The government is increasing defense spending: where will the money come from, how was the budget cut, and what are the risks for Ukraine?

7 October 19:26

The Cabinet of Ministers of Ukraine proposes to increase the expenditure side of the 2025 budget by another UAH 324.8 billion, allocating these funds for defense. This is not a gesture of generosity, but rather a forced response to military challenges. The peculiarity is that part of the money is planned to be “intercepted” from the resources planned for 2026 under the ERA Loans initiative (the European Union and the G7 countries).

Why the government took this step, where it will try to find funding, and whether the decision to increase defense spending has its pitfalls and risks, "Komersant Ukrainian" analyzed.

What happened

On Monday, October 6, the government registered a bill on another increase in spending.

Prime Minister Yulia Svyrydenko explained that the decision was dictated by the dynamics of the frontline and the constantly changing conditions of the fighting. “Russia is not going to stop, it is changing its tactics at the front and only intensifies attacks on our energy infrastructure in the rear.

We have to be flexible and quickly adapt our spending to give the Army all the necessary means and resources to counter the enemy,” Svyrydenko wrote on her Facebook page.

This is the second increase in defense spending in 2025: the previous one, by UAH 412.4 billion, took place in late July. Such interim “revisions” to the budget are becoming almost traditional in a full-scale war.

How often and why is the budget adjusted?

Adjusting the budget in the middle of the year is not an exception, but a regularity. During a war, the situation at the front and needs change faster than can be foreseen at the planning stage.

For example, in 2023, the defense budget was increased twice (by UAH 537 billion in March and by UAH 303 billion in October). In 2024, the parliament approved one increase – by UAH 500 billion in September.

The Ministry of Finance explains that the reason is the changing dynamics of hostilities and the increase in attacks on civilian and energy infrastructure.

“Increasing spending to effectively resist aggression is a forced necessity,” the Ministry of Finance said in a release.

Previously, Ukraine was not able to use ERA Loans directly for defense purposes, which was a restriction that the government is now trying to remove.

What are ERA Loans and how do they work?

The ERA Loans (Extraordinary Revenue Acceleration Loans) initiative is one of the financing mechanisms for Ukraine created by the EU and the G7 countries. The source is the so-called “exceptional revenues” from Russia’s frozen state assets.

The idea is that the creditor countries (the EU, the US, Canada, Japan, and the UK) provide loans to Ukraine, and their repayment will be made from the proceeds of these frozen Russian assets.

Basic principles of ERA Loans:

all loans must be fully transferred to Ukraine by December 31, 2027;
at least 95% of the proceeds from the “immobilized” assets are to be used to repay these loans;
previously, Ukraine could not freely allocate part of these funds for defense – now this possibility is being expanded.

The Kyiv School of Economics estimates that the total volume of ERA Loans could reach about USD 50 billion (≈ EUR 45 billion) in 2024-2027.

How the Government plans to allocate the additional UAH 324.8 billion

Out of the total amount , UAH 310.5 billion will go to the general budget fund, which finances salaries, wages, procurement and other basic expenses.

The distribution looks like this:

The Ministry of Defense – over UAH 301 billion, of which:

about 211 billion – directly for the needs of the Armed Forces,
84.5 billion – for the purchase, repair and modernization of equipment,
5.5 billion for the reform of the defense industry.

National Guard – UAH 8.2 billion;

TheSecurity Service of Ukraine – UAH 1.3 billion;

State Special Transport Service – almost UAH 1 billion.

The Cabinet of Ministers proposes to allocate another UAH 14.3 billion to the special fund, in particular:

The Ministry of Defense – UAH 9.7 billion (development of the defense industry, repair of equipment, purchase of weapons);
The State Service for Communications and Information Protection – UAH 4.3 billion for the purchase of drones;
State Border Guard Service – UAH 82.9 million;
The Defence Intelligence of Ukraine and the Foreign Intelligence Service – UAH 28.8 million and UAH 7.9 million respectively.

This division between the general and special funds will allow the Cabinet of Ministers to be flexible, but at the same time requires strict control to ensure that the funds are used for their intended purpose.

Sources of funding: where the money will come from

1. The main source is ERA Loans. Out of the budget increase, UAH 294.3 billion is planned to be financed with ERA funds. This is a key element that changes the logic of financing: the resources planned for 2026 are transferred to the current year.

During the previous spending increase in July, the government also relied on the ERA, but it still needed to obtain permission from the European Commission to use part of the funds ahead of schedule.

2. Increase in tax revenues. In addition, the Government expects to receive about UAH 20 billion from an increase in personal income tax and military fees due to higher salaries for military personnel in November and December.

3. Reduced civilian spending. The Government proposes to save another UAH 10.4 billion at the expense of non-military items:

uAH 6.5 billion – reduction of expenditures on repayment of domestic government bonds and interest payments due to the strengthening of the hryvnia and a moratorium on payments on Eurobonds until 2027;
uAH 3 billion – savings on loans issued under state guarantees;
up to UAH 1 billion in cuts in non-priority spending in government agencies.

Record increase in the wartime budget: risks and challenges

Dependence on ERA Loans. If the proceeds from frozen Russian assets are lower or delayed, Ukraine may not receive the full amount of resources. This will create a risk of a deficit.

Weakening of the 2026 budget. Carrying over some funds from next year is actually “borrowing the future.” If partner assistance is reduced, the government will have less capacity to cover its needs.

Political procedure. The draft law has already been registered. The first reading is scheduled for October 21-23, and the final vote is scheduled for November 1. If the process is delayed, it may postpone the distribution of funds.

Control and transparency. With this scale of funding, control becomes critical. The special fund should not turn into a gray area without accountability.

Why the Government took a risky step

The situation at the front is changing every week. Therefore, the needs of the Armed Forces cannot wait for the new budget year.

In addition, the fact that ERA Loans allow raising resources without putting additional debt pressure on Ukraine played a major role.

Among other reasons, economic analysts highlight:

the use of proceeds from Russian assets is a symbolically fair decision: the aggressor is financing the resistance;
internal reserves for cost-cutting have been exhausted.

They also emphasize that in the case of increased spending in the 2025 budget, special attention should be paid to

actual receipt of ERA funds: whether they will reach the state on time and in full;
transparency of distribution: whether the government will provide reporting and audit of the use of resources;
the state of the 2026 budget, as the transfer of funds already creates a potential deficit;
the reaction of partners and the legal status of assets. The international system is still looking for sustainable mechanisms for their use.

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Мандровська Олександра

Editor