In the first half of 2025, Ukraine demonstrated a strong fiscal position. The revenues expanded significantly because of a strong tax performance and higher non-tax inflows. Legislative changes to the military levy and excise rates, higher wages, and inflation led to the rise of tax revenues to $23.3 bn. This is a 14.5% increase compared to the same period last year. At the same time, non-tax revenues surged by 32.6% to $16.4 bn thanks to the military assistance. Grant inflows reached $5.2 bn making external support critical for sustaining fiscal stability.

This is highlighted in the Fiscal Digest for the first half of 2025, prepared by the Center of Public Finance and Governance at KSE Institute.

Defense and security needs contributed to the sharp rise in expenditures. Total spending increased to $58.1 bn which is 17.1% more compared to the same period last year. Defense outlays reached $32.2 bn (+27.8%) and public order expenditures $8.5 bn (+15.2%). Social protection was the only major function to contract and fell by nearly 15%. This was mainly due to lower transfers to the Pension Fund and cuts to support for persons in difficult life circumstances.

In July, Parliament approved long-anticipated amendments to the budget, as the initial plan had underestimated defense needs during active hostilities. The mid-year budget amendments included 6.3% revenues increase and 10.2% expenditures growth. The deficit ceiling was raised by $5.6 bn to $42.2 bn. The amendments reflect the priority of sustaining defense financing. 

Having to keep up with record defense expenditures, the government managed to narrow the budget deficit in headline terms. The deficit still remains structurally high. Thanks to the revenue mobilization and external support the deficit fell by 16.7% compared to the same period last year. The fiscal pressures remain significant due to high share of external debt and are only partially offset by temporary inflows in the form of grants. Dependence on grants, revenue volatility associated with the ongoing war, and demographic pressures contribute to the structural fiscal risks.

The support of international partners, in particular through the Ukraine Facility, ERA, and IMF, remains critical for the budget stability through the end of the year and subsequently. Gross external loans amounted to $15.6 bn while domestic bond issuance fell to $5.6 bn. Transfers from the National Bank also helped bridge the gaps.

The reliance on external resources has been growing which has resulted in a substantial increase in the state debt. By the end of the first half of 2025, state debt reached $184.4 bn, with external debt comprising 72% of the total. Domestic debt growth was more moderate due to limited issuance and significant redemptions. Active debt management and importantly negotiations on GDP warrants remain essential to contain risks.

Overall risks remain elevated. Any delay or shortfall in external financing could force greater reliance on limited domestic resources, complicating deficit management. Weak economic recovery, infrastructure destruction, and adverse weather may dampen tax and export revenues. Outward migration and labor shortages risk eroding the tax base and increasing social spending needs.