Possible increase in taxes will exert inflationary pressure – NBU

The government's tax initiatives aimed at increasing budget revenues may increase inflationary pressure.

This is stated in the materials of the National Bank of Ukraine (NBU), the Ukrainian News agency reports.

"Individual tax initiatives may have a greater impact on inflation than is currently taken into account in the base scenario of the forecast. Financing significant expenditures on security and defense requires the expansion of the domestic resource base of the budget. The base scenario of the forecast takes into account a number of mobilization measures in 2024, in particular the increase of excise taxes. At the same time initiatives to introduce new taxes or increase rates on existing ones, reducing or canceling tax benefits are currently a forecast risk," the NBU notes.

It is noted that each of these initiatives can have a different impact on inflation.

Thus, an increase in certain direct taxes (in particular, from personal income) will reduce inflationary pressure due to consumption restrictions, thus offsetting the impact of higher budget expenditures.

Consumption taxes contain more pro-inflationary risks because their increase will be directly reflected in consumer prices.

In particular, in the case of an increase in the VAT rate, it will affect almost all components included in the CPI.

At the same time, as world experience shows, this effect is usually reflected in the annual inflation rate within 12 months and fades away.

Pro-inflationary risks include the possible introduction of a military levy on the income of enterprises.

Businesses can largely pass on such a tax to consumers.

The effect on prices can be multiplicative since taxation will occur at every stage of the production and sales chain, except for vertically integrated companies.

The introduction of such a tax can significantly increase inflation within a relatively short period.

As the Ukrainian News agency earlier reported, in mid-July, the Cabinet of Ministers approved draft laws proposing to raise taxes by a total of UAH 140 billion by the end of the year and to increase spending on the defense and security forces by UAH 495.3 billion.

To request a correction, please send an email.