

vII

RAPIDRESPONSEECONOMICS

vIII

assistance.Withloomingdemographicchallenges,itiscriticaltoencouragelabourforceparticipationbyallowingflexibleformsofemployment,strongerconnectionbetweensocialbenefitsandearnings,subsidisedchildcare,andrelatedpolicies.Migrationcanhelpcloseworkforceshortages.

Themainobjectivefortheregulatoryframeworkistoprovideafairandpredictableeconomicenvironment.WithaneyetoeventualadoptionofEUregulations,Ukraineshouldconductacomprehensiveauditofcurrentregulationsanduseregulatoryimpactassessmentforweighingcostsandbenefitsoffutureregulation.Althoughsomeefficiencygainscanbeachievedquickly(e.g.byacceptingEUlicenses),otherareas(e.g.antitrustregulation)requiredeepreformstogrowdomesticinstitutionsratherthanoutsourcethem.

AdifficultroadliesaheadofUkraineandonlyUkrainecanaccomplishitshomeworkandtransformitselfintoamoderncountrywithrobust,democraticinstitutionsandadynamiceconomy.TheinternationalcommunityhasofferedUkraineunwaveringsupportduringthewarandforthepost-warperiod.ThedeterminationofUkraineanditspartnersgivesusreasonstobelievethatUkraine’srebuildingwillbeasuccessstoryandwehopethatthisreportwillcontributetothissuccess.

POST-WARMACROECONOMICFRAMEWORKFORUKRAINE

I.INTRODUCTION

1.Morethan500dayssincethestartofthefull-scaleRussianinvasionin2022,thescaleofdestructioninUkraineisstaggering:millionsofinternallydisplacedpersonsandrefugees,1hundredsofthousandskilledorinjured,2manyhomesareinruins.3However,eveninthisdarkhour,itisvitaltodevelopplansforUkraine’sreconstructionsothattherecoverycancommenceonthefirstdayofpeaceinUkraine,ifnotearlier.Indeed,earlyplanningiskeybecauseEuropehasnotfacedanendeavoursomonumentalsinceWWII.Reconstructionwillhavescoresofprojects,involvemanyplayers,andemploycolossalresources.Thespectrumoftasksrangesfromurbanre-developmenttofightingcorruption.AsemphasisedinBeckeretal.(2022a),coordinationoftheseeffortsisparamountforreducingwasteanddelays.Thepurposeofthisreportistoproposeamacroeconomicframeworkforthepost-warperiodwhichcansupportasuccessfulrecovery.

2.BuildingonearlieranalysisforwartimemacroeconomicpoliciesinBeckeretal.(2022b),wefocusonfourcoreareas:fiscalpolicy,monetaryandfinancialsectorpolicy,labourmarkets,andregulatoryframework.Anoverarchingobjectiveofthesepoliciesistodeliverastablemacroeconomicenvironmentthatcanfacilitatetheflowofresourcestomostefficientusesandtolayfoundationsfordurableeconomicgrowth.Forexample,wediscussthedesignofgovernmentspendingandtaxationthatcandeliversustainablepublicfinancesconsistentwithnon-inflationaryfundingforlargereconstructionneeds,demographicsconstraints,andlimitedresources.Westressthatthesepoliciesshouldreinforceeachother(e.g.moderate-to-lowfiscaldeficitscansupportpricestability)andthusitiscriticaltohaveabroadperspectiveonmacroeconomicpolicies.

1

3.Theinitialmacroeconomicconditionsforthereconstructionarechallenging.Withmassivedefencespendingandsocialsupportneeds,thefiscaldeficitisat30%ofGDP(NBU2023).TheRussianblockadeofUkrainianportsseverelycurtailskeytraderoutesforUkrainiangrain,steel,andotherproductsthuscreatingalargeexternalimbalance.RussianattacksonUkrainianenergyinfrastructure(includingtheRussianoccupationoftheZaporizhzhiaNuclearPowerPlant,thelargestoneinEurope)continuetodisrupteconomicactivitysignificantly.However,evenwiththisdifficultbackground,itisimportanttolaunchpreparationsforthepost-warmacroeconomicenvironment.Forexample,theUkrainiangovernmentcanworkoninstitutionalreforms(antitrustlegislation,preparationsforprivatisation,etc.)andmakeinitialstepsforfutureeconomicliberalisation(movetoamanagedfloatoftheexchangerate,developplansfortheresolutionofnon-performingloans,etc.).

1AccordingtotheUnitedNationsHighCommissionerforRefugees(2023),eightmillionUkrainianrefugeesarerecordedinEuropeandelsewhereandsixmillionUkrainiansareinternallydisplaced.

2AccordingtoapollrunbytheKyivInternationalInstituteofSociology(2023),80%ofUkrainianshaveafamilymemberoraclosefriendwhowaskilledorinjuredinthewar

3KyivSchoolofEconomics(2023)reportsthat8.2%ofhousingstockisdestroyedorseverelydamaged.

RAPIDRESPONSEECONOMICS

4.Obviously,theongoingwarmakesanyprojectiontentative.Forexample,whiledesigningaprogrammeforUkraine,theInternationalMonetaryFund(2023)doesnotperformdebtsustainabilityanalysisduetoextremeuncertainty.Despitethefogofwar,ourbaselinescenarioisthatUkrainehasironcladsecurityguarantees

2

suchthatanotherRussianmissileorgroundattackisunlikelyfortheforeseeablefuture.However,eveninthiscase,weassumethatUkrainewillhavetocommitsignificantresourcestothenationaldefencetodeterpotentialaggressioninthefuture.Moreover,asdiscussedinGrygorenkoandSchnitzer(2022)andBeckeretal.(2022a),theprivatesectorwilllikelyneedadditionalassurancesintheformofmilitaryinsurance,private-publicpartnerships,etc.tode-riskinvestment.

5.GiventhescopeofUkraine’sreconstruction,thisreportnecessarilyleavesoutanumberofotherimportantareassuchtradepolicies,anti-corruption,institutionaldevelopment,humancapital,andorganisationalstructureforrebuildingUkraine.EarlycoverageofthesetopicscanbefoundinMovchanandRogoff(2022),Beckeretal.(2022c),EichengreenandRashkovan(2022),andotherchaptersinGorodnichenkoetal.(2022)butmoreanalysisisneededtokeepupwiththefluidsituationinUkraine.

II.FISCALPOLICY

Challenges

6.TheRussianinvasionputtheUkrainianpublicfinancesunderenormousstress.Revenueshavedeclinedbecausetheeconomyshrankandbecausethegovernmentcutsometaxestosupporteconomicactivity.4Atthesametime,spendingincreaseddramaticallytocoverthecostofdefenceaswellastosupportrefugeesandothersaffectedbythewar.Forthemoment,theresultingfiscalimbalanceiscoveredbyinternationalaid.Butonemayexpectthatfiscalimbalanceswillpersistwellintothepost-warperiod.Forexample,Ukrainewillhavetocommitsignificantresources(probablyontheorderof5%ofGDPwithsomeobserverssayingthatitcouldbeashighas20%)tothesecuritysector.Theeconomywillrecoveronlygradually.Thesocialcommitmentsneededtosupportthosewhoaredeeplyaffectedbythewar(internallydisplacedpersons,veterans,etc.)willbelarge.

7.Thegovernmenthashadweakinstitutionalcapacitytoenforcetaxcollection.Itisunlikelythattaxcompliancewillimproveradicallyafterthewarunlessthecountrytakesdeliberateandactivestepstoenhanceit.Thetaxsystemisperceivedasunfairgivingtheedgetothoseinafavourablepositiontoevadetaxes.

4SinceJuly2022,Ukrainiangovernmentrestoredimporttaxesandsomeexcises,andsinceJuly-August2023itreturnstopre-wartaxationrates.

POST-WARMACROECONOMICFRAMEWORKFORUKRAINE

8.Ukrainewilllikelyfaceademographiccrisisandsignificantworkforceshortagesafterthewar.(ConfederationofEmployersofUkraine(2023)estimatesthatthelabourforcemightshrinkfrom17millionbeforethewarto11millionafterthewarunlesstherearesubstantivemigrationinflowsafterthewar).WithmillionsofUkrainianstakingrefugeintheEU,UK,US,Canada,andothercountries,thecapacityoftheeconomytogrowwillbesignificantlycurtailed.Thisalsomeansthattheabilitytoraisetaxescouldbelimitedinthenearterm,sincerefugeesarelesslikelytoreturniftheyfacehightaxes.(Putanotherway,lowtaxratesmaygeneratehigherrevenuesinsofarastheyinducetax-payingformerrefugeestoreturn.)Relatedly,becausetherefugeestendtobedisproportionatelyyounger,thepressureonthepensionsystemishigher.UkraineshoulddevelopandimplementaproactivemigrationpolicytocovershortagesofworkforceandattractUkrainiandiasporaandmigrantsfromothercountries.

9.Becausethecountrywillnothavedomesticresourcesadequateforfinancingitsreconstruction,aviablemodelforeconomicrecoverywillinevitablyrequiresignificanteconomicaidfromUkraine’salliesandcompensationfordamages.Althoughsomeofthisaidcancomefrompublicsources(bilateralaid,internationalfinancialinstitutions,etc.),thereisaclearneedtoattractprivatecapitalnotonlyinordertoclosethefundinggapbutalsotoensurethatUkrainereceivestechnologytransferandisintegratedintoglobalvaluechains.

3

4

RAPIDRESPONSEECONOMICS

TABLE1ASUMMARYOFTAXESINUKRAINE

TAX

RATE

BASE

Personalincometax(PIT)

18%

Salary

Militarysurcharge

1.5%

Salary

SinglesocialContribution

22%*

Salary(between1-15minimumsalary)

Corporateincometax(CIT)

18%

Profit

Rentforuseofnaturalresources

1-70%,dependingontheresource

Marketpriceofextractedresource

Excises

variesdependingonthetypeofgoods

Unitofgood,enginevolumeforvehicles,etc.

Valueaddedtax(VAT)

20%(7%fordrugs)

Price

Importduty

4.4%(MostFavouredNation)

Valueofimports

Exportduty

Exportdutiesareveryhighandappliedtoafewproducts(oilseeds,scrapmetal,skins)topreventexportsratherthancollectrevenues

Energyduty(existeduntil2016)

2%

Valueofnaturalgassuppliedtoconsumers

Ecotax

Variesdependingonthetypeofpollutant

UAHperton

Othertaxes

Debtfortaxesthatappliedbefore2011

Vehicletax

UAH25,000pervehicle

Vehiclethatisnomorethan5yearsoldandcostsnolessthan375minimumsalaries(UAH2.5mlnin2022)

5

TAX

RATE

BASE

Propertytax,incl.land

Land:0.1%-12%(ratesdefinedbylocalgovernmentswithinminandmaxdefinedbythelaw)

Realestate:nomorethan1.5%ofminimumsalary(exactratessetbylocalgovernments)

Normativelandvalue.

Onesq.meter

Parkingfee

Definedbylocalgovernmentsbutnomorethan0.075%ofminimumsalary

Onesq.meter,exceptforplacesforfreeparkingforpersonswithdisabilities

Touristfee

Internaltourists:upto0.5%ofminimumsalary

foreigntourists:upto5%ofminimumsalary

Onenightofstay(children,peoplewithdisabilities,thosewhocameforbusinesstripsorfortreatmentareexempt)

Smallentrepreneurspayment(singletax)

3%,5%or15%(2%sincethestartofthefull-scalewaruntilAugust-2023)

Revenue

*Duringwartimeandsixmonthsafter,itisallowednottopaysinglesocialcontribution(SSC)butthistimewillbedeductedfrompensioncalculations.Singlesocialcontributiongoestothepensionfundandisusedtopaypensions,unemploymentbenefits,andsickleaves.

POST-WARMACROECONOMICFRAMEWORKFORUKRAINE

6

RAPIDRESPONSEECONOMICS

TABLE2DISTRIBUTIONOFTAXREvENUESBYSOURCEANDGOvERNMENTLEvEL

2021,ACTUALTAXREVENUES

CENTRALGOVERNMENT

LOCALGOVERNMENT

CONSOLIDATEDBUDGET

General

fund

(GF)

Special

fund

(SF)

Total

GF+SF

General

fund

(GF)

Total

GF+SF

Special

fund

(SF)

Personalincometax(PIT)10.95%-9.84%61.58%0.00%61.21%22.09%

Militarysurcharge

2.88%

-

2.58%

-

0.00%

0.00%

1.97%

Corporateincometax(CIT)

14.86%

-

13.35%

4.67%

0.00%

4.64%

11.27%

Rentforuseofnaturalresources

5.86%

19.97%

7.29%

2.49%

0.00%

2.47%

6.14%

Internalexcise

6.91%

12.58%

7.48%

0.63%

0.00%

0.63%

5.85%

Exciseonimports

1.55%

57.05%

7.19%

2.15%

0.00%

-

5.99%

Excisefromretailtrade

0.00%

0.00%

0.00%

2.39%

0.00%

2.38%

0.57%

InternalVATlessrefund

15.66%

0.00%

14.07%

-

2.14%

-

10.71%

VATonimports

38.24%

0.34%

34.39%

-

-

-

26.19%

Importduty

2.67%

9.14%

3.33%

-

-

-

2.54%

Exportduty

0.13%

0.00%

0.12%

-

-

-

0.09%

Energyduty

0.00%

0.00%

0.00%

-

-

-

0.00%

7

2021,ACTUALTAXREVENUES

CENTRALGOVERNMENT

LOCALGOVERNMENT

CONSOLIDATEDBUDGET

General

fund

(GF)

Special

fund

(SF)

Total

GF+SF

General

fund

(GF)

Total

GF+SF

Special

fund

(SF)

Ecotax

0.29%0.92%0.35%

-

99.99%

0.60%

0.41%

Othertaxes

0.00%

0.00%

0.00%

0.00%

0.00%

0.00%

0.00%

Vehicletax

-

-

-

-

0.01%

0.00%

0.00%

Propertytax,incl.land

-

-

-

12.55%

0.00%

12.47%

2.97%

Parkingfee

-

-

-

0.04%

0.00%

0.04%

0.01%

Touristfee

-

-

-

0.07%

0.00%

0.07%

0.02%

Smallentrepreneurspayment(singletax)

-

-

-

13.43%

0.00%

13.35%

3.18%

Total,UAHbn

994.55

112.54

1107.09

344.64

2.07

346.71

1453.803

POST-WARMACROECONOMICFRAMEWORKFORUKRAINE

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8

Generalprinciples

10.Organisingafiscalpolicysupportiveofeconomicrecoverystartswithswiftrestructuringoftheexistingpublicdebt(whichweestimatetoreach100%of2023GDP).Mostofthedebt(62%)istoexternalcreditors(roughly⅓tointernationalfinancialinstitutions,⅓toothergovernments,and⅓toprivatebondholdersandbanks).Internaldebtislargelyheldbybanks.Thegovernmentcannotrunafiscalpolicysupportiveofrecoveryifitisdevoting10%ofrevenuestoservicingdebt.Whenthewarisoverthegovernmentshouldseekamajorhaircut(e.g.itwas80%forIraqin2006-2008)tofreeupresourcesforreconstructionandbasicgovernmentfunctions.Asfirststep,therestructuringprocesscansimplystartwithanextendedmoratoriumoninterestandamortisation.Becauseinternaldebtwouldbeimpossibletorestructurewithoutdestabilisingbanksholdinggovernmentbonds,weenvisionthatthefocusshouldbeonexternaldebt.ReiteratingthemessageinBeckeretal.(2022a,2022b),weemphasisethatUkraineshouldbesupportedwithgrantsratherthanloansduringthewarandafterthewarisover.

11.Economicrecoverywillbehinderedbyavolatileanduncertainmacroeconomicenvironment.Toensuremacroeconomicstability,thegovernmentshouldavoidfiscaldeficitsnotsupportedbyforeignaidorotherfundingsourcesthatpresentminimalrisksformacroeconomicstability.Italsoshouldnotuseseigniorageasasignificantsourceofrevenuetoensurepricestability.

12.Mobilisingtaxrevenue:Giventhehighcostsofreconstructionandwhatwillunavoidablybeacentralroleforthepublicsectorinthisprocess(thegovernmentwillneedto,forexample,providemilitaryinsurance,takestakesinprojects,providesubsidisedfinancing,etc.),thegovernmentshouldhaveareliablesourceofrevenue(Table1summarisesthesystemoftaxesinUkraine)thatcreatesminimaldistortionsfortheeconomy,promoteseconomicgrowth,andrequiresmodestresourcesforenforcement.Thisisparticularlyimportantifinternationalaidisdelayedorfallsbelowexpectations.Unfortunately,thespaceformanoeuvrehereislimited:thegovernmentcannotsignificantlyraisetaxeswithouthurtingtheeconomyandcannotmeaningfullyreducethemwithoutunderminingitsabilitytocoverbasicpublicservices.Inthiscontext,furtherreformsofcustomsandtaxadministrationarenecessarytoreducesmugglingandotherformsoftaxevasion.

13.Focusonefficientspending:Withpressingneedsandlimitedresources,apriorityshouldbetoensurethatpublicfundsareusedinthemosteffectivemanner.

14.Usefiscalpolicytosupportinstitutionaldevelopment:becauseUkraine’sreconstructionisaboutthedeepmodernisationofthecountry,fiscalpolicyshouldbeanintegralpartofbroaderdevelopment.Forexample,thefiscalsystemshouldbeconsistentwithdecentralisationreformandEUintegration.

POST-WARMACROECONOMICFRAMEWORKFORUKRAINE

Taxes

15.Thelargesizeoftheshadoweconomy,weaktaxenforcement,andahighelasticityofthebaseforlabourandprofittaxescallforrelianceonindirecttaxessuchasthevalueaddedtax(VAT)andexcisetaxes.Thesetaxesaretheworkhorseofthecurrentsystem(Table2);theywillhavetoplayanevenmoreimportantroleinthefutureforanumberofreasons.First,VATandexcisesareinvestmentfriendly.Second,thesetaxescreatefewerdistortionsforlaboursupplyandproductionchains.Third,intheUkrainiancontext,withsignificantadministrativeconstraints,itislikelyeasiertoenforceaVATthanincometaxes(VAThasbuilt-inself-enforcement).

16.Personalincometax:givenweaktaxenforcement,aflatpersonalincometax(i.e.asystemunderwhichthetaxrateisthesameforallincomes;thissystemwasadoptedinUkrainein2004)offerstheadvantageofadministrativesimplicity.Withthefixedrate,incometaxescanbewithheldbytheemployer,whichshouldimprovetaxcompliance.Themaindisadvantageisthatthistaximposesaheavyburdenonlow-incomeindividuals.Typically,thisissueisaddressedwithprogressiveincometaxes,butthiscomesatthecostofahighercomplexity.Acompromiseistointroduceasurchargetaxonhighincomeindividuals.Specifically,thetaxauthoritiescanusetheirdatatodetermineifanindividualhasannualincomeaboveacer