The martial law evoked considerable changes in the municipal budgets in Ukraine and Khmelnytskyi Oblast in particular. The main financial challenges refer to the decrease of tax revenues, in particular, because of the withdrawal of the military personal income tax, which especially affected the incomes of the municipalities in 2024.
The total sum of military personal income tax for the 10 months of 2023, which came to the local municipal budgets of Khmelnytskyi Oblast, made up UAH 2,065.3 million, which is UAH 461.2 million more than that of previous 2022. Meanwhile, the role of the official transfers, which provide governmental support to the municipalities, has increased. Generally in January – September 2024, UAH 12.04 billion came to the local municipal budgets of Khmelnytskyi Oblast, in particular, UAH 800.8 million came to the speciality fund. Budget execution by the income makes up 77.7% of the target yearly index. This information is provided by the OpenBudget portal.
“Meanwhile in the same period of 2023, the general income to the local municipal budgets of Khmelnytskyi Oblast made up UAH 12,330.1 million, while in the corresponding period of 2022 the income made up UAH 9,941.7 million. That is, in 2023 compared to 2022, the income growth for UAH 2,388.5 million or +24% was observed, while in 2024 the income began to decrease, however, not considerably — for UAH 290.4 thousand or 2.4%. As we can see, in general, since 2022 the growth of the total income to the local municipal budgets of the oblast is observed”, says сounsellor in the issues of municipal finance and administration of U-LEAD Regional office in Khmelnytskyi Oblast Nataliia Liubchenko.
Compared to January – September 2022, during the 9 months of 2024 the structure of the total income to the general fund of municipal budgets of Khmelnytskyi Oblast changed as follows:
- Tax revenues — UAH 7.8 billion, or 64.7% in the general income structure (in 2022 — UAH 6.7 billion, or 67.6%).
- Official transfers — UAH 3.6 billion, or 27.9% (in 2022 — UAH 2.6 billion, or 28.5%).
- Non-tax revenues, income from capital transactions and target funds — UAH 890.2 million, or 7.4% (in 2002 — UAH 381 million, or 3.8% of the revenue).
“Thus, during almost three years, the density of both tax revenues and official transfers have slightly decreased with the simultaneous increase of their absolute values. At the same time, the share of the other income sources increased for 3.6%, namely non-tax revenues, income from capital transactions and target funds. Non-tax revenues became an important compensation source for the municipalities, which lost the military personal income tax. Here belong the incomes from the municipal property rent, sale of the land and services of the local administrations. In particular, the municipalities began to use the income from the target funds and the income from capital transactions to balance their budgets. It provided the opportunity to partially compensate the losses from personal income tax withdrawal and involve the money from the property sale and other non-tax revenues”, said the expert.
Dynamics of the incomes of the local municipal budgets of Khmelnytskyi Oblast in January – September 2022–2024 is shown in the picture.
In times of the full-scale war, the governmental support in the form of inter-budget transfers became even more meaningful and these transfers helped the municipalities cover social and educational expenditures. In 2024, the dependence of low-level tax-income municipalities upon the governmental transfers increased, which compensated the budget deficiency. Official transfers became the main support source, which allowed the municipalities to keep the basic level of services.
“Analysis of the additional revenues shows the importance of personal income tax for the municipalities of Khmelnytskyi Oblast. Thus, in 9 months of 2022, thanks to the military personal income tax, the municipal budgets received considerable support, namely UAH 1.6 billion, which makes a third of the total personal income tax, which entered the local budgets. Many municipalities located close to military units were dependent upon these revenues. Ongoing budgeting of personal income tax from the military people monetary allowance till November 2023 and increasing of its sums provided financial stability to many local budgets. Withdrawal of military personal income tax caused deficiencies and the municipalities had either seek other income sources or reduce the expenditures”.
She added that local taxes and fees added UAH 1.5 billion, to the budgets of Khmelnytskyi Oblast municipalities during 9 months of 2022, which is 22.4% of the tax revenues, in particular, UAH 834.1 million of unified social tax and UAH 661.7 million of property tax. In January – September 2024, the revenue from the local taxes and fees made up UAH 2.5 billion, which is 31.8% of the tax revenues. This includes UAH 1,379 million of unified social tax and UAH 1,091 million of property tax.
“Such considerable growth is explained by the fact that certain taxes became non-obligatory to be paid by the taxpayers both to the governmental and local budgets, which was implemented with the martial law beginning. With time, the volume of tax relief reduced and the tax income grew subsequently. At the same time, the income from the local property taxes, like the land tax and real estate tax, became less stable due to the economic challenges, particularly the war effect on businesses and reduction of rental income”.
Cross-section dynamics of constituents of the local tax revenues in Khmelnytskyi Oblast municipalities in 2022–2024 is shown in the table.
|
|
for 9 months of 2022 |
for 9 months of 2023 |
for 9 months of 2024 |
||
|
Index |
UAH million |
% |
UAH million |
% |
UAH million |
|
Real estate tax |
106 |
7 |
195.1 |
10.2 |
236.7 |
|
Land tax |
159.2 |
10.6 |
214.3 |
11.2 |
237.5 |
|
Rental fee |
395.1 |
26.2 |
514.8 |
27 |
611.6 |
|
Transport tax |
1.4 |
0.1 |
2 |
0.1 |
5.6 |
|
Local fees |
3.5 |
0.2 |
4 |
0.2 |
5.3 |
|
Unified social tax |
843.1 |
55.9 |
978.5 |
51.3 |
1,379.3 |
|
Local taxes and fees total |
1,508.3 |
100 |
1,908.7 |
100 |
2,476 |
The martial law also caused significant changes in financing the expenditures of the local budgets, specifically those made by limitations of performing the duties by the Treasury bodies according to determining the priority of expenditures, that is, their sequence of realisation.
“In January – September 2024, local municipal budgets of Khmelnytskyi Oblast financed the expenditures for UAH 11.5 billion, which is 67.3% of the adjusted yearly plan. These figures are on the same level as those of the 9 months of 2023 — UAH 11.5 billion and 64.1% of the adjusted yearly plan, and they significantly exceed the financing volume during January – September 2022 — UAH 8.1 billion and 60.5% of the adjusted yearly plan. Such gradual increase in financing the expenditures is related to the expansion of the determining the priority of budget expenditures”.
According to the expert, in times of war, new priorities occurred in the expenditure parts of the local municipal budgets and subsequently their structures changed.
“Traditionally, the biggest share in the expenditure part of a budget is devoted to education. In January – September 2022, it was financed for UAH 5 billion or 61.2% in the total structure, in 2023 — UAH 5.8 billion or 51% and in 2024 — UAH 6.3 billion or 55%. The second place in the volume of financing belongs to public administration, which has the following shares of expenditures in the corresponding periods: in January – September 2022, it was financed for UAH 1 billion or 12.9% in the total structure, in 2023 — UAH 2.2 billion or 18.9% and in 2024 — UAH 1.8 billion or 15.3%. This area of expenditures particularly includes inter-budget transfers, whose dynamics growth significantly in 2023 and makes UAH 1 billion or 45% of the total sum of public administration expenditures compared to UAH 94 million or 9% in January – September 2022. It’s related, first of all, to significant increase of support of the Armed Forces of Ukraine and the civil defence units from the local municipal budgets”.
At the same time, the municipalities reduced the investments to infrastructure and new projects, focusing on the current expenditures and minimal social needs, which is related to both financial shortage in the local budgets and determining the priority of expenditures.
Nataliia Liubchenko’s advice for the municipalities to establish financial stability in the martial law conditions:
- to expand the income base — support local businesses, involve investments and develop the service sector;
- to involve international aid — the municipalities can use international grants for restoration of the infrastructure;
- to optimise the expenses — by focusing the money on the critical programs and reducing expenditures on the minor projects.
