Analysis of the effectiveness of the financial equalization system in Ukraine in the context of reducing regional disparities.

Abstract

This article examines the effectiveness of Ukraine’s financial equalization system in addressing regional disparities. The authors explore both theoretical and practical dimensions of horizontal equalization mechanisms for local budgets, implemented as part of the fiscal decentralization reform initiated in 2015. Using statistical data on local budget performance for 2021, the study assesses the extent of financial disparities among territorial communities before and after the application of equalization tools—basic and reverse subsidies. The findings indicate that, despite some progress in reducing gaps in budgetary provision, the current financial equalization model falls short of achieving its intended goals. Specifically, even after income equalization, the disparity between the wealthiest and poorest communities remains excessively high (15–19 times) compared to the standards of developed countries (3–5 times). Furthermore, the impact of equalization policies varies significantly depending on the type of administrative-territorial unit: rural communities experience the greatest benefit, whereas urban areas feel minimal effects. The authors conclude that improving the effectiveness of financial equalization requires both broadening its base (by incorporating not only personal income tax but also all local budget revenues) and diversifying its tools (introducing targeted development transfers, special subsidies, and other mechanisms to support depressed areas). The study highlights the need for future research on the post-war state of local finances, strategies for reconstruction based on the financial sustainability of communities, and the adaptation of international experience in addressing the consequences of armed conflict and economic crises.