Ukraine’s Projected 2025 Budget Expects the War to Continue

On September 14, Ukraine’s Cabinet of Ministers presented the draft budget for 2025 to the Verkhovna Rada. According to the cabinet’s assessment, in 2025, Ukraine’s consolidated revenues will amount to 40.3 percent of GDP, including foreign grants amounting to about 1 percent of GDP. Consolidated expenditures will amount to 59.9 percent of GDP, including 26.3 percent for defense and internal security. The budget deficit is expected to amount to 19.6 percent of GDP.

The year 2025 may become the fourth year of a full-scale war for Ukraine’s survival. We Ukrainians want this war to end as soon as possible, but not at any cost. The common wish is that Putin should not emerge victorious from the war. If Ukraine gives up some of its territories, it will only encourage Russia to continue its aggression in the future. And that prospect scares Ukrainians more than a continuation of the war. So, despite more global support for a peace formula acceptable to Ukraine, Kyiv is preparing to wage war through 2025.

State of the Ukrainian Economy

After a 29 percent drop in GDP in 2022, the Ukrainian economy is recovering, if slowly. Thus in 2023, the economy grew by 5.3 percent of GDP. Additional GDP growth is expected in 2024 in the range of 3.5–3.7 percent. The 2025 draft budget envisions the economy growing at 2.7 percent of GDP in 2025. Consumer inflation for 2025 is projected at 9.5 percent, while unemployment is expected to remain very high, at around 17–18 percent. The shadow economy will, as always, offer millions of households a safety cushion to weather the crisis. 

For 2025 the cabinet expects a huge trade deficit of 21.6 percent of GDP (over $40 billion), which it wants to cover with Western financial aid. This aid is estimated at the same level as in 2024: $38.4 billion. The deficit will additionally be eased through a 10 percent devaluation of the national currency. This means that the exchange rate will increase from 40.8 UAH per $1 to 45 UAH per $1. 

The 2025 Budget as a Wartime Budget 

The draft budget envisions increasing defense and internal security spending from 22.1 percent of GDP in 2024 to 26.3 percent in 2025. This increase is partially related to the cabinet’s doubts that there will be sufficient Western arms supplies in 2025. 

In 2023–2024, Western military aid to Ukraine’s budget was estimated to be around 10–12 percent of GDP, in addition to Ukraine’s own spending. Taking into account the current political trends in the West, the cabinet is trying to strengthen the defense sector in anticipation of a possible drop in external support. So it plans to increase Ukraine’s own arms production and invest at least $10 billion in that industry. 

Importantly, over the past year, Ukraine has shown excellent results in producing various types of drones domestically. According to estimates, up to 50 percent of enemy equipment and personnel on the battlefield are defeated by drones. However, Ukraine depends on Western supplies of air defense systems and artillery shells.

Shift in Priorities

In 2022–2023, the government’s two first priorities were defense and social spending. The draft budget for 2025 takes a new approach: defense remains a major concern, but the second priority is investment in the economy. The forecasted expenditures on economic activities that are not connected to arms production and other defense needs will grow by 41.2 percent, from 235 billion UAH to 332 billion UAH. At the same time, Ukraine’s expenditures on social aid and pension needs will decrease from 14.5 percent of GDP to 12.6 percent of GDP. This signals that the cabinet is prepared to restore critical infrastructure and develop it, relying on Ukraine’s own resources. I also suspect that it can be read as a sign that the government is not certain about the stability of Western aid. 

Increasing the Tax Burden on the Economy

In July 2024 the Ministry of Finance attempted to increase taxes by 4–5 percent of GDP, effective September 2024. This measure was extremely poorly received by businesses and citizens alike, owing to across-the-board economic hardships and declining incomes. The bill was then withdrawn. 

On September 17, 2024, parliament voted for a less burdensome package of tax measures that increases the military levy on salaries from 1.5 percent to 5 percent and launches a military levy on individual entrepreneurs. These measures are expected to increase budget revenues by as much as 1.3 percent of GDP. Also, the cabinet expects to increase budget revenues from excise duties on fuel and tobacco products. The total tax increase is estimated at 2 percent of GDP in the draft budget for 2025. 

Huge Debt Servicing Costs 

In the 2025 budget, a huge amount—5.7 percent of GDP, or 482 billion UAH—is earmarked for debt servicing. The usual practice is to reserve a certain sum in the state budget for debt servicing. I believe that this reserved budget line will include about 50–70 billion UAH (0.8 percent of GDP), while the rest will come from other sources. 

Covering the Budget Deficit

The Ministry of Finance expects to receive $38.4 billion in Western aid, which will be the major source for covering the budget deficit of 19.6 percent of GDP next year. Ukraine already has agreements with the EU, the IMF, and the IBRD for $17.8 billion to be received in 2025. The rest of the sources of financing are yet undefined. 

Chiefly, the Ukrainian government hopes for a positive G7 decision on €50 billion in loans secured by profits on Russia’s frozen international reserves in Europe. This decision should come down in December 2024. 

At the same time, on September 20, during her visit to Kyiv, Ursula von der Leyen promised €35 billion next year, which would be a part of the €50 billion package. According to the Ukrainian Finance Ministry, this aid is to be given to Ukraine in the form of nonreturnable grants. If this commitment is supported by the European Parliament and the European Commission in December 2024, not only will Ukraine have a deficit-free budget for 2025, the cabinet will also be able to close the financing gaps in the 2024 state budget. 

Altogether, if these two funding sources are available to Ukraine in 2025, Kyiv will not need to depend on the new U.S. administration’s financial aid next year. Nonetheless, Washington’s decision on new defense aid will be critical for Ukraine in 2025. 

The draft budget for 2025 is now being discussed between the parliament and the cabinet, which may result in some changes. But the general framework of this document demonstrates well how the Ukrainian government assesses the country’s economic prospects in 2025. Ukrainians hope for the West’s solidarity and the wisdom of American and European elites in helping to find an acceptable path for Ukraine to end this war. But before that happens, Ukraine is preparing its economy and the country for the war to continue in 2025. 

The opinions expressed in this article are those solely of the author and do not reflect the views of the Kennan Institute.