The cracks of the 2007 budget

Professor Mikheil Jibuti

Along with many other reforms, the reform of Georgia’s financial-budgetary system has been implemented for fifteen years, but it has not been completed as yet. The cases of reformed reforms are frequent inside of incomplete reforms.

Many novelties become out of date and need to be changed because of procrastinating with system changes. A lot of changes that were initiated by various political or other interest groups do not withstand the test of time and turn into a barrier for implementation of new reforms.
In 2007 perfection of the budgetary process will be among the particularly important directions of the financial-budgetary reforms. By this year Georgia’s state budget, the budgets of Ajarian and Abkhazian autonomous republics as well as the budgets of 64 municipalities and 5 self-governing cities should be adopted. Budgetary practice of the local government units begins now. That is why, by the example of a comparatively formed budgetary process of the state budget, it is important to show the existing difficulties and how they can be overcome, how it can be approximated to the international standards and the best practice.
The budgetary process includes the budget’s preparation, submission, consideration, adoption as well as the budget’s execution, accounting and control.
Whatever efforts and attempts could be made for the improvement of the budgetary process, they will not bring the desired result if there is no adjusted legislation.
Unfortunately, in the process of legal adjustment of the financial-budgetary system in Georgia the emphasis is placed on the tax legislation whereas there are a lot of shortcomings in the budgetary legislation. First of all, there is a legislative vacuum and the law on the budgetary system of the autonomous republics has not been adopted. The accounting legislation of local government units, legal entities of public law, etc has not been completed. The requirement of Georgia’s law “On Georgia’s budgetary system” related to creation of the law “On the state Treasury” has not been fulfilled. According to this law (Article 51), Georgia’s executive power was to submit such draft law to the Georgian parliament in May 2003 (!). Secondly, there are a lot of weak points in the current laws. It particularly concerns the budgetary procedures and the issues of coordination of actions, communication and distribution responsibility between the main participants of the budgetary process – the President of Georgia, the government of Georgia, the parliament of Georgia, the National Bank of Georgia and local government units.
Before the amendment to the Georgian Constitution of 6 February 2004, the main budgetary subject in Georgia was the President of Georgia. According to the currently effective norm of the Georgian Constitution, “only the Georgian government is authorized to submit, with the President’s consent, the draft budget to the parliament after coordination of the main data with the parliament’s committees” (Article 93). The government is a budgetary subject, but an inferior one. According to the Constitution, it should obtain the consent of the President of Georgia and coordinate the draft budget with the “authorized parliament’s committees” with the purpose of its submission. Here the text is an obscure one. It is not clear what main data and directions should be coordinated and with whom. According to the text – with the parliament’s committee in the event that the parliament is authorized. But with which committee? If with all committees, then it could be said that that it should be coordinated with the whole parliament. This obscurity could be eradicated in accordance with the Georgian Constitution by Georgia’s law “On the order of drawing up and adoption of Georgia’s state budget” (Article 92). However, there is no such law. Its role is played by the law “On Georgia’s budgetary system”, in which the mentioned norms of the Constitution are concretized in the following way: implied under the basic data and directions is the “document” that includes: a medium-term macroeconomic forecast, a medium-term fiscal forecast as well as the basic data and directions of the state budget. It is not determined what period of time the mentioned “document” should cover. It only said in the law that budget indicators should be “for the past, current, planned and post-planned budget years” (Article 17, Paragraph 5 “A”).
The law makes the constitutional norm more obscure instead of concretizing it. Introduction of the word “document” was absolutely groundless. Sometimes it is in plural (Article 17 heading, Article 17, Paragraph 5, Paragraph 6), sometimes it is in singular (Article 17, Paragraph 1). According to one of the law’s articles, the Ministry of Finance submits “the documents containing basic data and directions” (underlined by me – M.J.) to the Georgian government no later than 15 April, while “the Georgian government, by agreement with the President of Georgia, submits the document (underlined by me – M.J.) containing basic data and directions approved at the meeting of the Georgian government to the economic committees of the Georgian parliament no later than 1 May” (Article 17, Paragraph 7). First of all, it is not clear what other “documents”, besides the “document” envisaged in Article 17.1 the Georgian Finance Ministry should submit to the government and then which ones out of this multitude should be agreed upon with the President and submitted to “economic committees of the Georgian parliament”.
First of all, the Georgian Constitution maximally exempted the President of Georgia from work relations at the preparatory stage of the budgetary process. In my opinion, it also should not be obligatory that the prepared draft law should be agreed upon with the President. In case the Georgian parliament fails to adopt the submitted draft budget no later than within three months from the end of the budget year and the President of Georgia decides to make use of his constitutional authority, he confronts with a choice: either dismiss the government or disband the parliament (Constitution of Georgia, Article 93, Paragraph 6). This will be influenced by the fact that he already agreed with the unadopted draft budget when he gave his consent for its submission to the parliament. All the more, it is unconstitutional and unnecessary that the President, together with the government, should be a co-author of the first outline of the draft budget. In this case, coordination of this document with the President is an obvious pressure to the parliament and the President can find himself in the role of a representative of one party in the budget debates while he is interested in the best variant and not in that of some institution.
Secondly, unclear is the law’s requirement that the government submits the “document” not to “the Georgian parliament”, but to “economic committees of the parliament”. According to this entry, the government recognizes only the economic committees as a direct partner. The same is written in “the Georgian parliament’s regulations” (Article 177, Paragraph 2). The Georgian Constitution requires coordination of “the basic data and directions” with all committees of the parliament, since different components of policy, for implementation of which the budget serves, are concentrated in these committees. Correspondingly, it is not correct to mention only the committees, everything should be submitted to the parliament of Georgia. However, it can be said that it is not envisaged in Georgia’s law “On Georgia’s budgetary system” how the Constitution’s requirement concerning “coordination” between “the government” and “the parliament’s committees” (Article 9, Paragraph 1) should be implemented. We should presume that instead of it, or under this notion, the legislator implies the conclusion that the Finance and Budget Committee prepares on the submitted document based on the results of consideration in the economic committees (it is not right to leave out other committees!) and sends to the government no later than 1 June (Article 17, Paragraph 7). The same is given in “the Georgian parliament’s regulations” (Article 177, Paragraph 4).
It is not envisaged in the law what will happen in case the Georgian parliament does not agree with the presented basic data and directions or how this consent should be formalized, what will happen if the reached agreement is violated, etc. It is also not envisaged how the draft law should be agreed upon with the President or what will happen if the President does not agree with it.
Besides the norms given in the law, it is important what kind of practice of its formal or informal execution is formed.
In reality the events related to the mentioned issues have been developing as follows. It was decided at the meeting of the Georgian government held on 26 April 2006 (Minutes 17) that “the document containing the basic data and directions for 2007-2010 should be submitted for coordination with the President of Georgia, after which it should be handed over to the Georgian parliament”. (It is not even mentioned here that the President of Georgia may not agree with it!). On 27 April the “document” was submitted to the President of Georgia for coordination (¹1/144, 27.04.2006). On 28 April the President of Georgia agreed with it (9/197, 28.04.2006) and on 28 April the Georgian government submitted it t the Georgian parliament (¹1/144, 28.04.2006, to the Georgian parliament and not to “economic committees of the Georgian parliament!”). The Finance and Budget Committee of the Georgian parliament made a conclusion on the submitted “document” that contained the given wishes and observations. Officially, their consideration is reflected in the draft of Georgia’s state budget. On 27 September 2007 (Minutes ¹41) the Georgian government approved Georgia’s draft law “On Georgia’s state budget of 2007” “along with the enclosed materials and attendant draft laws”. All this was agreed upon with the President of Georgia (¹91623) and was submitted to the Georgian parliament by the Prime Minister on 29 September.
It is not necessary to know the work of the bureaucratic machine very well to see that one-day adoption is a shortcoming of the coordination practice. As far as the state budget is concerned, a special law is adopted on it that is signed by the President. That is the final instance of adoption of the budget law and if the President has any disagreements with the work of the government or the parliament, he has an effective instrument of improving it – his veto, but if adoption of the state budget was dragged out so much that it threatens to the financial stability, he can make a decision as to which of them should be blamed for ineffective work – the government or the parliament.
But still, if the legislation is not changed, the coordination mechanism should be concretized. It should be determined in what form coordination with the Georgian parliament takes place and what procedures should be passed for coordination with the President of Georgia. In the latter case the budget calendar needs to be changed as well. The neutral expert-consulting mechanism for taking the President’s decision on the draft prepared by the government should be created. According to the current legislation, the finance Ministry of Georgia submits a draft of the state budget to the Georgian government no later than 15 September, and the Georgian government, by coordination with the President of Georgia, submits it to the Georgian parliament no later than 1 October. It is necessary that this calendar should be concretized. In particular, as the stages of consideration by the government of the draft submitted by the Finance Ministry, submission of the draft approved by the government to the President and obtaining his consent (taking into account the fact that the President can express wishes and observations with the purpose of the draft’s improving) and its submission by the government to the parliament. It is possible each stage could be presented as follows: no later than 22 September, 29 September and 1 October. If the President of Georgia should agree upon the draft budget prepared by the government and is to be submitted to the Georgian parliament, then expert examination of the government’s draft is necessary for the President’s decision. Whether it will be a special group in the President’s administration or some other body – this requires a separate decision. In my opinion, this function can be performed by the Georgian President’s deliberative body – the Economic Council under the President of Georgia.
In principle, a two-stage preparation of the state budget, when coordination between the executive and legislative power takes place in advance, should be progressive and fruitful, but the existing practice does not give best examples of that. What is the use of coordination if, in case of changing of the agreed parameters, one party of the agreement – the Georgian parliament considers it as a fact?
For instance, the Georgian parliament indicated in the final conclusion of the consideration of “the draft of Georgia’s state budget of 2007” in the Finance and Budget Committee on 19 October 2006 that the submitted draft budget and “the basic data and directions for 2007-2010” of the “coordinated document” (it is not indicated where or how this coordination took place) considerably differ. For example, according to the draft law, GDP deflator makes up 6.5%, but according to the main directions – 4.4%, the total budget deficit – 333 and 129.7 million GEL respectively, etc. But the point is that there is also the difference between the data for 2007 adopted by the Georgian government’s Resolution ¹109 dated 10 June and the draft budget’s data.
According to “the Georgian parliament’s regulations”, till 1 November the government, along with other observations, should submit “a revised draft of the state budget” (Article 179, Paragraph 9). On 31 October (¹1/331, 31.10.2005) the Prime Minister of Georgia submitted such draft to the Georgian parliament. According to “the Georgian parliament’s regulation”, “the propositions (observations), for consideration of which the government expressed its consent, should be taken into account in the draft law on the state budget”.
The abovementioned discrepancies are explained in the government’s reply by the fact that “in the basic directions’ document the preliminary forecast indicators are given, while in the draft budget the trends shaped during the past period of the current year are envisaged”, that the changes took place “in accordance with the government’s decisions”. Let me remind to readers that the matter concerns the period between 1 June and 1 October. Or it is up to the government only to decide why there is the coordination? Or why the draft law submitted to the Georgian parliament is not accompanied by the matrix as to what has been changed in comparison with the coordinated variant and why?
It is also not seen from the documents’ turnover how the observations concerning the draft of the state budget received from the Georgian parliament were considered. Were they studied by the Ministry of Finance, discussed at the government’s meeting or became known to the President or not? It is not seen that “the revised law on the state budget” submitted to the parliament’s consideration on 31 October by the Prime Minister of Georgia was agreed upon with the President of Georgia. Of course, according to the law’s logic, if the draft submitted to the parliament for the first time is agreed upon with the President, then the revised variant should be agreed upon as well. It can be said in relation to the final draft of the 2007 budget that it was not revised by government on the basis of the Georgian parliament’s observations and recommendations and was not agreed upon with the President. However, proceeding from the reality that the “revised” variant in fact does not differ from the “first” variant, nothing is changed by the aforementioned actions, though they include a significant threat – a possibility of changing of the “game rules” during the game.
Non-consideration by the government of any of the Georgian parliament’s observations is the evidence of either the government’s absolute confidence in the budget strategy and tactics chosen by it or disruption of the balance that provided for a great support of practically all the government’s initiatives on the part of the Georgian parliament, or it is the result of the inadequate appraisal of the changed reality. In particular, in our opinion, disuse until now of the chance that the government, in accordance with “the Georgian parliament’s regulation”, is given the opportunity of submission of the revised variant of the draft budget in the period between 1 October and 1 November is presented as a completely new phenomenon – Russia’s total economic embargo was imposed just in this period and it was impossible to anticipate this kind of format in the preceding period of preparation of the draft of the state budget. The fact that the government submits the draft budget worked out before the Russian embargo was imposed and declares that it is as good as in conditions of the Russian embargo gives rise to very small doubts about the methods, according to which the draft budget was drawn up.
In the budgetary process it is very important to balance the authority that is envisaged by the legislation in the competence of the executive and legislative branches of the state power. There is still the impression that such informal institution as preliminary negotiations is not used by the government in its relations with the parliament. It is very good when the coordinating function of the Finance Ministry in the budgetary process is high, but it should not be the basis of substitution of other institutions of power for it. When the Georgian Ministry of Finance prepares a circular concerning the limit expenses, it should be based on the basic directions and data agreed upon with the Georgian parliament. In general, the government’s approach in its relations with the parliament is often based on the achievements in the budget incomes declared by them. Figures have an opportunity of being cunning. It can be said that every second person in Georgia goes to the theatre. The same can be said otherwise: in Georgia they go to the theatre once in two years. The matter concerns the same indicator, but the first variant presents the situation with going to the theatre in Georgia in a good light, while the second one expresses a catastrophic situation.
Over the past three years the budget progress, from the viewpoint of incomes, is to the fore, though the complete information is not always given. If the structure of the 2003 budget were retained, the following would not get into the draft budget of 2007: 325.4 million GEL of the road fund, 564.5 million of the pension fund, the sums transferred from the central state budget for financing of the pension fund’s deficit, the profit tax that was not then the income of the central budget – 393.6 million GEL, the so-called special funds – 150-200 million GEL, etc.
We should calculate many indicators in a different way in order to comply with the requirements for a country aspiring for membership in the EU. For instance, the budget deficit against the total budget incomes should be calculated with respect to state budget and not the total one, proceeding from the simple logic that local government units are autonomous and non-deficit budgets, but as to the expression of the situation on the national scale, we should use the relative indictor of the tax incomes to the GDP.
During 15 years of Georgian parliamentarism the perception of the responsibility the parliament is charged with has not been established as yet, e.g. its direct responsibility for the current expenses in the country, the fact that the process of on-budget expenditures begins with adoption of the budget.
At the same time, the Georgian parliament places the emphasis on adoption of the budget and the account for its fulfillment, but the mechanism of control over the budgetary life of the executive power is almost not used.
Ensuing from this kind of relations that formed between Georgia and the parliament is the norm of Georgia’s “Law on Georgia’s budgetary system”, according to which “the limit volumes of the Georgian parliament’s cadres and expenses is determined by the Georgian government by coordination with the President of Georgia, on the basis of the draft submitted by the Georgian parliament. In adoption of the limit volume of the Georgian parliament’s expenses it should be taken into account that it should not be less than the one adopted in the previous budget year. At the same time, reduction in the state budget of the current expenses intended for the Georgian parliament in comparison with the previous year’s budgetary funds is possible only with the preliminary consent of the parliament.” (Article 18, Paragraph 2). According to the same law, the government does not need to coordinate with the Georgian President the adoption of the limit volume of the cadres and expenses of any other expending establishments except for the parliament. In the draft of 2007 the expenses of the Georgian parliament and the bodies existing under it (27 066 thousand GEL) have been reduced the planned indicator of 2006 (29 525 thousand GEL). It is not seen from the public documents and the first stage of consideration of the budget in the parliament that the Georgian parliament had any agreement with the government concerning this reduction.
This situation is caused not only by the fact that the parliament is a participant of the budget’s spending since it is adopted by it, but also because it, in some form, delegates its functions and allows the executive power to fulfill its function – dispose of the country’s purse. It is particularly evident when the Georgian parliament allows the executive authority to redistribute sums between the budget items.
The fact that the parliament often participates not only in the adoption of the budget, but also in its changing, contributes to losing of its ability to be an effective controller of the budget’s fulfillment. Frequent changes in the budget cause the dystrophy of the controlling function of the Georgian parliament. What kind of conclusion should the parliament make on the semi-annual fulfillment of the budget if it has several times introduced amendments and addenda in it? Or how the parliament should express a correct position concerning the budget’s fulfillment if amendments to the budget law were introduced on 30-31 December? It becomes a participant of the budget’s execution.
Introduction of amendments, when on the pretext of the incomes’ increase there takes place increasing of expenses instead of cutting of the deficit at the expense of the increased incomes with the purpose of the economy’s invigoration, contributes to losing of the parliament’s ability.
Georgia’s state budget represents an instrument for realization of the country’s strategic goals. That is why it is highly important how the priorities of the country’s social and economic development are determined, how they are presented in the programs, how the limited resources are distributed and what the tasks of the fiscal sphere are.
Budget is the mirror of the policy existing in the country. It should be possible to read it. First of all, it should be seen how effectively the resources have been distributed and secondly, evaluation of the results should be possible. At the same time, the budget should be drawn up so that it could be possible to evaluate and compare the actions implemented in different years. That is why the budget’s classifier is of great importance. Classifiers show concentration of budget sums for particular purposes.
I shall draw attention to one fact. In the budget of 2007 organizational classification of expenses (according to responsible spending subjects), functional classification (according to the structure of public expenses) and program classification (appropriations with determination of strategy and results) is given. Unlike the budget of 2006, no expenses according to classification of arrangements are mentioned. Expenses according to economic classification are not given in the budget. The economic classifier gives an opportunity to see the macrofinancial policy in the budget. At the same time, the economic classifier should be present along with the financial classifier and during the fulfillment of each function what it, for example, will show the share of wages. Economic classification of expenses shows how the government’s functions are fulfilled. There was such experience in Georgia and it is not right to lose it. Thus, the budget is less available for analyzing without the economic classifier.
In more details the expenses are shown in the state budget, the less is the risk of losses and corruption. All incomes and expenses should be shown in the budget in accordance with the same classifier. Does nobody asks or replies why many codes of the classifier are left out? For example, in the budget of 2007. In the government’s functional classifier there are 7011, 7013, 7016, 7017, 7018 codes, but there are no 7012, 7014, 7015 codes. This classifier should, if nothing else, reflect the transfers handed over for local government units. And if this is reflected as 7017 – “money flows of general purpose between different levels of government”, then it is not determined correctly. There should be “different levels of public authority or administration”. Basic research, foreign economic aid should also fall under this column.
One of the main purposes of functional classification of expenses is the analysis of the public expenses policy in the historical aspect. If its components are changed every year and there is nothing to compare with, then what should the comparative analysis be based on? From this point of view, the state budgets of 2006 and 2007 cannot be compared. Leaving out of codes is not a right practice either. Presentation of codes at different levels is also erroneous. Let us take defense in the functional classifier. It is indicated for 2007 that out of 397. 996. 600 GEL 5 426 600 goes for defense. Functionally different expenses are not deciphered. If you look at the subsidies’ part (Article 44), there you shall only understand traveling expenses (26.5 million GEL), food expenses (20.2 million GEL) but you will not acquire familiarity with the structure of expenses. But in case of foreign assistance in elaboration of the budgetary and, generally, economic policy, their showing in the budget is necessary.
Drawing up of a program budget gives an opportunity of orientation for the strategy’s results and their evaluation.
Increasing of the rights of spending subjects – first of all, of the ministries – and their associating with budget activities’ programs is a positive phenomenon. However, the ministries should not conceive their strategic goals within the framework of departmental interests. The strategy of each ministry should be related to the law or laws, the execution of which is in its competence. The program’s priorities should be ranked accordingly. At the same time, the program approach will lose sense if the goal, tasks, costs, result, product are not exactly determined. Unfortunately, there is a general talk about the strategies of the ministries in the subsidies’ part of the 2007 state budget (Chapter IV) and not a single result is given for 2007 in the form of a concrete indicator. (We say nothing of the cases when the strategy is not given at all (Article 23 – the Supreme Court of Georgia, Article 36 – the staff of Georgia’s State Minister for the regulation of conflicts, Article 38 – the staff of the State Minister for civil integration issues, Article 56 – Georgia’s National Commission for Securities, Article 57 – the State Agency for Regulation of Oil and Gas Resources of Georgia).
The law on the state budget does not only reflect the country’s economic life, but also shoes the level of lawmaking. The law on the state budget should be maximally secured against any mistakes, including grammatical ones. This issues is still to be solved proceeding from the shortcomings that are in practice of the budget law, including the one of 2007.
Almost harmless is the shortcoming that, for instance, in Article 6 the column dealing with the number of workers of the chart “Payments of Georgia’s state budget in organizational aspect” are not filled up for all spending subjects, while the data for 2005 is not given at all. For 2007, the number of workers in the Georgian Control Chamber, the Central Election Commission of Georgia, the State Agency for Regulation of Oil and Gas Resources of Georgia, while Georgia’s National Commission for Securities, Regional Policy and Administration Service Training-Research Center have no column dealing with the number f workers.
This kind of “harmless” shortcomings give the leadership of some departments an opportunity to manipulate with the number of workers and financially award themselves to the prejudice of the matter.
It is good that the budget technology is being improved, but it should not restrain the growth of budget incomes. For the first time in fourteen years, decreasing of budget incomes in comparison with the previous year is envisaged in the state budget of 2007. If in 2006 the total planned incomes of the state budget make up 3 538 807 thousand GEL, this indicator for 2007 makes up 3 444 351. It is true that there was a time during this period when the country did not have the state budget at all. It is also true that the incomes of the 2007 budget are higher than those of all budgets of the previous years, except for 2006. What caused this 3% (94.5 million GEL) reduction and was such forecast unavoidable or not? Losing of sums for the state budget was caused by the initiatives of Chogovadze and Bendukidze. Is it worth drawing attention to it? Of course, if we conceive the amount of these sums, it exceeds the total amount of equalizing transfers to municipalities by 7 times and more.
First of all, it was caused by changing of the customs tariffs. As far as customs tariffs are concerned, Georgia has obligations to the World Trade Organizations. “Nullification” of the customs tariffs carried out on the initiative of Bendukidze and Chogovadze did not ensue from the mentioned obligations. None of the obligations to the World Trade Organization prompted Georgia to take this step. Unfortunately, the authors of the initiative have not presented any calculations that could express the expected positive results from the viewpoint of money, time or other indicators. For the time being, according to the draft of the 2007 state budget, Georgia has lost more than 250 million GEL. Proceeding from the aforementioned, the budget deficit has risen by 250 million GEL along with the budget pressure on inflation. “Bendukidze’s reform” in the sphere of duties contributes to the budget pressure on inflation. As a result of this reform, in 2007 the budget will not receive more than 280 million GEL.
From the viewpoint of the economic theory, in Georgia there is a big incomprehensibility with respect to the deficit. It concerns not only the case when incomes rise and the deficit does not decrease, but also the data that is known in connection with this phenomenon. For 2007 the volume of the state budget’s deficit is determined at the level of 426.2 million GEL. It is much more than in 2005 (actual: 10.7 million GEL) and 2006 (planned: 289.1 million GEL). This a very bad tendency. At the same time, in the deficit financing sources the sum of 299.345 thousand GEL is envisaged from the so-called “free circulating assets”.
In connection with the deficit of Georgia’s state budget, its explanation is given in Georgia’s law “On Georgia’s budgetary system” (it is a negative difference between the budget’s incomes and money grants on the one hand, and expenses and crediting on the other. Article15). Correspondingly, covering of the 2007 budget deficit by “free circulating assets” is at variance with the law “On Georgia’s budget system”. According to this law, all incomes should be reflected in the budget (Article 4, Paragraph “A”). Covering of the deficit is not included in the budget’s payments (Article 10). With the purpose of overcoming the contradiction, the authors of the draft law created Article 11 “Transitional circulating assets” in the draft of the 2007 state budget, in which it is written that “the deficit of the 2007 state budget should be financed by the free budgetary funds existing for 1 January 2007, in the amount of 299 345.0 thousand GEL”. It is a paradox – if you have a forecast that you will have “free funds” by 1 January 2007 in the amount of up to 300 million, why you have the deficit in this part? The Treasury fixes the remains existing on the accounts of the single settlement system at the beginning and at the end of the year (Article 46, Paragraph “A”), but after 24:00 of 31 December all sums existing in the Treasury represent the incomes of the planned budget year (Article 33).
In the recent years the assignments unused by the end of the year have acquired large scale. In 2005 – 88 million GEL, in 2006 – (plan) – 130 million GEL, but as it turns out from the aforesaid, it will make up 299 million GEL.
The incurred expenses can be lower than the planned indicator in two cases. The first one – when the fiscal discipline is high and the second one – when there are shortcomings in the budget forecast. According to our observations, the Treasury is trying not to repeat the situation when in the past years it had no money and the accumulated debts put pressure on the Georgian financial authorities. However, surplus of money in the Treasury has the same negative effect on the economy as its emptiness. It is the most important reason causing inflationary expectations. A badly drawn up budget gives an opportunity to the Finance Ministry and the Treasury to “draw up the budget anew” and to substitute for the legislative power in real life. The Treasury, as a so-called confirmatory institution, decides which expense should be incurred and which one not.
In the shaped situation it is possible to consider the mechanism of utilization of the budget sums in order to rule out the practice of the “repeated” drawing up of the budget.
Different requirements of Georgia’s law “On Georgia’s budgetary system” are not fulfilled in the budget of 2007. The amount of annual limits of clear loans and loan guarantees is not determined (Article 40, Paragraph 1). If it is expected that this will not take place and it will not be necessary, it should be said so. Establishing of 0 is also a limit.
Coordination of different decisions is necessary in the state budget. It is desirable that coordination between the budgetary policy and the fiscal one should be increased. Frequently tax changes and budget’s expenses are determined separately. There should be a closer connection between the fiscal and the monetary-credit policy. The fact that the parliament adopts them separately should not weaken the connection between them, but, on the contrary – strengthen it.
Giving up of creation of the single economic policy in the country makes a big problem from the viewpoint of coordination (the law on indicated planning was declared as stale). Because of the different sub-systems of the economic policy actually moved away from each other and lost the ability of creation of a connecting single whole. The monetary-credit policy, the fiscal policy, the energy policy, the tourism policy, etc are intersynchronized. This hampers a correct determination of arrangements and orientation for priority results. In the document on “basic data and directions for 2007-2010” the rate of real GDP growth and the consumer price index during the medium-term period are determined as 2006-7,5 and 5,0: 2007-7,0 and 5,0%. According to the information enclosed with the draft of the 2007 state budget, real GDP growth in 2006 will make up 8% instead of the planned 10%, and in 2007 – 7,0%, while the growth of the nominal GDP will make up 20,4% and 14,5% respectively. According to the same document, the expected inflation rate in 2006 – 9,2%, and in 2007 – 6,0%. According to the inflation review bulletin of the National Bank of Georgia, the index of the forecast growth of the consumer price index by the end of 2006 is 8,3-9,0%. According to the Economic Development and Poverty Reduction Program, the 5-6% annual inflation rate is expected in 2006-2010. According to the 2006 report of the International Monetary Fund (¹06/395) the expected real GDP growth for 2006 makes up 7,5%, inflation 10%, while for 2007 – 6,5% and 6,0% respectively… The forecast of the IMF and that of the draft budget of 2007 do not coincide. The Georgian parliament should pay attention to it, since these forecasts are nothing but the determinant of the amount of the budget incomes.
As to the finance-credit and the money-credit systems, it must be said that it is very good that the law prohibited the government to take the credit from the National Bank of Georgia. However, this decision was not followed by the action necessary for its implementation. It is the issue of treasury obligations. First of all, erroneous is the opinion that treasury obligations are necessary only when the Treasury is in a difficult situation. They are necessary for the development of the financial sector’s individual or collective investments. On the other hand, what will the government do if it suddenly needs funds? It is natural that, if there is no developed market of treasury obligations, it will have to break the law together with the National Bank of Georgia.
The effect of the Russian embargo is not envisaged in the given forecast. The only resource that is left for 2007 lies in the privatization sphere, though on the whole the forecast is an optimal one.
During fifteen years the main debates on the budget were related to incomes. Now the Rubicon has been crossed in the incomes’ part, though there arose a new Rubicon – expenses.
In many cases the expenses of the spending establishments’ budgets are not concretized, their purposefulness is not determined. For example, cannot be deciphered the expenses of the Ministry of Education and Science for general education schools (200 million GEL), “Concern for Children” program (8,9 million GEL), alternative program of concern for children (2,5 million GEL), program for educational institutions (101,5 million GEL), “A deer’s jump” program (13,0 GEL), the program of the Finance Ministry of Georgia for regional infrastructure projects (21,2 million GEL), energetics rehabilitation programs (47,1 million GEL), enterprise development projects (25,7 million GEL). According to the articles given as examples only, the fate of up to 430 million GEL will be decided by the ministries instead of the Georgian parliament (!!). According to Georgia’s law “On Georgia’s budgetary system” (Article 3, Paragraph 1 “A”; Article 28, Paragraph 2), the ministries and other spending units are responsible for the expense management, but it is not up to them to determine the directions and amount of expenses.
There was the following reply to the remark of the Finance and Budget Committee of the Georgian parliament that separate expense items instead of the total sum (50 million GEL) should be given for the projects to be implemented in the regions: “Allocation of the mentioned sums would take place on the basis of the information given from the local level and the decisions on allocation of the sums will be taken by the Georgian government”. Such approach gives rise to a curious situation. How it can be explained that more than 70 projects, that had to be implemented in the regions in accordance with the state budget of 2005, are again introduced in the draft of the 2007 state budget. It is maintenance and repairs, etc of schools in Khobi – the village of Dzveli Khibula, Martvili – the village of Taleri, Mestia – the village of Mazeri, Abasha – the village of Ontopho, Chokhatauri – the village of Khevi, Lanchkhuti – the village of Chochkhati, Khulo – the village of Uchkho, Shuakhevi – the village of Chvana, Lentekhi – the villages of Zhakhundera and Natsuliashi, Tskaltubo – the village of Dghnorisi, Lagodekhi – the village of Kabla, Adigeni – the villages of Lelovani and Mokhe, Tsalka – the village of Trialeti, Dusheti – the village of Barisakho, Tianeti – the village of Ghulelebi, Mtskheta – the village of Galavani, Khelvachauri – the village of Dzablaveti, Akhaltsikhe – the villages of Minadza, Klde and Sviri, Kharagauli – the villages of Vertkvichala, Khidara, Sargvishi, Lashe, Leghvani, Kharagauli, Vani, Kitskhi.
All this happens when there are tens of millions on the Treasury’s accounts and it should become the source of doing next year of the matter that was to be done this year. The indicator will be improved by this, but what about the matter?
I do not want to try the readers’ patience along with exceeding the limit of the article’s volume determined by the editor of the magazine’s scientific part – Emzar Jgerenaia, and here I stop to discourse on the subject with the remark that it is just the beginning of the conversation, and if it is encouraged by listening, we shall continue the discussion of these issues in the near future.