reservation for economy
Reservation of non-critical enterprises, corruption, and employment of veterans
Full-scale war affects all areas of the country’s activity. Its negative impact causes labor shortages, a shortage of human resources in the military, and a decrease in the income of both citizens and the budget as a whole. The search for quick solutions to some problems, such as reservation for economy, sometimes leads to the deepening of problems in other areas, such as the army and corruption.
Analytical points:
1) analysis of draft laws registered in the Parlament and review of their potential risks,
2) conclusions from ministries and recommendations from lawyers,
3) recommendations on ways to fill the budget from the NGO “Intention,”
4) proposed solution from the NGO “Intention” regarding the shortage of workers.
Reservation for economy, analysis of draft laws
Let’s analyze what exactly the parliament is proposing as a solution to economic problems through draft laws. What exactly are the conditions offered by the Verkhovna Rada for non-critical enterprises, including sole proprietorships?
Reservation for non-critical enterprises
It should be noted that reservations for the economy are already in effect and apply to critical infrastructure and are regulated by Cabinet of Ministers resolutions. For example, Resolution 560 regulates reservations for critical enterprises such as energy companies, defense industry enterprises, medical institutions, transport companies, etc. However, as of September 2024, six bills (No. 11331, No. 11331-1, No. 11332, No. 11332-1, No. 11332-2, No. 11308), which in various ways propose reservations for non-critical infrastructure.
The criteria for reservations for non-critical enterprises, the bills propose to include in the reservation:
- Business entities, in particular sole proprietors, who pay a monthly fee of UAH 20,400 for each employee or for themselves;
- Sole proprietors with a monthly income of UAH 61,200 or more;
- Employees or sole proprietors whose monthly salary is at least UAH 36,336, without an additional fee;
- Enterprises, organizations, and institutions with 10 or more employees who pay social security contributions of UAH 40,000 per month, up to 50% of employees;
- Officially employed persons or sole proprietors are automatically booked if they pay at least UAH 8,000 in taxes to the budget each month.
Risks of draft laws on reservation for economy
What risks are hidden in the draft laws on conscription, and how will the proposed mechanisms affect the army, society, and, in the long term, the economy?
Corruption risk of the “monetary criterion” for reservations
Such economic reservation mechanisms in draft laws should provide for the introduction of special checks. These checks should monitor: first, the receipt of bribes by employers (including sole proprietors) for employment in order to avoid mobilization; second, the creation of “fake” positions; and third, fictitious employment.
Accordingly, without such checks, an enterprise or an individual sole proprietor will be able to reserve specific people in exchange for bribes, regardless of their level of education or experience, or even “sell reservations” for artificial vacancies, regardless of whether the vacancies exist or not.
The division of society into “classes” as a social risk
Wealthy individuals will effectively “buy their way out” by paying for economic reservations, which will exacerbate class inequality and create a so-called “war for the poor.” In turn, the “war for the poor” will exacerbate the psycho-emotional state of the population and increase social tension, which could lead to conflicts and violations of the law. We emphasize that in wartime, the country needs solutions that unite all segments of the population, especially civilians and the military.
Ignoring the interests of the military and injustice
Many active military personnel had professions and incomes in civilian life that could have entitled them to deferment instead of joining the army. However, the proposed bills do not provide any opportunity for military personnel to be discharged from service in order to return to their previous jobs and continue to pay “deferment” and contribute to the budget.
Defense capability risk
Such “monetary” criteria for conscription, enshrined in legislation, do not take into account the needs of the front line in terms of personnel. At the same time, the army also suffers from a shortage of specialists and professionals. For example, the army also needs IT specialists, accountants, drivers, etc.
Increase in unemployment and decrease in tax revenues
Small businesses, such as individual self-employed entrepreneurs who do not have the financial resources to “pay for the reservation,” will be forced to close. As a result, the budget will lose revenue from these businesses. The closure of such individual self-employed entrepreneurs will, in turn, lead to an increase in unemployment and an increase in unemployment benefits.
Conclusions of ministries and recommendations of lawyers regarding draft laws
According to the law, ministries provide an analysis of the impact of each new bill on the entities that are subordinate to them. We publish the conclusions of their analysis. We also publish an analysis from a professional legal NGO.
Recommendations and conclusions of ministries
In its conclusion, the Ministry of Agrarian Policy does not support 11331 and does not recommend the bill, since for many agricultural enterprises the specified amounts of wages and tax payments are too high. Accordingly, mobilization may disproportionately affect agricultural regions.
The Ministry of Defense also does not support 11331 in its conclusion, as the proposed reservation model would violate one of the principles of mobilization preparation—guaranteed sufficiency, which determines the need to maintain a balance between providing the national economy with labor and the ability to recruit personnel for the army.
The Ministry of Economy also does not support 11331, as such a model (reservation) should ensure a balanced and fair approach, social equality, contribute to the preservation of the human resources potential of the national economy, and take into account the Armed Forces’ need for human resources. In addition, the level of wages is already one of the industry criteria currently used by the Ministry of Economy to determine which enterprises are critical to the national economy.
Analysis by the NGO “Legal Hundred”
The needs of the Armed Forces must be taken into account first and foremost. Accordingly, the greater the need for personnel, the higher the criteria for booking should be. This means that they must be approved at the level of subordinate regulatory acts so that the process of adapting the criteria to the conditions is more efficient.
It should be noted that some draft laws contain a reference to the Tax Code, without proposing amendments to this code regarding the introduction of a reservation fee. This makes the draft law vague and does not define its ultimate goal. When determining the need for such changes, the most important issue is the amount of this fee.
Also, the authors of the bills do not justify the selection criterion based on salary level and why these particular employees should receive reservations.
An analysis and comparison of the grounds for conscripts and military personnel shows that the latter are significantly limited in their ability to be discharged from service compared to the possibility of obtaining a deferral for persons who do not perform military service. In this situation, deferrals at the expense of the state will put military personnel, for whom there are not even clear terms of service, in an unfair position.
Recommendation of the NGO “Legal Hundred”: reject 13331, 1331-1, 13331-2.
Sources of budget revenue as an alternative to reservations
The budget is undoubtedly an important component of an adequate level of defense capability. But apart from the “reserve tax,” there are actually other ways and sources of filling the budget, both at the level of responsibility and functions of the entire country and individual communities. Let’s consider just a few of them.
Solving the problem of filling the budget
The main “stated” goal of such bills is to obtain funds to be allocated to the army. Although the goal seems to correspond to the need to protect the country, the mechanism for achieving it is harmful. For example, Penny Pritzker, the US Special Representative for Ukraine’s Economic Recovery, suggested filling the budget and fighting corruption at the same time. Specifically, she suggested focusing not on raising taxes, but on reforming customs and fighting gray markets. These are revenues that the country is not receiving, although it should be.
Another source of funding for the army could be the redistribution of non-critical expenditures from local budgets to the needs of the army. For example, the repair of fountains (7 million hryvnia, Chernivtsi), the repair of a court (106 million, Odesa), the reconstruction of lighting (17 million, Kharkiv), etc.
In addition, our team has the impression that such draft laws on reservations for non-critical enterprises were primarily developed to please voters and in response to requests from individual business players, such as IT, air transport, finance, and insurance (taking into account the State Statistics Service report on their average salary levels), but not at all to enhance defense capabilities during wartime.
Addressing labor shortages as an alternative to economic reservation
The shortage of workers is certainly detrimental to the economy, but the shortage of personnel and specialists in the military threatens the existence of the entire country. What should be the long-term perspective for replacing “quick and easy” solutions?
Proposal by the NGO “Intention” regarding staff shortages
Instead of short-term recruitment of personnel, we propose a long-term strategy of rotating service in the defense forces for the population without compromising the defense capability and effectiveness of the army. Namely:
- to introduce at the legislative level the dismissal from service in accordance with the mechanism we have developed for the gradual replacement of military personnel,
- to allow the reservation of 50% of employees of critical enterprises, provided that half of those reserved are veterans and reservists discharged from service.
Why are fixed terms an alternative to economic reservation?
Legislatively defined terms of service would bring the following benefits or advantages to business, society, and the army:
- Those mobilized after discharge could return to their previous jobs, resume their pre-war businesses, or open new ones and create jobs.
- Businesses would have a predictable period for which employees would be mobilized. They would also have a minimum forecast of the number of employees who would return to work.
- Mobilization would be easier, as 63.8% of men of mobilization age are afraid of service precisely because of the lack of fixed terms of service.
- The level of corruption would decrease. Both military personnel looking for ways to be discharged from service and conscripts looking for ways to avoid service due to the uncertainty of terms would stop seeking this opportunity.
- It will ensure the timely replacement of physically and mentally exhausted military personnel, which will contribute to the effectiveness of the army and defense capabilities.
- It will guarantee equal rights and obligations for all citizens, as enshrined in the Constitution. This will reduce the tension and “divide” between civilians and the military, which is currently only growing, especially in cases of conscription for non-critical enterprises.
Along with veteran politicians who are already successfully active, the adoption of a law on clear terms of service is a long-term and strategic decision. The same applies to the customs reform proposed by the US representative to fill the budget. We would like to see elected officials guided primarily by a long-term perspective when drafting amendments to legislation. But not by short-term considerations of how to please voters and temporarily fill the budget.
Full article in our publication for “Vox Ukraine”