Imperfections and priorities of 2010 State budget

Maka Ghaniashvili

Final draft bill on “2010 state budget of Georgia” has been introduced as a legislative initiative to the parliament on Nov-13-2009.

After long debates and discussions parliament adopted new budget on Dec-04-2009. However, experts are doubting performance of many prognostic showings of the next year’s budget.
Experts of Economic Problems Study Center, Mr. Shota Murghulia and Mr. Davit Narmania presented conclusions and analysis of the center to the mass media concerning draft budget of 2010. Meeting with journalists has been held within the framework of “Increase of 2009 state budget transparency and reporting obligation by means of monitoring” project funded by Open Society – Georgia.
According to 2010 draft bill, state budget revenue is defined as GEL 6,773.4 million, while forecast parameters of revenues is GEL 5,171.9 million. Consequently revenues made up 76,3 percent of budget revenues. Significant change in this parameter in comparison with 2009Y state budget is not planned. 2009 budget revenues (considering planned amendments) made up GEL 6,614.5 million, while revenues amount GEL 5,137.5 million. However, it should be noted that approximately 25 percent of state budget do not represent revenues and it is derived at the expense of increase of liabilities.
Forecast parameters of budgetary payments of 2010 state budget were defined as GEL 382 million that is 23.1 percent of Gross Domestic Product. The same parameter of 2009 budget is 22.8 percent. This implies that the share of budgetary payments in Gross Domestic Product is slightly increasing.
According to new draft budget, it is planned to increase income tax by GEL 92.2 million (8.6 percent). However, experts of Economic Problems Study Center doubt whether such forecast of income tax increase is based on relevant calculations and they assume that actually 8.6 percent increase of income base is a difficult task to achieve, as income tax rate remains the same in 2010.
Besides this, it is planned to increase profit tax by GEL 11.4 million (2.2 percent). If considering the fact that current payments of profit tax will enter budget in 2010 and that they are calculated on the basis of profit gained in 2009, while 4 percent reduction of economy was observed in 2009, it becomes rather interesting what is the basis of such an optimistic forecast.
Minor reduction of VAT (Value Added Tax) is planned in 2010. It is worth of noting that VAT rate changes are not planned in 2010 and inflation forecast is about 4-5 percent. “Reduction of Value Added Tax must not be in connection with the president’s initiative on returning VAT to entrepreneurs, as this procedure existed before and VAT was included in 2009 also. Reduction of VAT volume reflects unenviable situation of the economy or violation of law by the Ministry of Finances in previous years. At the same time, forecasted funds gained from customs duty and excise duty are considerably increasing in 2010. This is a result of legislative amendments of tax code. New taxation approach must not counteract to the requirement of World Trade Organization”, – says the report published by the centre.
Forecasted parameter of grants (revenue) in 2010 is defined as GEL 462.9 million. It might be interesting to review grants received and expected grants in 2008-2010YY. Grant in amount of GEL 617.2 million was received in 2008, while it is planned to receive GEL 449.8 million in 2009 and GEL 462.9 million in 2010. In other words, total amount of grant assignations over three years is GEL 1529.9 million. The sum is less than a billion dollar. As it is well-known, it has been agreed to appropriate $2 billion to Georgia at the Conference of Donors. Actually, state budget of Georgia received only half of promised sum over three years.
Reduction of non-financial assets in 2010 is forecasted to be GEL 200 million. This implies privatization of aggregate fixed assets. The same showing in 2009 was GEL 163,5 million. Forecasted indicator of financial assets reduction was identified as GEL 48 million that is returning of issued loans. The same showing of 2009 is GEL 683,5 million.
Budget revenues from increase of liabilities in 2010 is GEL 1313,5 million. It is planned to receive GEL 100 million from domestic sources, and GEL 1213.5 from foreign sources. Budget revenues from increase of liabilities amount 19,4 percent. The same showing in 2009 was 17.7 percent. This implies that the share of liabilities in budget revenues is increasing and this cannot be called a positive tendency.
Assignments of 2010 state budget amount GEL 6733,4 million, while expenditures of 2010 budget make up GEL 5459.3 million. This is GEL 7,4 million less in comparison with previous year showing (GEL 5466,7 million). The sum to be paid from state budget of 2010 for increase of non-financial assets was identified as GEL 987,8 million that is GEL 22,8 million more in comparison with the same indicator of previous year (GEL 966,4 million). While the sum paid from state budget for financial assets was identified as GEL 86,9 million that is GEL 82,8 million more in comparison with the same showing of 2009 (GEL 169,7 million).
The sum appropriated from state budget in 2010 for reduction of liabilities amounts GEL 199,4 million. GEL 135,4 million is assigned for covering of foreign debt and GEL 64 million for public debt. GEL 121,2 million will be spent on foreign debt in 2009 and GEL 257.5 million on public debt.
State budget expenditures almost remain the same for 2010 state budget compared with 2009 state budget. Reduction is observed in payments necessary for increase of financial assets that are not considered as expenditure. Reduction is noticed in an article of state liabilities’ clearing also. This gives a ground to experts of “Economic Problem Study Centre” to assume that “buckle up” policy is not felt in 2010 state budget, as expenditures were not reduced. Increase of financial assets and decrease of liabilities were reduced.
However, Minister of Finances does not agree with this opinion. Kakha Baindurashvili declared that budgetary institutions of Georgia managed to save GEL 350 million in the crisis year and this sum will be moved to 2010 state budget. Economic Problem Study Centre experts assume that saved GEL 350 million is not seen anywhere, but GEL 100 million can been seen actually. At the same time, experts claim that president’s order about “buckle up” was reflected in budget with six month delay. Budgetary institutions started to save funds only in Oct-Nov, when the problem of budget revenues became apparent. Minister of Finances says that he cannot understand statements made by the center experts. Mr. Baindurashvili said in the interview with radio “Comersant” that GEL 350 million is actually saved in the budget of current year and the sum will be reflected in 2010 state budget.
As one might see from Table 3, financing of defense, environment protection and housing-municipal services are reduced significantly. While financing of economic activities, health care and education are increasing.
Expenditures of 2010 state budget exceed revenues by GEL 287,425.5. This is an operational balance. This indicator is identified as GEL 389,704.9 in 2009Y. This is a positive tendency in budget policy. However, when comparing the showing with the initial version of 2009 state budget we see that this indicator is significantly deteriorated.
Government representatives are explaining that social field is of first-priority for main financial document. However, together with experts politicians have some remarks concerning 2010 state budget either. Opposition parties did not support 2009 or 2010 state budgets. Vice Speaker of parliament of Georgia, one of the leaders of Christian-Democrats, Mr. Levan Vepkhvadze decalred that the main problem in the country is unemployment, while new budget is not oriented on employment issues at all. He explained that two-third of working places are at the expense of big enterprises, while normal European development proves that two-third of working places must be created at the expense of small and medium sized enterprises.
How far governmental calculations of 2010 state budget might be realistic? We will find out whether doubts of experts come true exactly in a year. However, it’s a fact that optimism of government in Georgia is called in question not only by Georgian experts, but also by representatives of international institutions. In the end of November month, Prime-Minister of Georgia, Nika Gilauri, said in an interview with agency Reiter: “Georgia has overcome economic crisis and it is a reliable and important partner for any investor”. The management of European Bank for Reconstruction and Development does not share optimism of Georgian prime-minister. According to EBRD forecast, crisis is not over in Caucasus and in Georgia. Olivier Decamp, vice president of Euro Bank, said that crisis overcoming will be slow in Caucasus, and at the same time 5 percent reduction of economy is anticipated in Georgia. It might become possible to talk about completion of crisis only in two years. Therefore, government should be careful in this aspect. While, our government makes optimistic forecasts for 2010 state budget, instead of showing carefulness. This casts a doubt on performance of 2010 budget.
* Statistical data and tables presented in this article are fully based on materials provided by “Economic Problem Study Center.