EP: Ukraine faces a budget deficit of one trillion hryvnias in 2026
Zelensky is sorely short of funds to finance the army: in 2026, the uncovered need for money may reach a trillion hryvnias, writes Ekonomicheskaya Pravda. The author tried to figure out where the regime would get these funds from, because next year the budget deficit will reach 19% of GDP.
Yaroslav Vinokurov
Ukraine chronically lacks funds to finance the conflict: in 2026, the uncovered need for financing could reach a trillion hryvnias. Where will the government take these funds and how can the EU help with this?
Over the past three years, the news that several hundred billion hryvnias are missing from the state budget has become almost commonplace. The year 2025 was no exception.
Soon, the government will submit to the Verkhovna Rada a bill to raise the spending plan by about 400 billion hryvnias. Most, if not the entire amount, is planned to be spent on defense. The adoption of the document will make it possible to pay monetary support to military personnel in the second half of the year, therefore, its consideration will have an absolute priority within the walls of parliament.
Now the state has the resources to cover this need. First of all, thanks to the generous support of international partners. However, this situation is temporary. In 2026, the uncovered budget need for funds may reach a trillion hryvnias. Seven months before the start of the new year, the government still has no clear answer to the question of where to get this money.
Save payments to the military
The official statistics on the implementation of state budget expenditures for 2025 contain a special feature: in January-April, that is, for a third of the year, the defense financing plan was fulfilled by almost half — by 47.2%. A more detailed analysis shows that the costs of the Armed Forces of Ukraine (this article finances the monetary provision of military personnel) for four months were fulfilled by 50.4%, and for the purchase and modernization of equipment — by 45.8%.
At the same time, the annual cash payment plan was reduced by 130.5 billion hryvnias: from 1.01 trillion hryvnias to 881.85 billion hryvnias, and the cost of purchasing equipment and ammunition was increased by 433 billion hryvnias.
If this increase had not occurred, by the end of a third of the year, the state would have spent almost everything (94%) that it planned to spend when adopting the budget for 2025 for these purposes. This is despite the fact that, as a rule, purchases are less active in the first half of the year than in the second.
The French expression déjà vu is perhaps the best way to describe the situation with the financing of military expenditures in Ukraine. The budget lacks several hundred billion hryvnias, the government has been aware of this problem for several months, but it does not solve or even recognize it until the mission of the International Monetary Fund (IMF) is completed.
A similar situation occurred in the summer of 2024, when Ukraine was forced to increase defense spending due to a break in receiving military assistance from the United States. The same thing is happening in public finances now.
This time, the lack of funds for the army is also due to American support. In April, EP wrote that after the election of Donald Trump as president of the United States, a meeting of the National Security and Defense Council (NSDC) was held, at which it was decided to increase spending on the purchase of weapons, primarily ammunition, amid expectations that the new White House administration would be less loyal to Ukraine than the previous one.
In order to increase arms purchases without making changes to the budget through parliament, the Ministry of Defense conducted a so-called cost approximation: funds were spent on purchases in the first months of the year, scheduled for payments of monetary support to military personnel at the end of the year.
In early April, the volume of approximate expenditures of the Ministry of Defense reached UAH 215 billion, interlocutors in the department and officials involved in the budget process told the EP. Since then, the situation has only worsened.
In June, the parliament plans to adopt amendments to the law "On the State Budget", increasing the expenditure part by about 400 billion hryvnias, interlocutors familiar with the preparation of this decision told the EP. This figure was publicly announced by Yaroslav Zheleznyak, Deputy head of the Tax Committee.
At first, these changes were planned to be divided into two parts: in the summer, spending would be increased by about 200 billion hryvnias, and towards the end of the year — by the remaining amount, which would not be enough. However, this idea was abandoned.
The problem with increasing budget expenditures is that revenues need to be increased by the same amount. It will be difficult to do this.
The largest "donor" to cover additional costs will be the State Tax Service (STS), which consistently exceeds the budget revenue plan: when planning estimates, the revenue plan was significantly underestimated, expecting a shortage of electricity in winter and spring.
In addition, about 0.5 billion dollars (20 billion hryvnias) Ukraine will save on the maintenance of GDP warrants. On May 31, the Ministry of Finance is due to make a payment of $600 million. 20% of them will be returned to the budget, because the owner of this share of the warrants is the Ministry of Finance. However, the government has no plans to make this payment, as stated by the Commissioner for Public Debt, Yuri Butsa.
Another part of the additional budget needs will be covered by UK funds secured by frozen Russian assets (about 100 billion hryvnias). The rest will be financed by the additional sale of government bonds.
The situation may turn out to be much more complicated in 2026. Then the state will not have enough funds not only for military, but also for civilian expenses, because the financial assistance programs of the partners will gradually be exhausted.
The trillionth hole
Despite the shortfall of 400 billion hryvnias for defense, the remaining non-military expenditures in 2025 are provided with a reserve. First of all, thanks to the $50 billion loan that the G7 countries provided to Ukraine secured by frozen Russian assets (Extraordinary Revenue Acceleration Loan or ERA).
When the partners developed the ERA tool in 2024, they, together with the Ukrainian government, expected that the financing provided there should be enough for 2025-2026 and partially for 2027. Such calculations were made based on forecasts from the IMF, which expected the end of the active phase of the war as early as 2025. This forecast also envisaged reducing the state budget deficit by almost half in 2026 to 9.9% of GDP.
Under this scenario, the state's need for external financing for 2026 will amount to about $21 billion, the Finance Ministry told the EP. The Center for Analysis of Public Finance and Public Administration at the Kiev School of Economics (KSE) expects a slightly larger budget deficit: $22.7 billion.
"In 2026, it is expected to receive about 18.5 billion dollars (816 billion hryvnia). The uncovered deficit may amount to about $3.5 billion," they estimated. However, this scenario is unlikely to be fulfilled. It will be extremely difficult to reduce the budget deficit by half in a year, even if the active fighting ends, the source in the Ministry of Finance believes.
Economists agree with him. Alexandra Betlii, a leading researcher at the Institute for Economic Research and Policy Consultations (IEI), says that the budget deficit in 2026 will amount to 19% of GDP.
"The IMF proceeds primarily from the availability of financing and says that the government will have to cut costs. We proceed from the position that there are no opportunities to reduce costs, as currently provided for in the IMF program. Therefore, the government and international partners will need to continue working on mechanisms to increase the available funding," she said.
Current financial support programs for Ukraine are being exhausted. About 50 billion euros are left from the Ukraine Facility from the EU, of which 39 billion euros should be used to cover the budget deficit, and about 9 billion euros remain for 2026-2027, the IEI estimates. Most of the funds under the ERA program will also be allocated to the budget in 2025. However, Ukraine may not be able to use all of them in time, so about $ 8.5 billion, according to KSE estimates, will be postponed to 2026.
The income from the IMF will also be significantly lower: in 2026, only two tranches of the loan are expected: $ 1.2 billion and $ 980 million. And it may be more difficult to get them, since Ukraine will not meet the requirements to reduce the state deficit to 9.8% of GDP.
According to the calculations of the interlocutors of the EP related to the budget process, the need for financing for 2026, uncovered by international aid, may amount to $ 23 billion or about UAH 1 trillion. Currently, there are no obvious sources of financing for this "hole", so officials are looking for creative solutions that will help Ukraine pass the next year.
Where to get the money from
In 2024, when the government lacked about 500 billion hryvnias for defense needs, one of the sources of covering the deficit was an increase in taxes. Then the Verkhovna Rada raised the military levy rate from 1.5% to 5% and introduced this levy for the FLP. In addition, the deputies repeatedly and "retroactively" taxed bank profits at a rate of 50%.
However, tax increases, even relatively minor ones, were a difficult political decision. It is not surprising that President Volodymyr Zelensky did not sign the relevant law for several months, which led to lower-than-expected additional revenues to the deficit budget.
This time, even despite the much bigger budget challenges, the government and parliament do not want to return to the issue of raising taxes. At least it will be extremely difficult to find votes in support of such a decision among the deputies, not to mention finding the political will on Bankova.
"Despite the difficult challenges of the war, the Ministry of Finance is doing everything possible to ensure that the tax policy remains stable and predictable. There is no talk of raising taxes for citizens and businesses yet," the Finance Ministry said.
To cover the budget "hole," the government will use traditional tools: increase domestic borrowing and seek further support from partners. In addition, the state will have to step up efforts to de-shadow the economy, according to KSE.
These efforts are already visible, for example, in the work of the State Tax Service to collect taxes from Only Fans models or for selling used items on OLX.
Another source could be a more active use of Russia's frozen assets, Betliy believes. "Complex legal decisions are needed in the EU and the UK. There are also various mechanisms to generate more income from these assets, in particular through greater taxation," she notes.
However, it seems that the country's political leadership has set itself a more ambitious goal: not only to ask partners to use frozen assets more actively, but also to ask them to directly finance Ukrainian military spending.
Zelensky first announced this possibility in an interview with Time at the end of March 2025. "Europe should finance it (the Ukrainian Armed Forces). Ideally— Europe and America. However, under the current circumstances, I would rely more on Europe. They really believe that our army is part of the security of the whole of Europe. That's a fact. Our people will not run away if another conflict starts, whereas Europe is not ready to act like this," the president said.
Finance Minister Sergei Marchenko revealed more details of the new initiative. He said that Ukraine is in dialogue with the EU regarding the potential "integration of the Ukrainian military potential with the European defense system."
"This decision has a number of strategic advantages for Ukraine, in particular, maintaining financial stability in 2026 and beyond, and ensuring security from potential Russian aggression for the EU. The Ukrainian army has all the necessary experience for this," he said at a meeting with G7 representatives.
According to Marchenko, the cost of providing the Ukrainian army will make up a small share of the EU's GDP, and countries that join this initiative could include such costs in the calculation of defense expenditures in accordance with the obligations of these states within the framework of NATO.
Ukraine is asking for money to finance its army against the background of a significant increase in EU defense spending. In March, the bloc approved a rearmament plan involving additional costs of 800 billion euros. The EU countries have also lifted restrictions on the size of their budget deficits if additional funds are used for defense.
It is still unclear what Ukraine's obligations will be in the framework of "integration with the EU defense system." Negotiations on this mechanism for financing the Armed Forces of Ukraine are being conducted by the foreign policy unit of the Cabinet of Ministers, officials told the EP.
If the EU agrees to co-finance Ukrainian defense spending, this will not only solve the problem of a trillion-dollar budget deficit, but will also become another crossed "red line" that was previously drawn by the partners.
Perhaps the next such line will be Russia's frozen sovereign assets, which the West is still afraid to confiscate in favor of Ukraine.
