KIEV: The World Bank has issued a report outlining a number of recommended fiscal reforms to help Ukraine establish sustainable public finances.
The report noted that Ukraine has been running general Government deficits for the last 20 years. Despite fiscal tightening in 2014, the fiscal deficit remained high at 4.6 percent of gross domestic product (GDP) due partly to weak revenue collections. Additional financing to recapitalize the domestic gas utility company, Naftogaz, brought the overall consolidated fiscal deficit (including Naftogaz’s accounts) to 10.1 percent of GDP in 2014.
The World Bank pointed out that Ukraine has some of the highest marginal tax rates on labor, especially high payroll taxes to finance social security spending and pensions. Yet, tax collections are undermined by narrow tax bases that are eroded by exemptions, low compliance, and loopholes that have led to widespread tax avoidance and evasion.
The Bank urged the Ukrainian authorities to implement tax reforms to expand the tax base for major taxes (value-added tax, corporate income tax, and personal income tax) by reducing tax exemptions and privileges. This would create space for lowering high marginal direct tax rates, which lead to heavy tax burdens on labor and capital, it said.