New Public Finance Management Strategy: Key Provisions Affecting Communities

The consequences will be felt not only in Kyiv, but also in communities — in local budgets, finance departments, village council chambers, and even in when and how a new streetlight appears or a road gets repaired.

The new Strategy is centered on building of a more predictable, resilient, and more EU-aligned public finance management system, providing for medium-term planning of local budgets, fairer equalization mechanisms, and the integration of communities into the system of public investment and fiscal risk management.

The Strategy continues previous reforms while taking into account martial law, post-war recovery, and the conditions for EU accession. It is intended to address specific local-level problems: weak community capacity for medium-term planning; the formal application of the program-based budgeting method; ineffective horizontal equalization; the absence of fiscal risk management rules at the local level; and weak municipal debt policy.

From an “annual budget” to a medium-term horizon

The Strategy establishes an important shift — both at the national and local levels, the budget should no longer be treated as a “one-year accounting exercise.” Two years ago, the preparation of the Budget Declaration was resumed; it covers the state budget and social funds and also defines the parameters of relations with community budgets. At the local level, beginning in 2025, it once again became mandatory to prepare three-year budget forecasts that take into account local development strategies, as well as gender and climate considerations. For communities, this means a transition to a clearer hierarchy of documents: “development strategy → medium-term community investment plan → budget forecast → local programs → budget programs” instead of a set of fragmented plans competing with one another for resources.

In the longer term, this could make local budget revenues and expenditures more predictable and more closely linked to actual community priorities. However, success will depend on whether there is sufficient analytical capacity at the local level to work with such instruments.

Equalization and state support: a chance for fairer rules

The Strategy provides for changes in approaches to the formation of the resource base of local self-government bodies in accordance with the division of powers under the principle of subsidiarity (services should be delivered at the level closest to their recipients). Each local self-government body should clearly understand its powers in each sphere, while the corresponding local budgets should have sufficient revenue sources to exercise those powers.

This is important to do alongside improving the mechanism for horizontal equalization of local fiscal capacity. In its analysis of the problems, the Strategy acknowledges that the current system of horizontal equalization does not ensure that the actual needs of communities are fully accounted for, especially expenditures related to geographic, demographic, and infrastructure characteristics. It also insufficiently takes into account the specifics of different territories when planning state budget development expenditures, particularly the differences between frontline, rural, and economically more developed communities.

The Strategy provides for a serious revision (by the fourth quarter of 2028) of the horizontal equalization formula, which should take into account the differing needs of regions when planning expenditures and integrate medium-term community investment plans with nationwide investments. If these changes are implemented using modern methodologies and high-quality data, they could reduce disparities between communities with different tax potential and make subventions and grants more predictable. This is a move in the right direction, but the final outcome for each community will depend on which specific parameters and indicators are built into the formula.

Public investments: new opportunities and stricter criteria

One of the most tangible areas for communities is reforming public investment management. A Strategic Investment Council has already been established, a Medium-Term Plan for Priority Public Investments for 2026–2028 has been approved, and the relevant procedures for project selection and implementation have been adopted. Regions and communities have, for the most part, developed their own medium-term priority investment plans linked to regional and local development strategies.

The new Strategy consolidates this model and provides for the further digitalization and integration of public investment management (PIM) into unified project portfolios of the state, regions, and communities. For communities, this opens the possibility of participating more systematically in state and donor recovery and development programs, provided they have clear priorities, medium-term plans, and transparent project evaluation procedures. The government plans to overcome the difficulties and challenges communities encountered during the implementation of the PIM reform. Above all, these include a shortage of staff capable of organizing the process of forming a public investment portfolio at the local level, the complexity of procedures, the absence of rules and conditions for obtaining state budget financing at the stage of planning investment ceilings, and a lack of understanding of the criteria for classifying certain capital expenditures as public investments.

At the same time, this means stronger competition for resources, since communities will have to not only prepare projects, but also justify their effectiveness within a unified set of rules. This may become a serious challenge for local self-government bodies with limited staffing resources and project-related and analytical competencies.

Debt and fiscal risks: communities become full-fledged players

The Strategy proposes creating a regulatory framework and strengthening the institutional capacity of executive authorities and local self-government bodies in the area of fiscal risk management. While fiscal risk management at the state budget level was established in 2019, it does not yet exist at the local budget level. Under the Ukraine Facility Plan, the procedure and methodology for managing fiscal risks of local budgets must be finalized by the fourth quarter of 2026, even though the Strategy provides for the introduction of local budget fiscal risk management beginning in 2028.

Recently, Parliament expanded access to local borrowing for all communities, both urban and rural. However, communities have so far made limited use of these instruments. Therefore, the operational plan for implementing the Strategy provides for methodological support for communities in local debt management, as well as improvements to the rules for attracting long-term concessional financing, particularly within the framework of projects with international financial organizations. As conceived, this should provide communities with safer and cheaper borrowing instruments for recovery and development by integrating local debt and risks into the overall public finance management system.

At the same time, the document emphasizes that the key risk lies precisely in the capacity to implement these approaches at the local level. Debt and fiscal risk management require high-quality financial analysis, scenario planning, and regular monitoring, while many communities are already facing staffing shortages and a lack of analytical skills.

Digitalization, the Treasury, and liquidity: more electronic procedures in day-to-day operations

A separate section of the Strategy concerns the digitalization of the public finance management system. At the local level, this primarily means integrating Treasury services, reporting, and procurement into a unified digital environment.

The introduction of the “e-Liquidity” system is planned to forecast cash flows in Treasury accounts, determine optimal liquidity buffers, and conduct REPO operations with temporarily available funds. Integration of the electronic procurement system with the DREAM platform and other state IT systems will continue, along with the development of Treasury services and the submission of reports on the execution of state and local budgets in electronic form.

For local financial authorities, this means a gradual transition to more automated processes and more intensive electronic interaction with the Treasury and state information systems. Alongside the potential benefits (a lower likelihood of liquidity shortfalls and faster payments), this also creates additional requirements for the IT and managerial capacity of local self-government bodies.

Transparency and oversight: a more demanding environment for community projects

The Strategy notes that during the wartime period, transparency of budget data declined due to legislative restrictions (which affected, among other things, Ukraine’s position in international budget transparency rankings). The new document sets the objective of gradually restoring and expanding openness, including through digitalization and stronger electronic reporting on the execution of state and local budgets.

In parallel, the Strategy provides for the development of internal control and internal audit, as well as external audit, in accordance with INTOSAI international standards for the protection of the EU’s financial interests. For communities implementing projects with European funding or operating within the overall public investment system, this will mean a more demanding, but at the same time more transparent, oversight environment.

For local self-government bodies, this is, on the one hand, an incentive to build internal processes based on clear rules and documents and, on the other hand, an additional burden on organizational capacity.

Are communities ready? The staffing challenge and implementation realities

The authors of the Strategy acknowledge that the key risk lies not so much in the design of the reforms as in their implementation. Among the implementation challenges mentioned are staffing shortages at the local level, limited analytical capacity, and the high uncertainty of wartime conditions.

Many of the changes laid down in the Strategy — medium-term planning, debt and risk management, participation in the public investment system, Treasury digitalization — require considerable time, as well as a high level of qualification and organizational culture among employees of local self-government bodies. The operational plan for implementing the Strategy provides for training and methodological support. However, these measures are described in rather general terms, without detailing the different types of communities, targeted training programs, or minimum staffing standards for finance departments.

As a result, even positive innovations may fail to function fully when finance departments operate with reduced staffing levels and are in constant crisis mode.

What the strategic document leaves out

The Strategy outlines key directions for the development of local public finance management, but not all important issues receive sufficient attention. In particular, insufficient attention is devoted to the following issues:

1. Own-source revenues and tax autonomy

The Strategy devotes considerable attention to harmonizing national tax legislation with European legislation and to revenue mobilization, but it does not detail ways to increase the share of own-source revenues in local budgets or to enhance the flexibility of community decision-making on local taxes. The emphasis is placed more on intergovernmental transfers and equalization than on strengthening communities’ own tax base or their right to administer it.

2. Minimum service standards and resource support for delegated powers

The Strategy addresses expenditure efficiency and the program-based method, but lacks mechanisms to ensure minimum standards of public services at the community level or a direct link between delegated powers and the volume of resources. Under conditions of wartime destruction, population displacement, and pressure on local infrastructure, this gap is difficult to assess. Some of these issues will be addressed in legislation on the division of powers between levels of government.

3. Resident participation and accountability at the local level

The Strategy declares the need to ensure public access to participation in decision-making and to budget data, but it does not specify the instruments to achieve this (for example, participatory budgeting and public discussions of medium-term plans). To move closer to European standards of good governance, it is important to apply these instruments in practice, and electronic systems such as DREAM cannot replace them.

4. A special approach to the frontline and de-occupied territories

The Strategy emphasizes the growing needs of communities resulting from wartime destruction, but it does not propose a detailed framework for differentiating community financing by degree of impact (frontline, de-occupied, rear-area communities, or “hubs” for internally displaced persons) and by functional territory type. Equalization based solely on classical indicators (personal income tax per capita, population size, and so forth) is insufficient under such conditions, yet the document offers no specific solutions.

5. Systematic strengthening of community staffing capacity

The Strategy acknowledges that the institutional capacity of local self-government bodies in the areas of medium-term planning and debt and risk management is insufficient. Yet, the proposed measures are reduced to general formulations about training and methodological support. The operational plan for implementing the Strategy does not specify targeted training programs or competency standards for employees of local self-government finance departments.

Conclusion for communities: a potential step forward with high capacity requirements

The changes laid down in the Strategy for the local level are logically linked to officially recognized problems, such as weak medium-term planning, imperfect revenue equalization, the absence of risk management, and a fragmented public investment system.

Overall, the Strategy appears as a well-assembled “framework” for public finance reform at the local level. The logic of the changes is clear, and the key directions (medium-term planning, public investment, risk management, and digitalization) are mutually consistent and fit into the European context. At the same time, on some issues particularly sensitive to communities, the Strategy remains overly general. This primarily concerns the revenue base, approaches to different types of territories, and systematic work on staffing capacity. Government decisions in these areas will significantly influence the Strategy’s implementation in communities.

For territorial communities, the Strategy provides for more medium-term planning, deeper integration into the state investment system, potentially fairer rules for resource distribution, and, at the same time, stricter requirements for forecasting, analysis, transparency, and digital readiness. Implementation of the Strategy will require local self-government bodies to strengthen their analytical capacity and improve the qualifications of their staff.