Ukraine Introduces Wartime Tax To Bolster Defence Against Russia

Ukrainian President Volodymyr Zelenskyy has signed the nation’s first wartime tax increases into law, marking a significant financial shift as the conflict with Russia enters its 34th month. The new tax measures, aimed at bolstering Ukraine’s defence sector, will take effect on December 1.

Finance Minister Serhiy Marchenko stressed the importance of these changes to ensure consistent funding for military efforts in the coming year. The war tax on personal income for residents will rise from 1.5% to 5%, with the levy extended to tens of thousands of individual entrepreneurs and small businesses. Additionally, the government has increased certain rental payments, imposed a 50% tax on commercial bank profits, and raised taxes on other financial institutions to 25%.

These measures are expected to generate around 140 billion hryvnias (£2.7 billion) in extra revenue in 2024, providing crucial support for Ukraine’s defence at a time when the country faces a larger, better-equipped opponent.

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The tax hike has sparked widespread debate, given the significant toll the war has taken on Ukraine’s economy. Widespread poverty, heavy fighting along the 1,000-kilometre (620-mile) front line, and Russian attacks on cities and infrastructure have compounded economic challenges.

Marchenko underscored that the tax increases are also vital for Ukraine’s financial programme with the International Monetary Fund (IMF), a critical partner. The government has reached a staff-level agreement with the IMF, unlocking potential access to £880 million, pending approval from the Fund’s executive board.

Ukraine’s military expenditures account for about half of the national budget, with the 2024 defence budget set at 2.2 trillion hryvnias, maintaining this year’s levels. While state revenues fund soldiers’ wages and domestic arms production, Ukraine heavily depends on financial aid from Western allies for social and humanitarian spending.

External financing needs are forecast to reach £31 billion next year, with a projected budget deficit of 19.4% of GDP in 2025, down from 24% this year. To cover the 2024 deficit, Ukraine plans to secure funding from the IMF, the European Union, and a long-anticipated £41 billion G7 loan backed by frozen Russian assets.

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