PUBLIC FINANCE RESILIENCE UNDER WAR SHOCK

Abstract

In the conditions of the Russian Federation’s full-scale armed aggression against Ukraine, public finance resilience is of crucial importance for ensuring defense capability, fulfilling current and future financial obligations of the state. The consequences of the transformation of public finance under war shock – given the huge losses of the national economy, the destruction of critical infrastructure, the unprecedented rise in the needs of the security and defense sector, and the limited budget resources – were the growth in the state budget deficit and government debt.

An assessment of how effectively the processes of adaptation to the war shock ran is of great importance. The condition of the state and local budgets of Ukraine in the first year of full-scale aggression and in the medium-term periods – during three years before the start of the war (2019–2021) and in wartime (2022–2024) – is studied. It is found that the growth in budget revenues became an important factor in the functioning of the state in the critical period, although it was provided not by own tax base, but by external grants and one-time revenues, which is an evidence of the structural weakness of the fiscal system.

In the period 2022–2024, each year, on average, about a third of state budget expenditures were financed through government borrowing, another 13% through international grants (free and non-repayable assistance). At the same time, taxes – a key factor in the state's financial sovereignty – covered only about 34% of expenditures compared to 71% in the pre-war years (2019–2021). It is proven that the main risks of destabilization of public finance are concentrated at the level of the state budget, and their minimization requires reducing its dependence on external sources. Key directions for addressing this challenge include reducing the loss of budget revenues from value-added tax through the digital transformation of tax administration and additional taxation of high-income earners. According to our estimates, this will increase state budget revenues (excluding grants and own revenues of government-funded institutions) by at least 15%.