How Ukraine’s Fiscal Policy in 2026 Will Hamper the Country’s Economic Recovery
Ukraine’s 2026 budget marks a new chapter in its fiscal and economic history, reflecting profound internal contradictions and challenges.
Amid ongoing military conflicts, the government strives to balance the need for defense and security funding with limited economic capabilities.
The draft budget, submitted by the Cabinet to Verkhovna Rada on September 15, 2025, vividly illustrates this struggle.
It emphasizes rising expenditures—an unprecedented 4.75 trillion UAH, with more than half allocated precisely to defense and security, constituting 27.2% of the projected GDP.
Estimates project revenues at 2.89 trillion UAH, but the budget deficit will reach an astonishing 1.9 trillion UAH, or 18.4% of GDP—an exceptionally high figure that complicates further economic growth.
The nominal GDP is expected to hit $220.3 billion, with GDP per capita around $5,634, based on Fitch’s assessment.
In such conditions, the economy is forecasted to grow at a sluggish rate of only 2.4%, the lowest over the past three war years, amid global and internal economic pressures.
A critical issue is the rising national debt, projected to reach approximately 107% of GDP by the end of 2026—an increase of nearly 17 percentage points over two years.
This is a consequence of continuous borrowing and debt servicing costs, amounting to over one trillion hryvnias, threatening financial stability and reducing potential for strategic investments.
The government claims no tax increases are planned for 2026; however, detailed analysis of the budget indicates otherwise.
Tax revenues from individuals and military fees will increase by nearly 20%, suggesting efforts to maintain a facade of stability while actually intensifying fiscal pressure through increased rates and fees.
New excise taxes on sugary drinks, an increase in tobacco, fuel, and other levies aim to boost revenues but also fuel inflationary pressures.
Higher fuel prices caused by excise hikes and advance rent payments—such as 60,000 UAH monthly for gas stations—will likely lead to increased prices across sectors, impacting living costs.
The budget also introduces levies on digital platforms like Booking, OLX, Bolt, promising to pay taxes for their Ukrainian clients, thus complicating the tax landscape for ordinary consumers.
Furthermore, the government aims to collect 60 billion UAH from shadow economy reduction, but this optimistic goal raises questions about its feasibility given current resources and enforcement capacity.
Implementing effective measures requires comprehensive reforms—digitalizing customs controls, modernizing the State Tax Service, and reforming the Security Bureau—though the draft budget provides limited funding for these initiatives.
Monetary policy remains tightly linked; the National Bank continues to favor government bond placements over expanding credit to the real economy, with banks preferring low-risk deposits in the NBU rather than lending to businesses.
This vicious cycle hampers economic recovery, as only about 40% of deposit funds are channeled into actual crediting.
Notably, the NBU’s record profit transfer of 146 billion UAH for 2025 will significantly influence the budget, while plans to attract up to $44 billion in foreign aid and leverage frozen Russian assets offer some relief, though the core challenge remains—implementing radical reforms in monetary and fiscal policies to foster long-term growth and stability.