The government’s economic growth forecasts for the next three years have become more cautious and envisage two scenarios. The main forecast is based on the assumption that the war will end in 2026. The alternative scenario assumes that active hostilities will continue for longer. The uncertainty of the security situation poses the main risk to the budget. In case of escalation, investment activity is expected to decline and defense spending to increase—these assumptions are reflected in the Budget Declaration analyzed by the Center of Public Finance and Governance of the KSE Institute.

Taking into account security risks, damage to critical infrastructure, and labor shortages, the authors of the Budget Declaration assume GDP growth of 4.5% in 2026 and 5% and 5.7% in 2027 and 2028. For comparison, last year’s forecast predicted GDP growth of 7.5% in 2026. Inflation, on the other hand, has declined slightly compared to last year’s expectations. Although inflation is expected to remain high in 2026-2027, it should return to the National Bank’s target level of around 5% by 2028, with a possible deviation of up to 1%.

The budget deficit is expected to decline significantly, from 9.9% of GDP in 2026 to 3.8% in 2028. Continued active cooperation with international partners is likely to play a key role in financing the state’s needs. Accordingly, faster growth in public debt is expected. According to the updated estimate, the debt-to-GDP ratio will remain at 100% throughout 2026-2028. Previously, it was expected that this indicator would gradually decline from 110% of GDP in 2025 to 90% in 2027.

Tax revenues will remain the main source of state budget revenues, with their share increasing from 84% in 2026 to over 90.4% in 2028. At the same time, the level of tax revenues in GDP will decline from 21.9% to 21.4% during this period. In its new forecast, the government does not include significant defense assistance due to the high uncertainty and sensitivity of such data. At the same time, a gradual reduction in budget expenditures is expected. In particular, the share of defense spending will decline to ~38% in 2028 if the war ends in 2026. If active military operations continue longer, security and defense funding will remain at the current year’s level. 

The subsistence minimum and minimum wage will grow mainly in line with inflation. At the same time, the subsistence minimum will remain below the basic needs of the population. Meanwhile, the minimum wage will increase by 8.6% in 2026 (UAH 8,688), 7.9% in 2027 (UAH 9,374), and 7.3% in 2028 (UAH 10,059). Wage growth will contribute to an increase in real incomes of employees, as well as revenues to the State Budget, the Pension Fund, and the Social Insurance Fund for Unemployment through an increase in the single social contribution.

Local budget financial resources will grow due to an increase in communities’ own revenues. At the same time, there are risks associated with the termination of the 4% additional personal income tax rate. Currently, it is thanks to this revenue item that communities receive a significant share of funds. Another risk for local budgets may be the continuation of the transfer of “military” personal income tax to the State Budget until 2027. However, the resumption of the State Regional Development Fund should compensate for part of the losses.

Overall, according to KSE Institute analysts, the Budget Declaration for 2026-2028 reflects the high level of uncertainty caused by the war and the need for additional measures to maintain macrofinancial stability. The document reflects cautious expectations for further development and provides for flexible planning in the current conditions.