Where the social budget goes


One of the challenges for the Ukrainian government is the poverty of citizens. The state spends billions on various types of assistance. But in this case, more is not better. Inna Shinkarenko, ShiStrategies Managing Partner, shared her experience in the Alternative Social Assistance project in the column for Economichna Pravda.


According to various estimates, in recent years, the real poverty level in Ukraine has fluctuated between 30-50%.


These fluctuations occurred due to changes in the hryvnia exchange rate, increase in pensions, social standards, minimum wage.


However, in general, the poverty level for a European country is at an abnormally high level.


Among the obvious reasons is the high level of redistribution of GDP through the budget, which takes away business opportunities for development and job creation. This level was determined not only and not so much by military operations, but it also remained high in calm years.


The main reason is the huge social spending of the state, which takes about 20% of GDP. That is, the incomes of business and the population are redistributed in favor of the poor compatriots, whose number is not declining, and the stratification of income between the poorest and richest people is only growing.


Probably, the point is not in the amount of money, but in the mechanisms of their distribution.


What is our difference from Sweden and some other countries that also actively redistribute business income through the budget? The poverty level in Sweden ranges from 0.2-0.9%. These are mainly immigrants who are not yet employed or people who are not working according to their internal convictions.


The difference between our countries is in the ideology of spending the social basket. In Ukraine, more than 90% of state social assistance is spent on direct payments to vulnerable categories of the population, the number of which is growing.


In Sweden, social policy has two vectors: direct payments, benefits, subsidies aimed at smoothing the income gap and ensuring the maximum level of employment of the working population. As a result, the unemployment rate in this country rarely rises above 2%.


The poor people in Ukraine are very different. Many works on a full or part-time basis, but earned for a normal life is not enough. They receive subsidies and sometimes help as low-income people. Most have additional sources of income that the state is not aware of.


Another category of low-income people is those employed in the informal sector of the economy and professional unemployed. In the eyes of the state, these people are completely destitute, because they have no other income than social assistance.


The system of redistribution of public income that we have built leads to the fact that the official working economy is forced to give part of its earnings in the form of taxes to subsidize the above categories of fellow citizens.


Over the past few years, I have participated in the creation of a state incubator for the development of entrepreneurs, implementing the project of the Ministry of Social Policy and the World Bank “Helping Hand” in the Kharkiv, Poltava and Lviv regions.


The project aims to search and test effective mechanisms for returning long-term unemployed to the labor market who have lost their motivation to work. Later, the target category was supplemented by internally displaced persons, who found it difficult to occupy worthy positions in the labor market in a new place.



In addition to traditional assistance in finding employment and organizing public works, the project for the first time in Ukraine applied a mechanism of interest-free lending for the purchase of equipment and materials to create a business.


You need to return only the difference between the loan amount and taxes paid for three years. If the amount of taxes paid exceeded the amount of the loan, or if the entrepreneur in the first year employed two immigrants, ATO participants, members of a low-income family for two years, you do not need to return the loan.


The amount of interest-free assistance averaged 64-70 thousand UAH. Not very much, but it turned out that for this money you can create a successful business.


Despite many concerns, the project was a complete success. The proposed innovative mechanism was extremely effective. We saw that the “Helping Hand” can become the missing wing of Ukrainian social policy, without which it cannot work effectively.


At the start of the project, we told each other that if a year after opening at least half of the businesses of yesterday's unemployed would work, this should be regarded as a success. The same statistics are shown by ordinary small entrepreneurs, half of which closes a business within a year.

The reality was stunned: after almost two years of the project, only three enterprises were closed, or less than 2% of the total. A huge role was played by the joint preparation and defense of a business plan, constant consultation of project participants and assistance in solving administrative problems.


The arithmetic of the pilot project is also impressive. The average amount of financing for each business amounted to UAH 70 thousand - almost the same as the average annual state assistance to a low-income family.


Most of the project participants work on the second group of a single tax.


There were, of course, “first-graders,” but there were also those who had already switched to a common taxation system. On average, each of them pays the state a month a little more than UAH 1,700 - a single tax and a minimum social contribution. This is if there are no employees, and many have already appeared.


It turns out that for a maximum of three and a half years, the state will return all the money spent in the form of taxes to the start-up entrepreneur. Moreover, the family of such a person no longer needs to pay a benefit and often a subsidy.


The integral assessment shows the return on public investment on average for a year with a small. This is Klondike for the state!

In the shortest possible time, in three or four years, from the current dependents who have the potential for entrepreneurship, you can get thousands of taxpayers who will not leave Ukraine to earn money, since here is their business.


And the solution to the problem of unemployment? But the general increase in the level of well-being and the growth of consumer activity? Although everyone has different businesses, the income of most of our entrepreneurs ranges from 20-60 thousand UAH per month, this is a very decent level. In addition, people are interested in paying taxes, as this is directly related to the amount of loan repayment.


Of course, I would like to introduce myself as the discoverer of such a wonderful mechanism, but it has been known for a long time. Why is Ukraine, where the system of social assistance to the population is lame on both legs, ignores an efficiently working tool and does not reveal the business potential of thousands of citizens?


The pilot project has been completed, and all of its participants fear that some officials will gather dust over the years for a unique official. But the project right now can be scaled to the whole of Ukraine, especially since after the success of the pilot stage of the project, there is no end to those who want to become its participants.


I watched all the stages of the formation of future entrepreneurs: distrust, interest, fear of being deceived, feverish work with documents, selfless work for myself, which does not leave room for fears. Here are a few examples of people who took their fate into their own hands.


Olga Onuliak, a young woman from the town of Skole in the Lviv region. Together with her husband Igor, she realized a long-held dream with the help of the project: she opened the first pizzeria in the six-thousandth town. She opened right on her yard, building a room around a large wood-burning stove, its only asset.


Olya is a woman-rocket, after the start of her business, she found in herself inexhaustible energy reserves. Now she is the most famous restaurateur in her town. Her pizzeria OlliО already serves not only the townspeople, but orders are also beginning to come from the ski resorts located nearby.


The income of the pizzeria has already exceeded 100 thousand UAH per month. Olga and Igor are planning to expand their business and product line. I am sure that everything will be fine with them. It cannot be otherwise when a person loves his job, and for the gratitude of a client, he is ready to fight no less than for money.


Sergey Khodis, a carpenter from the village of Nelyubovka, Poltava region, specializes in the manufacture of arbors and garden furniture. Participation in the project allowed the head of a large family to buy a full set of new German equipment for 64 thousand UAH. After that, sales grew at least three times.



The average income exceeds 25 thousand UAH per month. Sergey makes furniture in his yard, sells it through a page on Facebook, where he uploads photos of his work.


He says that recently they have ordered a lot from other regions - Lviv, Odessa, Kyiv, Kherson. The most important thing is that he is his boss: he is engaged in his favorite business and, as he says, gained confidence in the future.


These are just two stories out of almost 240 that could have begun thanks to the pilot project “Helping Hand”. According to conservative estimates, the potential on the scale of Ukraine is 30-50 thousand new entrepreneurs, tens of millions of hryvnias of taxes, tens of thousands of additional jobs.


An alternative is a further increase in multi-billion budget allocations for the payment of assistance to low-income people, unemployment benefits, and utility subsidies. What will the state choose?


Inna Shinkarenko for Economichna Pravda.