Ukraine tax and budget reforms boost aid outlook

Subject

Ukraine budget and tax reforms.

Significance

At end-2014, parliament adopted a host of changes to the taxation system, most of which came into force on January 1. These changes may indicate the authorities' readiness to undertake at least some overdue systemic reforms in revenue and spending, but they also underline the old problem of unreliability of the domestic tax system. The government is now holding consultations with the IMF regarding the new budget and other essential reforms to increase aid flows in order to avert sovereign default.

Impacts

• Reforms should help Kyiv receive multilateral lending, thereby lowering but not eliminiating default risk.
• Defence and security spending will be priorities for Kyiv in coming years.
• However, by failing to stabilise the tax system, authorities risk worsening the investment climate.