National Bank of Ukraine believes defense expenditures likely to grow, could be covered by issuing govt debt securities or raising taxes

MOSCOW. Jan 31 (Interfax) - The National Bank of Ukraine (NBU) believes the risk of the budget deficit's growth might persist in 2025-2027 as the defense sector's needs are likely to keep growing in this period, which could require mobilizing resources from the domestic debt market or raising taxes.

"Should this risk materialize, the government is expected to take extra measures to mobilize internal resources for avoiding the monetary financing of the budget deficit, particularly through increasing borrowings on the domestic debt market or raising taxes," Ukrainian media said citing the NBU's January 2025 Inflation Report.

"New tax initiatives, depending on their parameters, could influence inflation in different ways. Higher consumption taxes (for example, VAT rates) will immediately impact consumer prices. In case direct taxes are raised, the effect might be close to neutral or disinflationary, as they curb private consumption, which compensates for a pro-inflationary influence of large budget expenditures," it said.

A monetary policy to deal with a potential increase in taxes amid limited potential for optimizing budget expenditures will depend significantly on their configuration, it said.

As reported, Ukraine's 2025 state budget allots 26.3% of GDP for the security and defense sector, which is equivalent to UAH 2.23 trillion, up by UAH 47.6 billion from the updated plan for 2024.

In its macroeconomic forecast updated in January, the NBU lowered its projections of Ukraine's economic growth in 2025 to 3.6% from 4.3%, while increasing projected inflation to 8.4% from 6.9%, compared to what it predicted in October 2024.