Transformation of the Fiscal Mechanism of the EU Member States and
Ukraine During the Covid-19 Pandemic: from Consumption Supporting
to Investment Stimulation
VIKTORIIA RUDENKO
Department of Finance named after Viktor Fedosov
Kyiv National Economic University named after Vadym Hetman
54/1, Prospect Peremogy, 03057, Kyiv, UKRAINE
HALYNA POHRISHCHUK
Department of Finance, Banking and Isurance
Vinnytsia Education and Research Institute of Economics of West Ukrainian National University
37, Honty st., 21017, Vinnytsia, UKRAINE
OLENA MOSKVICHOVA
Department of Hotel and Restaurant Business and Tourism
National University of Life and Environmental Sciences of Ukraine, UKRAINE
15, Heroiv Oborony st., 03041, Kyiv, UKRAINE
MYKHAILO BILYI
Department of Finance
Vasyl Stefanyk Precarpathian National University
57, Shevchenko st., 76018, Ivano-Frankivsk, UKRAINE
Abstract: Faced with COVID-19, most countries have used the fiscal mechanism to mitigate the effects of the
coronavirus crisis, which primarily involved supporting economic subjects and ensuring the required level of
consumption. However, on the way to overcome the pandemic, it is necessary to use a fiscal mechanism to
stimulate investment, which is an important prerequisite for economic recovery. Therefore, the purpose of the
article is to determine the role of the fiscal mechanism in the context of the COVID-19 pandemic and justify its
reorientation from supporting consumption to stimulating investment. In the course of the research, it was
established that in modern conditions the fiscal mechanism acquires special significance, becoming a priority
tool for the struggle of states against the consequences of the corona crisis, shifting the emphasis from the
previous priority of the monetary mechanism. The impact of the fiscal mechanism in terms of budget revenues,
budget expenditures, government loans, and guarantees on consumption and investment in EU member states
and Ukraine were analyzed. As a result of the study, it was found that the COVID-19 pandemic, which has
intensified all existing socio-economic problems of states, despite all its negatives, can become a springboard
for qualitatively new investment development. At the same time, it is necessary not to change the design of the
fiscal mechanism, but to reorient it to more efficient and adapted to new conditions investments in the
development of green and digital economy, as well as strengthening the socio-economic stability of countries.
Key-Words: fiscal mechanism; fiscal policy; budget revenues; budget expenditures; government loans;
government guarantees
Received: June 9, 2021. Revised: April 19, 2022. Accepted: May 16, 2022. Published: June 2, 2022.
1 Introduction
For the successful implementation of fiscal policy
in any country, a fiscal mechanism is formed,
which allows making the most effective
implementation of its tasks and ensure the fiscal
interests of the state. The fiscal mechanism
contains the means, forms, and methods by which
the influence on the formation, distribution, and use
of financial resources to conduct the fiscal policy,
in particular, aimed at stimulating consumption and
investment.
The global COVID-19 pandemic highlighted
the critical role of the fiscal mechanism in
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maintaining the livelihoods of households and
ensuring the functioning of economic entities.
Restrictive measures taken by states as to the
movement of people and social contacts have led to
business closures, declining business activity, and
labor markets contraction. The reduction in the
number of jobs and falling incomes of economic
entities against the background of extremely
uncertain development prospects have led to a
significant reduction in consumption and
investment. If with the beginning of the pandemic
the fiscal mechanism ensured the recovery of
consumption, in the long run, it should promote the
intensification of investment, which is an important
prerequisite for sustainable economic development.
The purpose of the study is to consider the
specifics of the transformation of the fiscal
mechanism of EU member states and Ukraine
during the COVID-19 pandemic, which included
both support for consumption and increased
investment.
Taking into account the importance of the
fiscal mechanism in the regulation of socio-
economic processes, its operation is based on a
certain methodology, which consideration depends
on the successful implementation of a specific goal
of the study. This methodology covers methods of
theoretical study and practical knowledge of the
processes of formation, distribution and use of
financial resources in order to implement fiscal
policy aimed at maintaining consumption and / or
intensifying investment activities during the
COVID-19 pandemic. These methods are
considered on an empirical, theoretical and
theoretical-empirical level.
Empirical methods are directly related to the
phenomena being studied and used at the stage of
formation of a scientific hypothesis. The study used
empirical methods such as description (fixation of
historical aspects of the transformation of the fiscal
mechanism in the COVID-19 pandemic),
comparison (comparison of historical phenomena
and processes that took place in the fiscal
mechanism during the COVID-19 pandemic),
observation (examination of peculiarities of
historical facts characterizing the transformation of
the fiscal mechanism during the COVID-19
pandemic).
Methods of theoretical level allow
conducting logical research of the collected
historical facts, to formulate concepts, judgments
and to draw conclusions. The research was
conducted using the following methods of
theoretical level: historical (study of the specifics of
the fiscal mechanism during the COVID-19
pandemic in chronological order), logical
(production of new statements of those ones
already installed about the use of the fiscal
mechanism in the COVID-19 pandemic),
argumentation (grounding of use of the fiscal
mechanism to support consumption and/or increase
investment through known historical facts due to
the implementation of certain considerations).
Theoretical and empirical methods help to
identify certain reliable facts and objective
manifestations of reality in the study of processes.
The following methods of theoretical and empirical
level were used during the research: analysis and
synthesis, induction and deduction, abstraction,
generalization, analogy, concretization and
classification.
The methods used in the study did not
exclude the possibility, in some cases, of simply
stating the facts in order to give the relevant
reasoning of the necessary evidentiary force.
2 Problem Formulation
The formation and functioning of the fiscal
mechanism are studied by Ukrainian scholars in
fragments, and therefore the theory of the fiscal
mechanism in the Ukrainian economic literature
has not been properly developed. Thus, the concept
of “fiscal mechanism” is rare; it is often identified
with tax, budget, or budget and fiscal mechanisms,
which we consider incorrect. Therefore, to clarify
the essence of this term, it is necessary to consider
two basic categories “fisc” and “mechanism”.
The very notion of “fisc” dates back to the
Roman Empire. In the dictionary of foreign terms,
the term “fiscus” (from the Latin fiscus) is
interpreted as “state treasury” [1], although initially
the word “fiscus” was associated with a basket,
mostly where the money intended for issuance
(transitional amounts, regardless of whether the
money belonged to the state or an individual) were
kept. Therefore, the word “fisc” began to denote
any box office, any amount that could be issued
immediately. In modern conditions, fisc is
understood as the state treasury (budget) [2]. In
addition, S. Honcharov and N. Kushnir define fisc
as “a set of financial resources of the state in a
centralized state” [3], while Yo. Zavadskyi, T.
Osovska, and O. Yushkevych treat fisc as “the only
national financial center” [4]. In our opinion, the
fisc needs to be considered in terms of the
components of the state budget - revenues (among
which the leading role belongs to taxes and
government borrowing) and costs (among which
the priority is expenditures and budget credits).
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As for the concept of “mechanism”, in
financial science, as in other fields of science, there
is still a debate about the understanding of its
nature and characteristics as a relevant scientific
category. Thus, in explanatory dictionaries, the
term “mechanism” is considered from several
positions [5; 6; 7]:
1. A mechanism as an internal device
(system of links) of a machine, device, apparatus,
or something that drives them into action.
2. Mechanism is a set of states and processes
that make up a certain physical, chemical,
physiological, psychological, etc. phenomenon.
3. Mechanism is a device that transmits or
converts motion.
4. Mechanism as a system, a device that
determines the order of any activity.
5. Mechanism as a method, mode.
In the scientific literature in determining the
essence of the concept of “fiscal mechanism” is
used one of the above approaches or a synthesis of
several of them, which we have summarized and
reflected in table 1.
Table 1. Approaches to the definition of the term "fiscal mechanism"*
Author(s)
Characteristics of the concept
Position to
understand
the content in
explanatory
dictionaries
Yu. Aleskerova
“The fiscal mechanism is defined goals and directions of development of
budgetary and tax relations and methods of their implementation at the local
level” [9].
2,3,5
V. Banton,
V. Taranhul
“The fiscal mechanism is the optimal use of the multiplier effects of
government spending and taxes to ensure the desired growth of real GDP,
which provides for the organization of fiscal relations, justification of current
measures to intervene in the formation and use of budget funds” [10].
2,3
T. Fursa,
S. Synytsia
“The fiscal mechanism is a set of fiscal measures carried out by authorized
state bodies, which are part of the overall economic strategy of the country,
to finance the activities of the state and communities, as well as indirect
funding to regulate the development of various sectors of the economy,
designed to promote sustainable development of production and growth of
national welfare” [11].
1,2
I. Kantsur
“The fiscal mechanism is a set of budget and tax mechanisms, which
combines the distribution processes from tax payment to the use of financial
resources of the state; a system of interconnected tools, which determine the
optimal parameters of the formation of financial resources for different
levels’ budgets and the maximum efficiency of their placement and use to
ensure the socio-economic development of society” [12].
1,2,4
T. Litovchenko
“The fiscal mechanism is a set of economic and organizational, regulatory
forms and methods of managing the fiscal activities of the state in the process
of formation, distribution, and use of monetary resources to meet its needs”
[13].
1,2,4,5
O. Sydorovych
“The fiscal mechanism is a set of organizational and legal norms, methods
and forms of public administration mechanisms for revenue mobilization,
their distribution and redistribution to achieve economic, social and
environmental goals of state formation” [14].
1,2,4,5
S. Tkachiv
“The fiscal mechanism is a set of specially designed and legally established
methods and levers for the use of financial resources” [15].
2,5
V. Tropina
“The fiscal mechanism is a set of economic, organizational, and legal forms
and methods of managing the process of formation, distribution and use of
centralized funds for the state to perform its functions - economic, social,
political, ideological (spiritual), which in real life cannot be distinguished,
how it is impossible to divide the fiscal mechanism into separate
mechanisms in the specified directions” [16].
1,2,3,4,5
M. Vatahovych
“The fiscal mechanism is a set of budget and expenditure, and tax forms,
1,2
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tools and instruments for the formation, and use of centralized funds to
finance the activities of the state and achieve its policy goals” [17].
V. Zymovets
“The fiscal mechanism is the withdrawal and redistribution of revenues by
the state in the framework of fiscal policy, which can be considered mainly
in the dynamics – as part of the turnover of financial resources, but not in
statics” [18].
2,3
*Source: Research by scientists
In table 1 we have given a far from the
complete list of definitions of the concept of “fiscal
mechanism” available in the special literature. But,
perhaps, these examples are enough to conclude
that over the years of research, financial scientists
have not only failed to form a common
understanding of the fiscal mechanism, but also,
conversely, introduced into scientific circulation a
significant number of definitions of this concept,
including almost all range of financial phenomena
and processes.
Therefore, in our opinion, the fiscal mechanism
should be considered as a set of fiscal means,
forms, and methods of targeted state influence on
the formation, distribution, and use of financial
resources to implement fiscal policy, ensure
qualitative changes in the socio-economic sphere
and achieve balance in satisfaction of fiscal
interests of all economic entities [8].
The impact of the fiscal mechanism on
consumption and investment can be quantitative and
qualitative. The quantitative impact of the fiscal
mechanism is expressed through the volume and
proportions of mobilization of financial resources to
the state budget, and their distribution between
individual territories, sectors of the national
economy and segments of the population.
Depending on changes in the ratio of financial
resources at the state and local levels, the amount of
budget revenues, the size of public procurement, the
amount of budget funding is regulated the economic
development, the impact is carried out on social
production, socio-cultural development of society,
its scientific and technological potential.
The qualitative impact of the fiscal mechanism
is associated with the use of such methods of
formation and use of financial resources, forms of
organization of financial relations, which allow
them to be considered as incentives for
consumption and investment. At the same time,
special means are used, the main of which include
reduction of tax rates, conditions for granting tax
benefits, setting the maximum size of the budget
deficit, the maximum amount of public debt,
conditions for granting budget loans and budget
financing, etc.
Thus, the fiscal mechanism in the context of
regulating consumption and investment can play a
stimulating, deterrent, leveling, optimization, and
integration role. The stimulating role is aimed at
expanding consumption and investment and is
realized through favorable taxation and active
budget investment. The deterrent role, on the other
hand, is aimed at creating barriers to the
development of certain consumer or investment
processes and is manifested through an increase in
the tax burden and a reduction in budget investment.
The leveling role is manifested in the
combination and maximum security of the interests
of all economic entities through the establishment of
optimal taxation and effective implementation of
budget investment. The optimization role is to
ensure the development of consumption and
investment processes taking into account economic,
social, cultural and environmental efficiency. The
integrative role is related to the coordination of
management decisions of various economic entities
in the context of the strategy of socio-economic
development of the state.
3 Problem Solution
3.1 The Impact of the Fiscal Mechanism on
Consumption and Investment
The state forms a fiscal mechanism to implement
fiscal policy. The fiscal mechanism influences
consumption and investment to address the
priorities of socio-economic development of the
country and provides a consensus in meeting the
fiscal interests of the state, enterprises, and
households.
During the COVID-19 pandemic, the fiscal
mechanism provided the basis for overcoming the
crisis, due to the nature of the socio-economic
shock and the health emergency with
unprecedented real consequences [19]. The priority
use of the fiscal mechanism to combat the
consequences of the corona crisis is explained by
the rapid achievement of the set tasks. Thus, there
is a certain time lag between the emergence of the
destabilizing phenomenon (pandemic COVID-2019
and the crisis caused by it) and its elimination
through regulatory measures of the state. Moreover,
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the time lag of the monetary mechanism is usually
longer than the fiscal, which is primarily due to the
complexity of the transmission mechanism, through
which the primary means are able to influence the
set tasks [20].
Using the experience of previous years, states
have used the proposals of J. M. Keynes on the use
of the fiscal mechanism to stimulate consumption
and later investment [21]. In particular, the following
components of the fiscal mechanism were used:
1) budget revenues, due to the manipulation
of which the tax burden on enterprises and
households was reduced, which allowed to
compensate for the losses of the latter and to restrain
the sharp decline in production and consumption;
2) budget expenditures, through the
manipulation of which the necessary health care
financing was provided, state support was provided
to the most affected enterprises and households,
which prevented a radical decline in economic
activity, more significant job losses, and more
significant social costs;
3) government loans and guarantees, as well
as the recapitalization of enterprises by the state,
which managed to support the working capital of
economic entities during the emergency period and
ensure fewer bankruptcies.
In countries with developed market
economies, in particular EU member states, all
components of the fiscal mechanism have been fully
used to reduce the negative socio-economic
consequences of the COVID-19 pandemic. In
emerging market economies, in particular, in
Ukraine, only certain components of the fiscal
mechanism were used. This situation is due to a
number of factors: different levels of economic
development of states and readiness to respond to
this crisis; the potential of fiscal space and the
sustainability of the public finance system; a speed
of development, adoption of the corresponding
system of measures; the level of development of
health care systems in general and the public health
care system and epidemiology in particular; the
degree of rigidity of lockdown measures and social
distancing; the level of development of medical
science and production of medical goods and
medical equipment in the country; human resources
of the health care system and the development of the
network of medical institutions; the difference
between the demographic and gender-age structure
of the population; the level of urbanization and
population density in the country [22].
In addition, the use of certain components of the
fiscal mechanism to combat the effects of the
COVID-19 pandemic, according to IMF experts,
should be determined by the stages of its deployment
and course [23].
In the first stage of the outbreak of the epidemic
and the lockdown of the economy, the fiscal
mechanism was focused on priority budget financing
of health care and state support to affected enterprises
and households by reducing the tax burden and
expanding budget transfers. That is, fiscal measures
were mainly aimed at preventing a fall in
consumption, rather than supporting investment.
In the second stage of the gradual opening of
the economy in an uncertain epidemiological
situation, the fiscal mechanism was aimed at
adequate budget financing of health care and
maintaining state support for certain needy
enterprises and households. That is, fiscal measures
were taken to increase consumption and gradually
restore investment. However, the priority was to
make public investments with the mass
involvement of the liberated labor force in the
implementation of such investments.
In the third stage of the pandemic containment,
when the progress in vaccination is achieved, the
state should direct the main efforts to economic
recovery. The use of the fiscal mechanism will
depend on the ability of states to make productive
public investments and to continue measures to
support needy enterprises and households, mainly
through the provision of government loans and
guarantees. That is, fiscal measures should focus
not so much on supporting consumption as on
stimulating investment.
Thus, in the context of the COVID-19
pandemic, the rapid and coordinated use of
components of the fiscal mechanism in the EU, in
particular through additional government
expenditures and shortfalls, has helped households
to maintain demand maintain demand at the
appropriate level and to provide business entities
with their business activities. The scale and
effectiveness of fiscal measures varied across the
EU members due to the different size of the fiscal
space, the level of economic development and
access to international credit.
3.2 Use of the Fiscal Mechanism in Terms of
Budget Revenues to Combat the Effects of
the COVID-19 Pandemic
The moment of an immediate outbreak of the
pandemic and associated with it increased burden
on health care required countries to respond quickly
by imposing severe restrictions and securing
support for economic entities. EU member states at
this time actively manipulated taxes to prevent
significant losses to businesses and falling
household incomes, as shown in table 2.
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Table 2. Measures within the revenue component of the fiscal mechanism to combat the effects of the COVID-
19 pandemic in EU member states*
Country
Austria (VAT), Belgium (VAT, CIT, IIT, SSCs), Bulgaria (VAT), Croatia (CIT),
Cyprus (VAT), Czechia (VAT), Estonia (VAT), France (VAT, CIT, SSCs. PT),
Germany (VAT), Greece (VAT), Hungary (VAT, CIT), Italy (VAT, SSCs), Malta
(VAT, CIT), Poland (CIT, IIT), Portugal (VAT), Spain (VAT)
Austria (IIT), Czechia (IIT)
Hungary, Latvia
Austria (VAT, CIT, IIT), Belgium (VAT, CIT, IIT, SSCs), Croatia (VAT), Cyprus
(VAT), Czechia (VAT), Denmark (VAT), Finland (VAT), Germany (VAT, CIT,
IIT), Greece (VAT), Hungary (VAT), Italy (VAT, SSCs), Latvia (VAT), Lithuania
(CIT), Luxembourg (CIT, IIT), Malta (VAT), Netherlands (VAT), Poland (CIT,
IIT, SSCs), Portugal (VAT), Romania (VAT, CIT, IIT), Slovenia (VAT, CIT, IIT),
Spain (CIT, IIT), Sweden (VAT, CIT, IIT, SSCs)
Austria (VAT, CIT), Belgium (VAT, CIT), Bulgaria (VAT), Croatia (VAT, CIT),
Cyprus (VAT, CIT, IIT), Czechia (VAT, CIT, IIT), Denmark (CIT, IIT), Estonia (VAT),
Finland (VAT, CIT), France (VAT, CIT, IIT), Germany (CIT, IIT), Greece (VAT, CIT,
IIT), Hungary (VAT, CIT), Ireland (VAT, CIT, IIT), Italy (VAT, CIT), Latvia (VAT,
CIT, IIT), Luxembourg (VAT, CIT, IIT), Malta (VAT), Netherlands (VAT), Poland
(VAT, CIT, IIT), Portugal (VAT, CIT, IIT), Romania (VAT, IIT), Slovakia (VAT, CIT,
IIT), Slovenia (VAT, CIT, IIT), Spain (VAT, CIT, IIT), Sweden (VAT)
Croatia, Cyprus, France, Greece, Hungary, Poland, Slovenia
Belgium (VAT, CIT), Bulgaria (CIT, IIT), Croatia (CIT, IIT), Cyprus (CIT, IIT),
Denmark (CIT, IIT), Finland (CIT, IIT), Germany (CIT), Greece (VAT, CIT),
Hungary (VAT), Ireland (IIT), Italy (CIT), Latvia (IIT), Lithuania (IIT),
Luxembourg (CIT, IIT), Malta (CIT), Netherlands (CIT, IIT), Poland (CIT, IIT),
Portugal (CIT), Slovenia (CIT)
Belgium (VAT), Cyprus (VAT), Czechia (VAT, CIT, IIT), Estonia (VAT),
Finland (VAT), Germany (VAT), Hungary (VAT, CIT), Latvia (VAT), Lithuania
(CIT, IIT), Luxembourg (CIT, IIT), Portugal (VAT), Romania (VAT, CIT, IIT),
Slovakia (VAT), Slovenia (VAT), Spain (CIT, IIT)
Austria, Belgium, Czechia, Malta, Netherlands
*Source: Compiled by the authors based on [24; 25]
Note: VAT – value added tax; CIT – corporate income tax; IIT – individual income tax; SSCs – Social security
contributions; PT – property tax
In the EU member states, the fiscal mechanism
in terms of budget revenues provided for the
improvement of tax administration and the
provision of tax breaks on certain taxes:
1) value-added tax: to support the most
affected sectors of the economy (catering, tourism,
culture, sports), and to reduce the cost of medicines
and medical equipment to combat the pandemic;
2) corporate income tax: to prevent the
deterioration of the financial condition of
enterprises and increase their investment;
3) individual income tax: to compensate for
the loss of household income and ensure their
normal functioning.
As for Ukraine, the threat of loss of budgetary
resources has led to insignificant use of the revenue
component of the fiscal mechanism. Thus, tax
breaks for businesses in response to the corona
crisis included: increasing the annual income
threshold for the simplified taxation system,
deferment of tax audits and tax filing deadlines,
abolishing tax fines and penalties for delaying tax
payments, temporary exemption from real estate
tax and the single social contribution. Payments by
enterprises for the lease of state and communal
property were halved, reduced by four times or to
zero for the quarantine period. Individuals affected
by the coronavirus were given the right to deduct
the cost of purchasing drugs from the individual
income tax base. Tax exemptions from VAT and
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import duties were provided for the production and
supply of medical devices intended for the
treatment and containment of COVID-19 infection.
In 2021, small businesses were written off tax debts
amounting to approximately 80 euros, and they
were entitled to a tax holiday to pay a single tax
until May 2021 [26; 27].
In the future, new priorities of the fiscal
mechanism should appear in terms of budget
revenues, which will contribute to progressive
development, both on the way out of the crisis of
the COVID-19 pandemic and in the post-coronary
crisis perspective. Such priorities should
include [28]:
1) a clear socially-oriented direction, freeing
it from the dominance of the principles of
neoliberalism and market fundamentalism of the
past; 2) focus on neutralizing excess, in particular,
the speculative income of enterprises that managed
to take advantage of their technological advantages
during the pandemic;
3) focus on the application of a stricter tax
burden on those individuals who managed to get
rich in the corona crisis;
4) synchronization with other countries,
which is best done within large institutional
structures, such as the EU or OECD.
In our opinion, the revenue component of the
fiscal mechanism in the future should contribute
not only to ensuring social equality, but also have a
positive impact on investment. It should be noted
that some EU member states, even during the
deployment of the COVID-19 pandemic, took
measures to stimulate investment. Thus, in Austria
an investment premium was introduced, equal to
7% or 14% depending on the type of investment (in
the form of a grant), awarded where the first stage
of investments in depreciable assets was made
between 1 August 2020 and 31 May 2021. Belgium
has temporarily introduced the 25% capital
investment deduction period for fixed assets
acquired or constituted between 12 March and 31
December 2022. Belgium has also introduced а
20% tax credit is available to individuals who
purchase shares in qualifying COVID-19 affected
companies from March 14, 2020, and still possess
those shares as at December 31 of the year of
acquisition, subject to conditions. A similar
measure is available for individuals who purchase
shares in COVID-19 affected SMEs from 1 January
to 31 August 2021; the total tax credit cannot
exceed €100,000. In Hungary, from May 2020, the
corporate income tax for the next four years has
been abolished for companies that will direct their
profits to the implementation of investment
projects. In Slovenia investment incentive measures
have been enhanced where new employment is
generated in manufacturing, services, and R&D.
Spain enhanced tax deductions from corporate
income tax and individual income tax are available
for investments made in the cultural sector [24; 25].
Ukraine has also developed measures to use the
fiscal mechanism in terms of budget revenues for
investment development, in particular, the Law of
Ukraine “On state support of investment projects
with significant investments in Ukraine” [29] was
adopted. The latter provides for the following
forms of support for significant investment
projects:
1) exemption from payment of certain taxes
and fees;
2) exemption from import duty of new
machinery (equipment) and components to it,
which are imported exclusively for the
implementation of the investment project with
significant investments for the implementation of a
special investment agreement;
3) ensuring at the expense of the state, local
budgets, and from other sources, not prohibited by
law, the construction of related infrastructure
facilities necessary for the implementation of an
investment project with significant investments.
In addition, in the context of the COVID-19
pandemic, the revenue component of the fiscal
mechanism is planned to be used for such
investment purposes [30]:
− introduction of special economic zones of
industrial-type with preferential tax regimes;
− introduction of effective incentives for the
implementation of investment projects of
innovative direction and acceleration of the
creation of innovative products by innovative
enterprises and organizations through the
introduction of a 20% incremental tax credit for
income tax;
− tax holidays for income tax for enterprises
that develop intellectual property for 5 years,
provided that they carry out such activities during
the previous five years;
− introduction of tax holidays for small and
medium enterprises involved in the implementation
of projects for the production of energy saving
equipment, provided by exemption from income
tax for three years and the application of a reduced
50% tax rate over the next two years under the
condition of funding of at least 30 % of the cost of
projects by private enterprises.
In our opinion, during the COVID-19
pandemic, the revenue component of the fiscal
mechanism should be flexible and adaptive with a
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rapid response to support the investment activity of
households and businesses and ensure the
sustainability of key macroeconomic indicators of
socio-economic development of the state.
3.3 The Use of the Fiscal Mechanism in
Terms of Budget Expenditures to Eliminate
the Negative Effects of the Corona Crisis
Unprecedented quarantine measures aimed at the
self-isolation of citizens, closure of service
enterprises, banning sports and entertainment
activities have undoubtedly affected the ability of
economic entities to generate income. Therefore,
due to the expenditure component of the fiscal
mechanism in the EU member states, not only the
priority financing of health care was carried out,
but also the programs of state support of economic
entities were introduced, adapted or expanded,
which is shown in table 3.
Table 3. Measures within the cost component of the fiscal mechanism to combat the effects of the COVID-19
pandemic in EU member states*
Measures
Country
Providing state support to certain vulnerable
groups of population
Bulgaria, Cyprus, France, Italy, Slovenia
Providing state support to families with children
Czechia, Germany, Hungary, Italy, Romania
Expanding the scope of state unemployment
benefits
Austria, Belgium, France, Greece, Ireland, Latvia,
Luxembourg, Malta, Spain
Providing transfers to cover fixed costs of
enterprises
Austria, Ireland
Providing state support to enterprises that retain
jobs
Austria, Bulgaria, Croatia, Cyprus, Czechia, Denmark,
Estonia, Finland, France, Hungary, Ireland, Lithuania,
Malta, Netherlands, Poland, Portugal, Slovakia, Slovenia,
Sweden
Providing transfers for businesses that suffered
losses during the pandemic
Austria, Belgium, Croatia, Cyprus, Czechia, Estonia,
Ireland, Finland, France, Germany, Luxembourg,
Netherlands, Slovakia, Sweden
Providing state compensation to citizens who lost
income during the pandemic
Bulgaria, Czechia, Denmark, Estonia, Germany, Greece,
Hungary, Ireland, Italy, Latvia, Lithuania, Malta,
Slovakia, Slovenia
Temporary cancellation / deferment of utility bills
Lithuania, Poland, Romania
Temporary reduction of utility tariffs
Greece, Lithuania, Slovenia
Providing state aid to pay for utilities
Bulgaria, France
Temporary cancellation / reduction / deferment of
rent for commercial premises
Belgium, Czechia, Greece, Ireland, Latvia, Romania,
Spain
Providing state support to non-profit organizations
Austria, Estonia, Poland
Abolition of financial sanctions in case of delay in
the execution of the state order
Belgium, Poland
State recapitalization of the share capital of
enterprises in priority industries
Finland, Hungary, Latvia
*Source: Compiled by the authors based on [31]
In the EU member states, the fiscal mechanism
in terms of budget expenditures provided for the
financing of health care, including the purchase of
medicines, the equipment of hospitals, as well as
financial and other incentives for medical staff.
State support was also provided to households,
which varied from country to country, but the main
focus was on providing those who lost their jobs or
experienced reduced working hours, and increasing
cash benefits to the most socially vulnerable
categories of the population (families with children,
pensioners, veterans, low-income, etc.). In addition,
state support was provided to enterprises and self-
employed persons most affected by the pandemic,
the affected sectors of the economy (air transport,
agriculture, tourism, etc.), as well as exports in
conditions where the pandemic disrupted
international cooperation within value chains. In
fact, the state used budget funds to compensate
economic entities for the losses they suffered or
lost income to maintain the appropriate level of
consumption.
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As for Ukraine, limited budget resources did
not allow for the full financing of health care, and
we can’t even speak about the state support to
enterprises and households. Thus, in January and
April 2021, entrepreneurs who ceased their
activities due to quarantine were able to receive
about 250 euros of one-time compensation from the
state. Entrepreneurs were also given the right to
receive assistance for children less than 10 years of
age. Regarding the payment of unemployment
benefits, the minimum amount of benefits for
persons with and without the necessary insurance
experience was increased. Temporary
unemployment benefits were introduced for those
who lost their jobs during the quarantine period, in
the amount of 2/3 of the monthly salary, but not
more than the minimum wage. One-time cash
benefits were also provided to pensioners with low
pensions in the amount of approximately 30 euros,
the monthly pension for pensioners over the age of
80 was increased, and pensions were indexed to all
categories of pensioners. Doctors and medical staff
received a 300% salary increase for the treatment
of patients with COVID-19. State insurance of
health workers in case of disability related to
COVID-19 was also introduced [27; 32].
In addition, in Ukraine in 2020 within the
special fund of the state budget was established the
Fund for the combat against acute respiratory
disease COVID-19 caused by coronavirus SARS-
CoV-2, and its consequences − a temporary budget
program, the funds of which were to be used
primarily to finance additional expenditures on
health and social expenditures directly related to
the COVID-19 epidemic [33]. However, a
significant part of the budgetary resources of this
Fund was not spent for its intended purpose, in
particular for holding local elections, construction,
and repair of roads, additional payments to police,
etc. Some part of the Fund's budget resources was
not allocated at all. Therefore, in 2021 such a Fund
was not formed [34].
The question now is how long states will be
able to compensate to economic entities its incurred
costs and lost revenue. Those countries that have
balanced public finances are likely to be able to
afford this by leveling at the expense of public
finances some compensation from reduced
employment in general or the introduction of
reduced working hours across the country.
However, there are very few such countries (say, in
the EU only the countries of Northern Europe,
Germany, and some others can “afford” this). For
most countries, including Ukraine, this can cause,
on the one hand, a new wave of welfare losses, and
thus − increasing social tensions, which will
inevitably lead to a socio-political crisis. On the
other hand, such a situation could lead to an even
greater imbalance in public finances, which will
already provoke a systemic economic and financial
crisis [35].
In our opinion, the fiscal mechanism in terms
of budget expenditures in the future should focus
mainly on public investment and the reduction of
unproductive expenditures. State support for
enterprises and households at this stage should be
more selective and aimed at helping viable
economic entities which suffer from social
distancing or whose preservation is critical to the
country's economy.
3.4 The Role of the Fiscal Mechanism in
Terms of Government Loans and
Guarantees in Support of Economic Entities
in the Context of the COVID-19 Pandemic
During the corona crisis, many small and medium-
sized economic entities, as well as businesses and
self-employed workers in the service sector,
suffered heavy losses. Therefore, to ensure access
to debt financing, EU member states have actively
used the fiscal mechanism in terms of government
loans and guarantees. Thus, in the spring of 2020
Austria, Denmark, Germany, Greece, Hungary,
Ireland, Italy, Latvia, Lithuania, Luxembourg,
Malta, Netherlands, Poland, Portugal, Romania,
Spain, Sweden started or announced new
government guarantee schemes that allow
financially disadvantaged economic entities to
continue having access to financial resources. Some
countries − Croatia, the Czech Republic, Estonia,
France, Germany, Greece, Italy, Latvia,
Luxembourg, Portugal, Slovenia, Spain, and
Sweden − provided government loans through
banking institutions or development funds.
It should be noted that in many EU member
states the provision of government loans and
guarantees was aimed at stimulating investment. In
particular, in Germany, syndicated lending with the
participation of the state was carried out for
medium and large enterprises that made
investments, as well as state lending to newly
created small and medium enterprises. In Spain and
Romania, state guarantees were provided to self-
employed workers and enterprises to make new
investments to adapt, expand or upgrade production
and service facilities, as well as to resume their
economic activities. In Italy and Estonia, state
guarantees were provided to enterprises solely to
support employment, make investments or ensure
the proper functioning. In Ireland, state guarantees
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were provided to start-ups. In France, innovative
loans were provided for start-ups secured by state
guarantees.
As for Ukraine, state loans to economic entities
affected by the COVID-19 pandemic were not
provided. However, state guarantees were provided
for the implementation of investment projects.
Thus, the State Agency of Motor Roads of Ukraine
received state guarantees for financing
construction, reconstruction, capital, and current
average repairs of public roads of state importance.
Commercial banks received government guarantees
for loans for investment purposes, refinancing of
debts of business entities on previously granted
loans, and financing of working capital, except for
overdrafts.
3.5 The Impact of the Fiscal Mechanism on
the Intensification of Investment Processes of
EU Member States and Ukraine
In the post-crisis period, the number of investment
resources will be much smaller than in previous
years, and so (reduced) indicators will be
maintained for at least several years (business
investment costs will recover quite carefully and
will be significantly inferior to household
consumption expenditures) [35]. Therefore, it will
be more important and effective to use the fiscal
mechanism to stimulate investment in certain
“breakthrough” areas, the acceleration and
strengthening of which will largely depend on the
success of transformations (or reforms) in the most
important areas of the economy.
In the EU, large-scale financial support for
public investment and reforms that will make
Member States' economies more resilient and better
prepared for the future provides for the
establishment of a Recovery and Resilience Fund
[36]. Thanks to this Fund, it is planned to use
significant resources of the EU budget to mobilize
investment and pre-financial support in the crucial
first years of post-crisis recovery.
The Recovery and Resilience Fund will provide
€ 723.8 billion (in 2020 prices) to support reforms
and investment in the EU Member States, of which
€ 385.8 billion in loans and € 338 billion in grants
[37]. This will help countries to overcome the
socio-economic consequences of the corona crisis,
to strengthen national economies, and better
prepare for a green and digital future.
To receive money from the Recovery and
Resilience Fund, EU countries must adopt and
agree with the European Commission their
National recovery and resilience plans. Moreover,
the European Commission requires compliance
with the targets − at least 37% of expenditures for
the development of the green economy and at least
20% of expenditures for the development of the
digital economy. In addition, the plans of EU
member states require investment and reform in the
following areas [37]:
1) power up clean technologies and
renewables;
2) renovate energy efficiency of buildings;
3) recharge and refuel sustainable transport
and chagrins stations;
4) connect roll-out of rapid broadband
services;
5) modernise digitalisations of public
administration;
6) scale-up data cloud capacities and
sustainable processors;
7) reskill and upskill education and training
to support digital skills.
Today, the existence of humanity requires so
many resources that go beyond the capabilities of
our planet. Therefore, fundamentally new steps are
needed, the transition to a concept of development
that will solve social, financial, fuel, and climate
problems comprehensively. This solution is the
concept of a green economy, i.e. an economy with
low carbon emissions, efficient use of natural
resources, which satisfies the interests of society as
much as possible. The concept of a green economy
envisages economic growth combined with
environmental sustainability; as such an economy
creates jobs, stimulates economic progress and at
the same time reduces such significant risks as the
effects of climate change and growing water
scarcity [38].
Taking into account all given above, at the
current stage of the COVID-19 pandemic, many
EU member states will use the fiscal mechanism to
invest in the development of the green economy, as
shown in table 4.
EU member states will implement measures
to develop a “green” economy mainly through
the costly component of the fiscal mechanism
through public investment, as well as through
the provision of state guarantees and loans.
However, some EU member states will use the
revenue component of the fiscal mechanism for
the development of the “green” economy
through the introduction of “green” taxation.
Thus, Cyprus announces the introduction of a
carbon tax on fuel, the gradual introduction of a
water tax, and a waste disposal tax; Austria
plans to introduce preferential tax rates for low-
or zero-emission products in combination with
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targeted tax benefits for businesses and
households in need; Denmark will temporarily
increase tax deductions for companies investing
in technology and software to facilitate their
transition to new business models with lower
greenhouse gas emissions.
Table 4. Measures to develop the green economy in EU member states, which will be implemented through the
fiscal mechanism*
Measures
Country
Energy efficient reconstruction of
buildings
All EU countries
Development of renewable energy
sources
All EU countries
Biodiversity support and ecosystem
protection
Bulgaria, Czechia, Italy, Ireland, Hungary, Slovakia, Slovenia,
Poland, Portugal, Romania,
Modernization of the railway
Austria, Belgium, Croatia, Czechia, Ireland, Italy, France,
Hungary, Latvia, Poland, Slovakia, Slovenia, Sweden
Development of cycling infrastructure
Belgium, Czechia, Denmark, Greece, Hungary, Latvia, Slovakia
Promoting the transition to
environmentally friendly transport
Austria, Belgium, Bulgaria, Croatia, Czechia, Cyprus, Denmark,
Finland, Germany, Greece, Hungary, Italy, Latvia, Lithuania,
Luxembourg, Malta, Poland, Slovakia, Sweden
*Source: Compiled by the authors based on [37]
Ukraine, focusing on EU member states, also plans
to take measures to develop a "green" economy in
2022-2024. Thus, due to the fiscal mechanism in
terms of budget expenditures, the following
measures are envisaged [39]:
1) achieving “good” water status, in
particular the protection of settlements, agricultural
lands, and estates from the harmful effects of water;
water supply to low-water regions; measurement of
water quality indicators;
2) preservation and restoration of natural
ecosystems by ensuring sustainable development
and rational use of nature;
3) waste management, including radioactive
waste management, prevention, and adaptation to
climate change;
4) increase energy efficiency and energy
saving in the residential sector, in particular,
equipping consumers with energy metering devices,
insulation and thermal modernization of buildings
and premises, equipping with thermal boilers, etc.
The situation caused by the COVID-19
pandemic required economic entities to work and
learn in real time. Due to quarantine measures,
many companies and institutions were forced to
transfer employees to remote work, which required
new technological solutions - the development of
IT infrastructure, security systems,
communications, electronic task setting, and
tracking their implementation. And at the same
time, there was a need to train staff on how to use it
all and adapt to change.
The way out of the existing turbulence on the
trajectory of sustainable growth will be
accompanied by shocks for countries that have not
created the technological preconditions for a new
rise in time. Under the new conditions, the country
will also benefit from digital innovations, in which
all components of the economy develop, interact,
improve and grow [40]. Therefore, in the context of
the COVID-19 pandemic, many EU countries will
use the fiscal mechanism to invest in the
development of the digital economy, which is
shown in table 5.
Ukraine, following the example of EU member
states, also plans to take measures to develop the
digital economy in 2022-2024. Thus, it is envisaged
to use the expenditure component of the fiscal
mechanism for the implementation of the following
measures [39]:
1) providing general secondary education
institutions with modern educational equipment and
updating the material and technical base (purchase
of school buses, computer equipment, and
multimedia equipment, modern furniture,
educational and methodical literature, means of
protection of participants in the educational process
during quarantine, equipping physical culture and
sports premises);
2) ensuring the transferring of the most
popular public services into electronic form;
3) introduction of electronic interaction
between electronic registers and optimization of
registers;
4) ensuring reliable protection of information
in public electronic registers and creating an
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effective system for combating cyber threats,
ensuring the protection of personal data in
accordance to European requirements;
5) development of Internet access networks,
creation of conditions for fourth and fifth generation
mobile technologies;
6) ensuring access of social infrastructure
institutions, local governments, and citizens to high-
speed Internet;
7) creating conditions for the development of
IT business and other sectors of the creative
economy;
8) ensuring the availability of digital literacy
training through the development of existing and
introduction of new learning tools.
Table 5. Measures to develop the digital economy in the EU member states, which will be implemented
through the fiscal mechanism*
Measures
Country
Digitalization of education
Austria, Belgium, Croatia, Czechia, Cyprus, Ireland, Finland,
France, Greece, Poland, Portugal, Slovakia, Spain
Digitalization of health care
Cyprus, Finland, Luxembourg, Malta, Poland, Portugal, Slovenia,
Digitalization of public administration
Belgium, Bulgaria, Croatia, Czechia, Cyprus, Denmark, Finland,
France, Germany, Greece, Ireland, Italy, Lithuania, Luxembourg,
Malta, Poland, Slovakia, Spain
Digitalization of business entities
Bulgaria, Czechia, Denmark, Ireland, Italy, Latvia, Finland,
France, Greece, Poland, Portugal, Slovakia, Slovenia, Spain
Development of digital skills of the
population
Bulgaria, Latvia, Poland, Slovakia, Slovenia, Spain
Providing high-speed Internet access
Austria, Bulgaria, Croatia, Czechia, Cyprus, Denmark, Finland,
France, Greece, Italy, Latvia, Lithuania, Poland,
Improving the security of digital
infrastructure
Belgium, Finland, Luxembourg,
Support for innovation in digital
infrastructure
Austria, Finland, Germany, Lithuania, Poland,
*Source: Compiled by the authors based on [37]
As the effects of the COVID-19 pandemic are
overcome, the need to use the fiscal mechanism to
enhance socio-economic sustainability will
objectively increase.
The key areas of use of the fiscal mechanism
in the post-pandemic period should be [27]:
1) investments in the field of human capital
development to increase the level of education and
improve the health of the population;
2) investments in promoting the redirection of
labor and capital to promising industries that have
received impetus for development in a pandemic;
3) investment in improving the social
protection system through the rational use of funds
(to prevent the spread of poverty and growing
inequality);
4) investment in tax reforms, including
through the coordination of efforts at the global
level; 5) investments in reducing the vulnerability of
debt positions and strengthening debt transparency.
Therefore, EU member states will use the
fiscal mechanism to implement the following
measures: expanding the social safety net, improving
the quality and expanding the range of public
services, modernizing infrastructure, and
maintaining debt sustainability, as shown in table 6.
Ukraine, focusing on EU member states, also
envisages measures to strengthen socio-economic
stability in 2022-2024. Thus, it is planned to use the
fiscal mechanism in terms of budget expenditures
for the implementation of the following measures
[39]: 1) implementation of reforms that will
contribute to the creation of an effective and perfect
system of social support and pensions in the
medium term;
2) ensuring quality, modern and affordable
secondary education, building a safe and inclusive
education system, creating a modern system of
professional (vocational) education, and ensuring
the quality of higher education;
3) restoration of the status of Ukrainian science
as the main tool of technological development of
the state and creation of a new system of
management and financing of science;
4) ensuring universal access of citizens to the
guaranteed package of necessary medical services
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and medicines;
5) creation of conditions for the realization of
innovative researches and development of new
competitive aviation technologies, maintenance of
effective use of space potential, and increase of its
influence on the decision of actual problems which
realization and implementation will allow to
provide profitable serial production of high-tech
techniques in Ukraine, to develop samples of new
competitive models of aircraft and other equipment,
as well as promote its export to foreign markets;
6) formation of a properly functioning judiciary,
increasing the efficiency of judicial institutions,
implementation of European standards, and best
international practices.
Table 6. Measures to strengthen socio-economic sustainability in EU member states, which will be
implemented through the fiscal mechanism*
Measures
Country
Improving the business environment
Austria, Bulgaria, Croatia, Czechia, Greece, Italy, Portugal,
Slovakia, Spain
Support for employment and social
inclusion
Austria, Belgium, Croatia, Cyprus, Finland, France, Germany,
Greece, Ireland, Italy, Luxembourg, Slovenia, Spain
Improving the efficiency of public
administration
Bulgaria, Croatia, Cyprus, France, Germany, Greece, Ireland,
Italy, Latvia, Lithuania, Romania, Spain
Reorganization of the justice system
Bulgaria, Croatia, Cyprus, Greece, Italy, Romania, Slovakia
Carrying out pension reform
Austria, Malta, Romania, Slovakia, Slovenia, Spain
Expanding access to preschool education
Austria, Croatia, Cyprus, Germany, Greece, Slovakia
Support for research and innovation
Austria, Belgium, Bulgaria, Croatia, Denmark, Finland, Lithuania,
Slovenia
Healthcare modernization
Bulgaria, Czechia, Denmark, Finland, France, Germany, Greece,
Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta,
Romania, Poland, Slovakia, Slovenia
Housing
Germany, Italy, Latvia, Luxembourg, Portugal, Romania, Slovenia
Modernization of education
Bulgaria, Czechia, Cyprus, Germany, Ireland, Latvia, Lithuania,
Malta, Portugal, Romania,
Strengthening social protection
Bulgaria, Italy, Latvia, Lithuania, Slovakia
*Source: Compiled by the authors based on [37]
Thus, in the future, in the EU member states and
Ukraine, the fiscal mechanism should ensure adequate
financing of the medical and educational spheres, as
well as the development of green and digital
infrastructure. Such investments are likely to promote
social integration, increase the overall productivity of
the economy, and strengthen resilience to new
climatic conditions and future pandemics.
4 Conclusions
The COVID-19 pandemic caused the biggest drop
in economic activity since World War II.
Significant weakening of the monetary mechanism
has led to the active use of the fiscal mechanism to
combat the effects of the corona crisis. EU member
states and Ukraine gave priority to direct and
indirect fiscal support for private income and
employment, which limited the fall in consumption
and gave impetus to increased investment.
Although at the stage of the pandemic
deployment, the fiscal mechanism of the states
focused on providing emergency assistance to
enterprises and households to maintain a sufficient
level of consumption, in the future it should be
refocused on stimulating investment and ensuring
post-crisis recovery. States need to give priority to
fiscal measures that stimulate the labor market and
recapitalize enterprises, by harmonizing the
revenue and expenditure components of the fiscal
mechanism to develop a green and digital
economy, as well as to achieve socio-economic
sustainability.
In general, the fiscal mechanism in the context
of the corona crisis should facilitate the transition
to a new stage of development of the world
economic relations system, for which priorities
should be solving urgent problems of today:
improving climate conditions, sustainable growth
on a digital technological basis, overcoming
income inequality of economic entities,
guaranteeing social justice and welfare of the
majority of citizens.
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WSEAS TRANSACTIONS on ENVIRONMENT and DEVELOPMENT
DOI: 10.37394/232015.2022.18.64
Viktoriia Rudenko, Halyna Pohrishchuk,
Olena Moskvichova, Mykhailo Bilyi
E-ISSN: 2224-3496
684
Volume 18, 2022
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Contribution of Individual Authors to the
Creation of a Scientific Article (Ghostwriting
Policy)
Victoriia Rudenko proposed the idea of the article
and wrote subparagraphs 2, 3.2 and 3.5.
Halyna Pohrishchuk provided general supervision
of the study and wrote the introductory and
concluding part of the article.
Olena Moskvichova was responsible for the
analytical part of the article and wrote
subparagraph 3.3 and 3.4.
Mykhailo Bilyi was responsible for the
metodologycal part of the article and wrote
subparagraph 3.1.
Creative Commons Attribution License 4.0
(Attribution 4.0 International, CC BY 4.0)
This article is published under the terms of the
Creative Commons Attribution License 4.0
https://creativecommons.org/licenses/by/4.0/deed.e
n_US
WSEAS TRANSACTIONS on ENVIRONMENT and DEVELOPMENT
DOI: 10.37394/232015.2022.18.64
Viktoriia Rudenko, Halyna Pohrishchuk,
Olena Moskvichova, Mykhailo Bilyi
E-ISSN: 2224-3496
685
Volume 18, 2022