Fiscal Multipliers in Ukraine

Amid renewed crisis, falling tax revenues, and rising debt, Ukraine faces serious fiscalconsolidation needs. Durable fiscal adjustment can support economic confidence and rebuildbuffers but what is its overall impact on growth? How effective are revenue versus spendinginstruments? Does current or capital spending have a larger impact? Applying a structuralvector autoregressive model, this paper finds that Ukraine's near-term revenue and spendingmultipliers are well below one. In the medium-term, the revenue multiplier becomesinsignificant (with a wide confidence interval) and the spending multiplier strengthens. Capitaland current spending have a similar effect on growth but the capital multiplier remainssignificant for longer. These results suggest near-term consolidation based on a combinationof revenue and spending measures would have a modest impact on growth. At the same time,medium-term policies could minimize the adverse consequences of consolidation on growthby offsetting some current spending cuts with increased capital spending. Given the severechallenges facing the Ukrainian economy, it is important that policymakers apply these resultsin conjunction with broader considerations such as public debt sustainability, investorconfidence, credibility of government policies, and public spending efficiency. Consequently,it may be necessary to rely more on current spending cuts over other types of consolidationmeasures even though multiplier estimates suggest a more diverse combination of measures.