{"id":22554,"date":"2026-07-29T15:33:00","date_gmt":"2026-07-29T12:33:00","guid":{"rendered":"https:\/\/modecon.mnau.edu.ua\/?p=22554"},"modified":"2026-07-29T15:33:00","modified_gmt":"2026-07-29T12:33:00","slug":"transformation-of-the-mechanism-for","status":"publish","type":"post","link":"https:\/\/modecon.mnau.edu.ua\/en\/transformation-of-the-mechanism-for\/","title":{"rendered":"Stetsenko T., Volovod A. Transformation of the Mechanism for Financial Equalisation of Local Budgets Under War Conditions: from a Formula-Based Approach to Targeted Funding"},"content":{"rendered":"

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JEL Classification:<\/strong> H71; H77.<\/em><\/td>\nDOI<\/b>: https:\/\/doi.org\/10.31521\/modecon.V57(2026)-32<\/a><\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

[\/vc_column_text][vc_column_text]Stetsenko Tetiana<\/strong>, PhD in Economics, Associate Professor, Associate Professor of the Department of Finance, Banking and Insurance, V. N. Karazin Kharkiv National University, Kharkiv, Ukraine<\/p>\n

ORCID:<\/strong> 0000-0003-3836-4785<\/span><\/a>
\ne-mail: <\/strong>t.v.stetsenko@karazin.ua<\/span><\/a><\/p>\n

Volovod Andrii<\/strong>, Bachelor’s Degree Student, V. N. Karazin Kharkiv National University, Kharkiv, Ukraine<\/p>\n

ORCID:<\/strong> 0009-0005-9660-0223<\/span><\/a>
\ne-mail: <\/strong>andrii.volovod@student.karazin.ua<\/span><\/a><\/p>\n

Transformation of the Mechanism for Financial Equalisation of Local Budgets Under War Conditions: from a Formula-Based Approach to Targeted Funding<\/strong><\/p>\n

Abstract.<\/em><\/strong> Introduction<\/em><\/strong>. The unprecedented shocks of wartime\u2014marked by the destruction of industrial capacity, mass migration, and the shutdown of businesses in certain regions\u2014have critically distorted the revenue base for local budgets. These drastic changes necessitate an immediate, science-based reassessment of traditional budgetary regulation and equalization instruments. <\/em><\/p>\n

Purpose<\/em><\/strong>. <\/em>This article aims to justify the need to reform Ukraine’s financial equalization mechanism. To achieve this goal, the following objectives were identified: 1) assessing the impact of armed aggression on Ukraine’s financial equalization mechanism, 2) identifying the limiting factors of the current financial equalization system, and 3) formulating proposals to adjust the financial equalization mechanism to account for current changes in Ukraine’s economic and demographic situation. <\/em><\/p>\n

Results<\/em><\/strong>. <\/em>The article provides a comprehensive analysis of how the system of intergovernmental fiscal relations functions in Ukraine under the legal regime of martial law. The article explores the theoretical and methodological foundations of financial equalization and identifies acute disproportions arising from the application of the current formula for distributing transfers. These disproportions are exacerbated by mass population migration, the withdrawal of the “military personal income tax” (PIT), and the destruction of industrial infrastructure. Using statistical data from the Ministry of Finance and analyzing the work of domestic scholars, the article substantiates the need to transition from a linear approach to horizontal equalization to a differentiated cluster model. The article proposes a mechanism for introducing targeted “resilience grants” as an effective alternative to basic dotations for de-occupied and frontline territorial communities. <\/em><\/p>\n

Conclusions<\/em><\/strong>. The current financial equalization model is based on pre-war formulas and outdated demographic statistics. It has outlived its usefulness under the legal framework of martial law. An analysis of actual statistical indicators for Ukrainian communities confirms a severe distortion of the revenue base for local self-government following the withholding of the \u201cmilitary personal income tax\u201d. The only viable path forward is to transform the mechanism toward a cluster-based approach, dividing communities into rear, de-occupied, and frontline areas with individual equalization conditions, and introducing targeted “resilience” grants. This approach will preserve the viability of local self-government in Ukraine, distribute the burden fairly among regions, and ensure the stability of the state budget during the reconstruction phase.<\/em><\/p>\n

Keywords:<\/em><\/strong> budget system; local budgets; financial equalization; intergovernmental transfers; reverse dotation; tax capacity; military PIT.<\/em><\/p>\n

References<\/b>:<\/strong><\/p>\n

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      [\/vc_column_text][\/vc_column][\/vc_row][vc_row][vc_column][vc_column_text]Received: 25 April 2026<\/strong><\/p>\n

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      Stetsenko T., Volovod A. (2026). Transformation of the Mechanism for Financial Equalisation of Local Budgets Under War Conditions: from a Formula-Based Approach to Targeted Funding. Modern Economics, 57(2026), 238-243. DOI: https:\/\/doi.org\/10.31521\/modecon.V57(2026)-32.<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

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      [vc_row][vc_column][vc_column_text] JEL Classification: H71; H77. DOI: https:\/\/doi.org\/10.31521\/modecon.V57(2026)-32 [\/vc_column_text][vc_column_text]Stetsenko Tetiana, PhD in Economics, Associate Professor, Associate Professor of the Department of Finance, Banking and Insurance, V. N. Karazin Kharkiv National University, Kharkiv, Ukraine ORCID: 0000-0003-3836-4785 e-mail: t.v.stetsenko@karazin.ua Volovod Andrii, Bachelor’s Degree Student, V. N. Karazin Kharkiv National University, Kharkiv, Ukraine ORCID: 0009-0005-9660-0223 e-mail: andrii.volovod@student.karazin.ua Transformation of
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