Interbudgetary Transfers in Ukraine Under Martial Law: Fiscal Asymmetry and Prospects for Development

Abstract

Under martial law, the system of interbudgetary relations in Ukraine has undergone significant transformations caused both by the decline in the revenue base of local budgets and the need to strengthen the state's financial capacity to meet defense needs and support critically important areas. Changes in the structure of interbudgetary transfers reflect existing fiscal asymmetry, which manifests itself in the growing dependence of territorial communities on subsidies and subventions from the state budget. The purpose of the study is to conduct a systematic analysis of the transformation of interbudgetary transfers in Ukraine under martial law, to determine the impact of fiscal asymmetry and challenges in public finance, and to develop a set of recommendations for improving financial equalization mechanisms and strengthening the financial capacity of territorial communities. The article examines the specific features of the functioning of interbudgetary transfers system in Ukraine under martial law. It outlines problematic issues in the formation of local budget revenues, in particular: low autonomy of local budgets and their dependence on state subsidies and subventions; the imperfect methodology and mechanism of horizontal equalization; and the increased impact of horizontal financial asymmetry on the formation of the revenue base of local budgets. It is noted that the decentralization process, which began in 2014, contributed to strengthening the financial capacity of communities and gradually improving the quality of local self-government. The study analyzes trends in the structure of local budget revenues in Ukraine for 2021-2024, as well as the dynamics of interbudgetary transfers in 2022–2025. The key financial challenges and vulnerabilities of the interbudgetary transfer system are identified, and proposals for their neutralization are presented. It is concluded that effective modernization of the interbudgetary transfer system should be pursued in three main directions: implementing targeted compensation mechanisms for affected territorial communities, high-quality forecasting and automation of interbudgetary transfer payments, and strengthening the financial capacity of local budgets and transparency in their use of funds, especially donor resources.