The Budget for 2023 presented by the Government has been rightfully called a wartime budget. All state resources are subordinated to the task of defence and security of our homeland, which prompts a positive assessment of this document.
However, some indicators of the 2023 Budget still cause concern, as their unattainability may lead to certain macroeconomic imbalances. First of all, let's pay attention to the growth and inflation indicators. In 2023, the government predicts real GDP growth of 4.6%, inflation — 30%. While the GDP growth looks quite realistic (especially considering the expected GDP drop by a third in 2022), inflation seems somewhat overstated.
It is clear that the nominal GDP will be achieved thanks to the inflation component, which will allow redistribution of part of the resources through the budget and tax system. However, the fact is that the main price shocks (energy, blockade) have already occurred in 2022. And given that the Government preserves minimum social standards (minimum salary, living wage), and freezes utility rates, the inflationary pressure will decrease in terms of both demand and supply.
In this context, the NBU forecast published in the July Inflation Report looks more realistic: about 20%. This assessment is more reasonable, taking into account the domestic realities in the consumer markets: prices will simply not be able to continue their sharp rise due to the low purchasing power of households. The question why the Government and the National Bank of Ukraine did not agree on their assessments again remains, of course, rhetorical.
Therefore, due to lower inflation, the nominal GDP will also be lower, which will require a revision (reduction) of the 2023 Budget revenues in general, possibly requiring cuts in expenditures. The results will include the unattainability of the average salary of UAH 18,500 (remember, the minimum wages are maintained at UAH 6,700).
As an alternative, in case of a lower nominal GDP and lower Budget revenues, but maintaining the declared level of expenditures, and thus increasing the deficit of public finances, emission may well be used, which does not look too dangerous in wartime. The NBU will be able to continue buying military bonds, which, by the way, will slightly raise inflation to the level indicated in the governmental draft. Perhaps this is the option that the government keeps in mind. At the same time, we note that Ukrainians have already somewhat learned to cope with permanent price shocks.
To sum up, since the draft does not allocate funds to the autumn parliamentary elections but says that the Government should produce a bill that will provide finances for the parliamentary elections (after the end of martial law), it seems appropriate that such a bill is incorporated in the main financial document of the country, along with the macroeconomic forecast.
