Why Does the Government Choose the Worst Solutions?

The main current problem for Ukrainian business, apart from the war, is the lack of economic growth. It is no secret that even before the large-scale aggression, there were neither special investments nor an economic boom in our country.

Why did it happen? The situation began to develop in this way because our state never considered the development of business, entrepreneurial initiative, and investment attractiveness a priority. From time to time, the liberal wing of the government still manages to conduct initiatives such as Individual entrepreneurship, Prozorro, which is an electronic public procurement system, deregulation, but systematically the state, in which security forces and corrupt officials play a significant role in the execution of tasks, prefers to regain control over the economy and business.

That is, instead of creating the best conditions in the world for investing and doing business, the state creates obstacles for entrepreneurship. And already during a full-scale war in our country, according to our latest study of business problems (Advanter Group, August-September 2024), the problem of the unpredictability of the actions of the state itself became an equally significant problem as the war. It is worth noting that all this happened in the State, the financial capacity of which is provided primarily at the expense of business.

And this is logical, because a state that can retrospectively increase taxes for business, without declaring a sustainable economic policy for it for years in advance or without agreeing with them on urgent decisions and a clear strategy for the future, cannot be considered by investors and entrepreneurs as stable and predictable. Moreover, under such conditions, the state cannot be perceived as a reliable structure not only for Ukrainian business, but also for external economic partners.

And then, under all these conditions, the state is surprised that business invests in Poland, Romania, Spain, Bulgaria, Croatia and anywhere else, except in Ukraine.

In addition, it is worth noting that not only Ukrainian money goes to these countries, but also Ukrainian added value. Various large enterprises and factories are being built in these countries, and it is there that skilled workers are now concentrated who create the gross domestic product (GDP) for these countries, not for our Ukraine. The situation developed in this way because the state, and not just a full-scale war, essentially pushed business out of Ukraine.

Pressure on business

Another example: according to our recent research, 48% of entrepreneurs have faced pressure from law enforcement and regulatory authorities in the past two months. Of those who have faced pressure, 29% of respondents say that the pressure has even increased during this period.

All this is happening against the background of the recent moratorium and allegedly active work of the Council of Ukraine on issues of business support under the President of Ukraine. All this, as it turned out, does not work. There is a business ombudsman that tries to be aware of and solve problems that the state creates for business, but the power of this business ombudsman institution alone is not enough to overcome the situation.

Moreover, we faced the fact that a consolidated layer of unscrupulous and dishonest law enforcement officers and representatives of regulatory bodies is doing everything to nullify and completely devalue our joint efforts with the liberal wing of the government to protect business and modernize the Ukrainian economy. They arranged group joint liability.

For example, when we, together with the National Anti-Corruption Bureau of Ukraine (NABU), try to investigate a situation with pressure from a certain tax official, in response, the entrepreneur receives pressure from the prosecutor's office, the police, the State Bureau of Investigation (SBI), or the Security Service of Ukraine (SSU). This is how it works because relatives interfere in this matter, because there are horizontal connections that eventually create the second, third, fourth wave of pressure. We can see this now even in public cases – "Textile-contact", "Edem resort", "X-park" and others.

Therefore, from the very beginning, the idea was to remove economic responsibility from various bodies and leave it only to representatives of the Bureau of Economic Security of Ukraine (BES). In addition, it is worth noting that the state institution of the Bureau of Economic Security of Ukraine should be fundamentally restarted and cleaned with the help of our international partners and public control. And even then, this important state body should, in an analytical way, first warn the business about detected violations, and only then punish its representatives for non-compliance with the rules.

And then there should be the creation of changes to the Criminal Procedure Code of Ukraine through the introduction of the presumption of innocence of business. The idea is to make it so that the corrupt law enforcement officer cannot cause business to stop using various tricks and shows or other actions to block business. After all, in the conditions in which our country found itself, even the blocking of tax invoices is an economically and socially unjustified pressure on business.

It is worth noting that at this moment no substantial changes have taken place. We were traditionally lied to and deceived as usual, because the tax police moved directly to the Bureau of Economic Security of Ukraine. That is, in fact, politicians did not make any significant decisions, but only changed their name plates under the guise of creating a new state structure. That is why we demanded the restart of the Bureau of Economic Security of Ukraine and managed to convince the Verkhovna Rada of Ukraine to adopt not Tatarov's draft law, but the one supported by civil society, analytical centers and business.

It is now important to bring our next step to a logical result, namely, to restart the customs of Ukraine. The corresponding law has already been adopted. Now is the time to take real steps. Currently, work is underway to ensure that both the Bureau of Economic Security of Ukraine and the leadership of the State Migration Service of Ukraine (SMS) will be rebooted in the coming months. In addition, it is important to form a system of public control at every point, so that there is an opportunity to take advantage of the newly adopted laws. Next is the turn for reforms of the Road Patrol Service of Ukraine and the revision of the Criminal Procedure Codex of Ukraine.

The government is unable to make effective economic decisions

Yes, our state currently lacks financial resources. We, representatives of business communities, analytical centers, and the public sector, emphasized that it was necessary to carry out reforms yesterday in order to avoid a similar situation. The state says: okay, let's do reforms (later), but first we'll just raise taxes. To which we answer: if you raise taxes now and do not make systemic reforms, then in a year there will be no room to raise taxes, because business will simply be destroyed, and therefore it is even more difficult to initiate systemic reforms.

That is why we proposed to prioritize systemic reforms, rather than banal tax increases. By the way, this is how we managed to start the process of discussing the customs reform of Ukraine and restarting the customs office.

Regarding the adopted law on raising taxes, at the discussion stage there were actually two models for raising them. The first is a temporary increase in the value-added tax (VAT) by 2% (which would provide 77 billion UAH of revenues to the budget according to its parameters for 2025). The second model is an increase in the military levy, which, according to our calculations, will lead to a significant shadowing of salaries and to the fact that the possibilities of the state budget will decrease by UAH 39 billion in the worst-case scenario. However, it is worth noting that at the same time such a development of events is the most probable for our state. Everything can happen in this way when our country has to raise the salaries of civil servants as compensation for the increase in taxes.

In addition, even the lawyers of the secretariat of the Verkhovna Rada of Ukraine pointed out that the rule on retrospective tax increases violates the Constitution of Ukraine. In other words, it was not possible to vote for such a bill. After all, it is not just economically imperfect and contradicts economic logic, the main thing is that it violates the Basic Law of Ukraine.

However, the law was still voted for. That is, a decision has been made that may turn out to be devastating for the economy of Ukraine, lead to shadowing, reduction of investments in our country, etc.

Why does this happen? Everything is simple. The main reason why this happened is because in our country, in addition to corrupt officials, who are the main people who benefit from all this, namely, who benefit from the fact that all these unsuccessful and ill-considered legislative decisions are made in our country, in addition to liberals and old bureaucrats, there are also populists. It is the populists, in the end, balancing between the liberals and the security forces, who most often make decisions in favor of the security forces. In addition, it happens that they banally make decisions in favor of populist ideas. For example, it is possible to hear such an idea that if we raise the value-added tax (VAT), then all consumers will see an increase in prices.

We calculated the impact of a 2% increase in the value-added tax on inflation. It is insignificant, namely it is only about 0.4%. But the president of Ukraine was shown a linear logic: if the value-added tax increases, prices will rise. That's all. They did not show that an increase in the military levy would lead to similar rates of inflation growth but would bring significantly more negative consequences.

However, we do not have access to the president of Ukraine, because the president does not agree to communicate with civil society, analysts or business. After the resignation of Rostyslav Shurma, there is no one responsible for economic issues in the Office the President of Ukraine.

So how can we better convey the position of think tanks and business to the "balancing" government and, first of all, to the president? How can we show this position to a person without whose approval not a single decision on state policy is made. For example, apparently, the reservation of critical personnel is not approved because of the position of the President of Ukraine, Volodymyr Zelenskyy. This happens because he probably does not understand what profit it will be for the country but focuses on populist slogans such as "war for the poor" or on the unjustified position of the military.

At least we haven't seen any calculations against booking critical personnel so far, which in practice will promote recruiting, fill the budget with UAH 250 billion in 2025, destroy corruption like the one in Khmelnytsk (which is minus UAH 80 billion per year from the economy!), stimulate business activity, bring salaries out of the shadows, etc.

This is how it turns out that most adequate, important economic decisions are put on hold or canceled altogether, because the office of the President of Ukraine does not rely on economic modeling, on analytics, on strategizing. These are obviously prohibited concepts there. And thus, accordingly, we as a country are simply held hostage by a banal misunderstanding of economic laws and live in the realities of political ones.