Funding for defense and security needs is increasing, significantly outpacing the growth of all other expenses. In the Q1 of 2025, $20.8 billion was allocated for security and defense-related needs, $16.4 billion of which was used by the Ministry of Defense of Ukraine. This is a 55% increase compared to the same period last year. Meanwhile, total budget expenses for the same period increased by 26.8% year-on-year and reached $27.9 billion.

Social support expenses, in contrast, decreased by 15.7% to $2.5 billion in total, due to policy adjustments and reduced transfers required by the focus on defense. Some items of expenses were cut even further. Thus, aid to vulnerable groups, including internally displaced persons, decreased by more than 30% due to stricter rules for receiving funds. Transfers to the Pension Fund decreased by 26%, to $1.7 billion, after the transition of special categories of pensioners to the general system. 

Overall, $7.1 billion, or 25.4% of the state budget, was allocated for socio-economic development in the first quarter. For comparison, in 2024, the share of these expenditures was 33% or $7.3 billion, while security and defense funding for the same period was about 67% ($14.8 billion). 

The increase in spending by the Ministry of Defense is primarily explained by the steady flow of aid from international partners. Unlike at the beginning of 2024, there are no similar interruptions in the supply of military equipment, which has a significant impact on the sector. As a result, in the 1st quarter of 2025, the Ministry of Defense used $5.8 billion from a special fund that channels international assistance. Comparatively, in the same period last year, only $2.7 billion was used. 

Along with the growth in expenses, tax revenues were higher than expected. In the Q1 of 2025, the state budget received 14.3% more taxes than planned. The main reason for this growth was the changes in tax policy adopted at the end of last year and rising inflation. 

The largest increase – by 43.7% – was shown by the personal income tax and military fee, which amounted to $2.5 billion. However, VAT remains the largest source of tax revenues with a share of 21.6% in the total revenue structure.

More than $1 billion was generated by the increase of corporate income tax rates for financial institutions and banks. Advance payments from gas station owners and an increase in the excise tax on tobacco products also contributed to a significant increase in tax revenues. As a result, the tax plan for the Q1 was exceeded by 14.3% or $1.5 billion.

Non-tax revenues also played an important role in generating budget revenues. In the Q1, $7.7 billion was accumulated, which is 34.7% of all budget revenues for the period. The main source of such revenues was military aid provided by foreign partners – $6.6 billion or 86% of all non-tax revenues. 

Despite the decline, international support and loans remain crucial for budget financing. In the Q1 of 2025, external borrowings amounted to $6.3 billion. $4.2 billion of this amount was received under the ERA mechanism, which is guaranteed by future income from frozen Russian assets. An additional $1.7 billion was provided by Canada. Another $400 million is a tranche from the IMF under the terms of the 4-year Extended Fund Facility (EFF). Donor support, which accounts for more than 10% of revenues, is gradually recovering. Thus, in the Q1, Ukraine received 130% more grants than last year, totaling $2.3 billion. 

Notably, the agreement with the United States on mineral extraction will not significantly affect public finances in 2025. First, the final version of the agreement doesn’t convert the grant aid previously provided by the US into debt. Secondly, the created associate fund will receive relatively small amounts from Ukraine. For example, according to the Ministry of Finance, if the fund were to operate under similar conditions from 2019, the Ukrainian side would contribute about $71 million over 5 years. The expiration of the “economic liberalization” with the EU on June 5 will have a much greater impact. Without a timely replacement, it could reduce exports by $1.5-2 billion (about 6% of the total) and slow GDP growth by 2.5%.     

The continuation of active hostilities in the second half of the year may further increase defense spending. At the same time, foreign (in particular, US) military aid is likely to be reduced or suspended. To overcome the financing gap, the government will probably have to use further domestic borrowing, tax increases (e.g., VAT), fiscal consolidation, and structural reforms aimed at reducing shadow economy revenues. That is why a careful mid-year adjustment and sustained support from partners will be important for maintaining fiscal stability.