Reverse Subsidies: Funds for People or “Prosecutors?”

In recent months, there has been a fierce debate about the budgetary support of communities. Some innovations in the draft state budget for 2025 shocked not only communities and international partners but also the entire Ukrainian society. We are talking about double standards. It is proposed to withdraw from the communities 4% of the personal income tax (PIT), reverse subsidies, a single tax, part of the educational subvention and, in fact, to lift the moratorium on raising tariffs for the population in one part of the state budget. Because there are no funds for people — we are at war.

At the same time, other lines of the state budget provide for an increase in salaries for prosecutors, judges and controllers of the Accounting Chamber. There is money for them. By the way, in addition to the increase in salaries, the employees of the Accounting Chamber may receive another bonus thanks to the Parliament: they will not be obliged to declare their income as civil servants. Apparently, this is to prevent more media scandals about the huge wealth of law enforcement officers, members of medical and social expert commissions (MSECs)... No declaration, no scandal.

However, let's leave this for the international partners to comment, who provide financial assistance to Ukraine on the condition that democratic and anti-corruption reforms are implemented. And let's get back to community budgets. While MPs are confident that they will be able to keep 64% of personal income tax and the single tax in community budgets, the situation with the reverse subsidy is unfortunately different. High-ranking officials have not yet realized the extent of the repercussions for society from the removal of the reverse subsidy from local budgets.

What is a reverse subsidy?

In simple terms, it is the withdrawal of community funds to the state budget. And this is the most important thing to remember. Later, the Budget Code of Ukraine explains why this is done: “… for the horizontal equalization of the tax capacity of the territories.”

With the outbreak of the full-scale war and the temporary occupation of a large part of the territories, the horizontal equalization mechanism has completely exhausted itself, as the physical base and the terms of payments have changed significantly. Therefore, it is absolutely logical and correct that the government automatically stopped the reverse payment from local budgets on February 28, 2022. In 2023, they tried to withdraw the reverse again due to the growth of the “military” PIT, but in 2024, the reverse was abandoned, as community revenues decreased significantly due to the withdrawal of the “military” and “security” PIT from local budgets. Since October 2023, the so-called security forces — prosecutors, law enforcement officers, including prison staff and the State Emergency Service — have not paid personal income tax to local budgets.

In the draft state budget for 2025, it was again offered that the reverse be withdrawn, without economic justification, in the absence of a basis for calculations and without taking into account the fact that “military” and “security” PIT are not returned to the communities. We are talking about 189 communities, of which 150 are small towns, villages and settlements. It is officially proposed to “rob” them for the second time through the withdrawal of the “military” and “security” personal income tax and now the reverse. And this is despite the fact that unofficially, since the full-scale invasion, communities have been performing state functions at their own expense by building fortifications, meeting the needs of the military, carrying out security measures and much more, doing their best to protect their residents and for our common Victory.

Shock of small communities

In the structure of most small communities, this is an extremely large amount of money that will not be compensated. In some, the withdrawal amounts to more than 30% of their own income. Can you imagine taking away 34% of the budget of Pokrovsk (Donetsk region), 20.8% of the budget of Pivdenoukrainsk (Mykolaiv region), 21.3% of the budget of Nataline village and 11.5% of the budget of Donetske village in Kharkiv region, 16% of the budget of Komyshanka village (Sumy region)? The list goes on. These communities are constantly shelled, municipalities are extinguishing fires and evacuating people who are returning home due to the lack of housing in the country.

Of the 69 communities in the Kyiv region, 35 communities have seen their reverse subsidy withdrawn. It is hoped that the city of Kyiv will support them, just as it did in 2022–2023. But what will the others do?

The essence and economic purpose of bleeding 189 capable communities, many of which are located near the frontline and actively contribute to the state's defense capability, are not clear at first glance. After all, the reverse subsidy does not affect the increase in the total resource for the state budget and other communities, since the budget provides UAH 51.2 billion of additional (not basic) subsidies for 2025, while the planned figure for 2024 is UAH 33.4 billion. At the same time, the lion's share of this amount has not even been distributed among the communities, which means that no one stands to get it!

Why do the authorities want to take away UAH 12.9 billion of reverse payments from communities and add UAH 17.8 billion to the additional subsidy? It becomes clear once we look at how the additional subsidy was spent before. For example, in 2024, the government has already allocated UAH 2.4 billion for public roads from the additional subsidy, which was distributed manually for capital expenditures. The expansionist initiatives regarding the State Fund for Regional Development for 2025 are also part of this story.

What can be the consequences for people?

Firstly, support for the Armed Forces will decrease significantly because after the withdrawal of the “military” and “security” personal income tax last year, reverse payments are practically the only source of funding for the military.

Secondly, tariffs for heat and water will rise rapidly or the provision of services will cease. The reverse payments are used exactly to finance the largest enterprises in this sector to which the state already owes UAH 64 billion in compensation for the difference in tariffs. Can you imagine Dnipro or Lviv, Zaporizhzhia or Vinnytsia, Sumy or Khmelnytskyi, Chernihiv or Lutsk, Odesa or Ternopil, Poltava or Ivano-Frankivsk, Zhytomyr or Chernivtsi, Rivne or Cherkasy, Pivdenoukrainsk or Brovary... without heat and water? The heating season may stop not because of Russian shelling but because of the simple withdrawal of money from communities for building roads and raising salaries for prosecutors and the Accounting Chamber.

Thirdly, most rehabilitation and socialization programs for veterans will cease, as the most ambitious of them have been implemented in the communities from which reverse subsidies are withdrawn.

Fourthly, funding for education will be reduced, without which there is no chance of returning to Ukraine for those who left.

Fifthly, the presidential projects to support the economy “Buy Ukrainian” and “Made in Ukraine” will be curtailed, as communities will simply not have the funds for such purchases.

To prevent this, it is necessary to leave the reverse funds in community budgets. There is money to keep the reverse — an additional subsidy not allocated in the draft state budget for 2025. The argument “we have no money” does not work because, at the same time, the government is carefully supporting the security and supervisory bodies of the state financially.

Before the second reading of the draft state budget for 2025, the Parliament gave a clear instruction to the government in the Budget Conclusions to decide on the feasibility of withdrawing the reverse subsidies from communities. Members of Parliament of all factions sent a relevant appeal to Oleksii Kuleba, Deputy Prime Minister for Restoration, Minister of Development of Communities and Territories of Ukraine. The “take and divide” approach will not work anymore; communities, as the foundation of the country after decentralization, must be capable.

This is a task not only for local governments but also for the state authorities.

 

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