www.debaty.org

February 28, 2012 Teacher’s House, Kyiv, Ukraine

INCREASING GOVERNMENT SPENDING WILL PREVENT THE 2ND WAVE OF CRISIS IN UKRAINE PUBLIC DEBATE BRIEF

Speakers FOR the motion Speakers AGAINST the motion

Oleksandr Suhonyako President of the Association

of Ukrainian Banks

Viktor Pynzenyk Former First Vice-Prime Minister of Ukraine, Former Minister of Finance

György Surányi Head of Central and Eastern Europe Region for Intesa Sanpaolo Group, Chairman of the Board of CIB, PBZ, VUB, Former President of the National Bank of Hungary

Mehdi Hasan Senior Editor (Politics) at the New Statesman,

United Kingdom

The debate on the motion “Increasing government spending will prevent the 2nd wave of crisis in Ukraine” opened the season of public debates in 2012. The event was held by the Foundation of Effective Governance in partnership with Britain-based Intelligence Squared. The Ukrainian journalist and TV anchor Mustafa Nayem moderated the debate.

As economies face the looming second wave of the global crisis, experts argue which kind of a budget policy can mitigate the consequences of this crisis. On one hand, an increase in public spending will boost domestic demand and encourage the economic growth, but on the other, budget cuts today will help to accumulate and preserve the resources that the country will need to fight the consequences of the crisis.

Advocates for the motion emphasized the ineffectiveness of austerity. To this end, they referred to the examples of Great Britain, Spain, Ireland and other countries which exercised strict budget policy and financial control, yet failed to prevent the crisis.

Their opponents agreed that the influx of budget money in infrastructure and investments may boost the economy. However, when the country heavily suffers from a budget deficit, this financing is only possible by increasing the public debt, which, in turn, increases macroeconomic risks. This is while Ukraine already has problems with an access to international capital markets.

During the discussion, the audience remained almost entirely truthful to their initial opinion. The panel against the motion won the vote with an 8% increase, from 61% at the beginning of the debate to 69% at the end.

Public debates provide an opportunity to discuss the most topical issues of Ukraine’s economy. The project’s goals are to help the public develop an informed view on the country’s economic situation and to facilitate a culture of constructive communication about its most important problems.

Oleksandr Suhonyako: “The increase of public spending per se cannot prevent the economic crisis or help the country combat this crisis. The problem can only be solved with an entire set of economic tools. The main source of filling in the budget is our brains and hands. That is why our main concern should be that this source is never exhausted”.

Viktor Pynzenyk: “Speaking of public spending, we should not overlook one ‘small’ thing: where to get the money. In our case, we can only get the money by increasing the public debt. This is while during the last four years Ukraine has already increased its public debt five times. Moreover, we are threatened by a sovereign debt which builds up when the economy spends more than it earns. Consequently, it is weird to call for more spending when almost all of our problems come from spending too much”.

György Surányi: “Nobody is willing to lend money to Ukraine until its fiscal situation is sustainable. Ukrainian households do not want to place their money at the government’s disposal either. Under these circumstances, the best advice is to improve the economy’s solvency and instead of levying new taxes, ensure the effective management of the existing financial resources”.

Key Statements

Q&A Session with the Audience

Voting Results

Q: “What additional sources can cover the increased public spending?” A: Oleksandr Suhonyako: “Our fiscal policy should meet the goal we set, i.e. an expansion of the domestic market. This includes joined projects of government and business, both local and foreign. The main thing is to earn the trust. Then we will have a favorable investment climate”. Q: “Don’t you think that the government should pay more attention to the quality and effectiveness of public spending?” A: Oleksandr Suhonyako: “We say that public spending should go for the renewal of our economy. There should be a direct relationship between public spending and the economic growth. We must be prepared for structural changes in our economy. Tomorrow we may face a crisis triggered by sovereign debts in banking system or metallurgy. That is why we must be ready to increase the domestic demand today (or better yesterday!)”. Q: “This year budget spending has increased compared to the previous year. There is no secret that the government plans to cover the additional amount by issuing state bonds. How these bonds may affect the liquid assets of the banking system?” A: Viktor Pynzenyk: “Last domestic auction has failed. The government could not borrow a single hryvnia. That is why it invents different types of bonds, but this clearly is a mistake”. A: Oleksandr Suhonyako: “If anyone in the Czech Republic had issued bonds in Euro, not in krona, this would have been tantamount to a capital crime. Yet in Ukraine such an initiative is welcomed. Hard currency bonds are madness”. Q: “Is the following statement true: to fend off the second wave of the financial crisis in Ukraine, the government needs to increase spending on the projects that are enticing from the political and investment points of view?” A: Viktor Pynzenyk: “Investments are not the government’s task. If we speak of infrastructure, then yes, this is the element of a favorable business environment. If we speak of industrial investments, then this is not what the government should spend its budget on. The government merely has to create the conditions for such investments”.

Mehdi Hasan: “We now have the results of the austerity experiment conducted by western European governments over the past two years, which slashed public spending to try and rein in soaring budget deficits: growth has ground to a halt, consumer confidence continues to plummet and unemployment has hit record levels. It makes no economic sense to reduce domestic demand. Ukraine’s leaders should be trying to boost demand in order to kickstart growth and create new jobs”.

Further information and the video version of the debates are available on:

www.debaty.org and www.feg.org.ua

FEG, 8 Illinska Str., 8th Entrance, 5th Floor Kyiv, 04070, Ukraine

tel: +380 44 501 41 00 feg@feg.org.ua

Increasing government spending will prevent the 2nd wave of crisis in Ukraine