Local Budget Revenue Under War in Ukraine: Tax Base Erosion, Fiscal Collapse, and Donor Dependency
Ukraine's decentralisation reform (2014–2020) had created a significantly stronger local government fiscal base than existed under the highly centralised Soviet-era system. Amalgamated Territorial Communities (ATC — hromadas) gained broader revenue powers including local personal income tax shares, property taxes, land payments, and fees for local permits and services. By 2021, local budgets collectively managed a substantial share of consolidated public expenditure and had achieved meaningful fiscal autonomy in many oblasts. The full-scale invasion reversed much of this progress: the dramatic contraction of local economies, population flight, destruction of taxable property, and business closure or displacement eroded local revenue bases precisely when local government expenditure pressures were surging due to war damage and IDP support costs.
Tax Revenue Erosion Mechanisms
Local budget revenues in Ukraine derive from several key sources — each of which experienced severe war-related pressure. Personal income tax (PIT) — shared between local and national government — fell as employed workers evacuated, businesses closed, and the overall employment base contracted. Business income taxes fell as enterprises in frontline zones ceased operating. Property taxes and land payments — often the most distinctive local fiscal instruments — collapsed in areas where property was damaged, destroyed, or occupied: there is no tax revenue from a bombed factory or an occupied farmland. Excise taxes on alcohol and fuel — another significant local source — reflected reduced consumption and supply chain disruption in affected areas. Only in western Ukrainian hromadas that absorbed large IDP inflows was there meaningful revenue growth from population-driven activity.
Local Revenue Change by Oblast Type
| Oblast Category | Revenue Change (approx.) | Primary Driver | Expenditure Change | Net Fiscal Position |
|---|---|---|---|---|
| Frontline / occupied (Donetsk, Luhansk) | -70% to -90% | Occupation; business collapse; population loss | Minimal (services suspended) | Effectively non-functional |
| Near-frontline (Kharkiv, Zaporizhzhia) | -30% to -50% | Business flight; property damage; population loss | +50–100% (defense, IDP, repair) | Severe deficit; central support |
| Central Ukraine (Poltava, Dnipro) | -10% to -25% | Business disruption; mobilisation | +25–50% (IDP, security) | Moderate deficit; transfers |
| Western Ukraine (Lviv, Ternopil) | 0% to +15% | IDP economic activity; relocation | +40–70% (IDP service surge) | Near-balanced or mild deficit |
| National average | -20% to -30% est. | Cumulative of above | +40–60% aggregate | Large consolidated deficit |
Central Transfer Dependency
Ukraine's national budget fiscal package for local governments was restructured under wartime conditions. The Ministry of Finance dramatically increased equalisation transfers and subventions to local governments — particularly in frontline and near-frontline oblasts — to prevent complete collapse of service delivery. The rescue and defence subventions, IDP support transfers, and education and health equalisation payments became the dominant share of local budget revenues in several of the most affected oblasts (Kharkiv, Zaporizhzhia, Sumy, Kherson). This represented a structural reversal of the decentralisation reform — local budgets that had achieved 40–60% own-revenue funding ratios before 2022 became 70–90% dependent on central transfers in the most affected oblasts.
EU and USAID Municipal Support
International donors provided direct municipal support through multiple mechanisms. The EU's macro-financial assistance (MFA) program for Ukraine — multiple tranches totalling tens of billions of euros — included specific components earmarked for local government budget support. The U-IMPACT program (USAID-funded) provided direct budget support to Ukrainian municipalities for service delivery continuity. UNDP's U-DOCA and humanitarian response programs channelled financial support for IDP services, heating system repair, and emergency infrastructure. The Council of Europe's Bank (CEB) provided municipal infrastructure loans. Aggregated, international municipal support amounted to hundreds of millions of dollars of additional local fiscal capacity above what Ukraine's national budget could provide alone.
Frequently Asked Questions
- Did any local governments actually go bankrupt during the war?
- Formal municipal bankruptcy does not exist under Ukrainian law in the same way as in some Western countries, so the concept of a hromada "going bankrupt" has no precise legal equivalent. However, several hromadas in frontline oblasts effectively became non-functional: their populations had evacuated, their infrastructure was destroyed, their staff had fled or been mobilised, and service delivery had ceased. These entities exist legally but operational governance has effectively been suspended. Central government and oblast administrations have assumed emergency management functions in such cases under wartime emergency provisions.
- How do occupied hromadas manage their legal status?
- Ukrainian hromadas in occupied territory maintain their legal existence under Ukrainian law, despite Russian occupation imposing its own "administrative" structures. Ukrainian mayors and councils of occupied hromadas who evacuated continue to function in exile — meeting virtually, maintaining administrative registries, continuing to receive some central budget allocations for services they cannot physically render (which accumulate for post-liberation use or are redirected to serving evacuated residents in IDP locations). This "government in exile" model for local administration is codified in Ukrainian legislation passed during the war.
- What is the fiscal situation of Kyiv city specifically?
- Kyiv represents a special case. As the national capital with the largest economy, Kyiv's local budget is far more resilient than regional governments, though still significantly affected. Kyiv's 2022 revenues declined materially from 2021 due to economic contraction and business displacement, but the massive inflow of government employees, international organisations, and reconstruction-related activity partially compensated. Kyiv Mayor Vitaliy Klitschko has managed a significant capital budget including large emergency infrastructure repair investments. Kyiv's relatively stronger fiscal position contrasts sharply with frontline city governments that have effectively collapsed.
- What is the role of property tax in local revenue recovery?
- Property tax (on residential and commercial buildings, paid annually) is one of the instruments that could support local revenue recovery in areas with less destruction. However, it requires a functional property register (under stress from wartime damage and occupation), a willing-to-pay property owner population (difficult to achieve during displacement and economic hardship), and enforcement capacity. Ukraine's post-war fiscal recovery plans envision strengthening property taxation — particularly for commercial real estate — as a key instrument of local fiscal sustainability, while providing relief or deferrals for residential properties damaged by the war.
- Has the war affected Lviv city's finances positively or negatively?
- Lviv's local budget presents a complex picture. On the revenue side, the influx of hundreds of thousands of IDPs and the relocation of major businesses (including IT companies under Diia.City) to Lviv increased economic activity and thus certain tax revenues. On the expenditure side, the city faced enormous additional costs: IDP services, education capacity expansion, housing pressure management, and infrastructure investments to handle population surge. Net, Lviv is assessed as having managed a roughly balanced or slightly strained fiscal position — better than any eastern or southern oblast, but still stressed relative to pre-war equilibrium.
Sources
- Ministry of Finance of Ukraine. Local budget execution statistics 2021–2024. Kyiv: MOF Ukraine.
- World Bank. Ukraine economic monitoring and local governance fiscal analysis. Washington D.C., 2022–2024.
- USAID U-IMPACT. Municipal budget support program Ukraine: outcomes. Kyiv: USAID, 2022–2024.
- KSE Institute. Ukraine fiscal impact of war: municipal dimension. Kyiv: Kyiv School of Economics, 2023.
- OECD. Decentralisation and sub-national government in wartime Ukraine. Paris: OECD, 2023.
Regional Analysis: Local Budget Revenue Under War in Ukraine: Tax Base Erosion, Fiscal Collapse, and Donor Dependency
The regional dimensions of the Russia-Ukraine conflict are shaped by geography in profound ways. Local Budget Revenue Under War in Ukraine: Tax Base Erosion, Fiscal Collapse, and Donor Dependency as a geographic and political entity has been affected by the war's dynamics in specific ways that reflect its location relative to front lines, its economic structure, demographic composition, historical characteristics, and administrative capacity. Regional analysis provides essential granularity to assessments that might otherwise obscure the highly differentiated impacts and responses across Ukraine's diverse territory.
Infrastructure destruction has imposed highly uneven burdens across Ukrainian regions, with areas closest to active combat experiencing the most severe damage to housing, transport networks, industrial facilities, and utilities. Local Budget Revenue Under War in Ukraine: Tax Base Erosion, Fiscal Collapse, and Donor Dependency sits within this damage landscape in a specific way, with its geographic position determining exposure to aerial bombardment, artillery fire, and ground combat. Post-war reconstruction planning must account for these regional disparities in damage and prioritize resources based on both humanitarian need and strategic recovery priorities.
Population dynamics in Local Budget Revenue Under War in Ukraine: Tax Base Erosion, Fiscal Collapse, and Donor Dependency have been fundamentally altered by the conflict's displacement effects. The internal displacement of Ukrainians away from frontline regions has depopulated some areas while creating strain on receiving communities. Return migration when security conditions permit will be shaped by the availability of housing, economic opportunities, and public services. Long-term demographic trajectories will depend on reconstruction investment, security guarantees, and the differential experiences of displaced populations who may have built new lives elsewhere during the conflict.
Economic activity in Local Budget Revenue Under War in Ukraine: Tax Base Erosion, Fiscal Collapse, and Donor Dependency reflects the wider disruption of Ukraine's wartime economy but with region-specific characteristics. Agricultural economies in southern and eastern regions face mine contamination, disrupted supply chains, and infrastructure damage alongside the direct security threat. Industrial concentrations in eastern Ukraine have been particularly severely damaged. Western regions have experienced economic stimulus from hosting displaced populations and receiving reconstruction investment, though these gains are offset by the costs of hosting and service provision.
Administrative Capacity and Governance
Local and regional governance in Local Budget Revenue Under War in Ukraine: Tax Base Erosion, Fiscal Collapse, and Donor Dependency faces the extraordinary challenge of maintaining public services, coordinating humanitarian assistance, and beginning reconstruction planning under active wartime conditions. Ukrainian regional administrations have demonstrated significant adaptability, leveraging decentralization reforms implemented before the war to maintain flexibility in crisis response. International technical assistance, digital governance tools, and emergency financing mechanisms have supported administrative continuity in areas experiencing severe disruption. Building lasting administrative capacity in the region is essential to both wartime governance and the post-conflict recovery trajectory.