Y 2002 Budget ? Rhetoric or Real Economic Calculations

By Sophiko Sitchinava

The crisis in economy gradually deepens. The budget is in a more pathetic and miserable condition. Instead of speaking about the real economic reasons, we deal with political demagogy about corruption. Yet, the most important thing are crucial problems in economy.

The Y2002 budget is a clear example of it. It lacks economic content as compared with its predecessors. Everybody admits the fact that the Y2001 budget has suffered a fiasco. In accordance with 8 months’ data, the budget lacks 210 millions. Sequestration is inevitable, but the trouble is that some people demand sequestration as well as changes in the budget. In the process of sequestration, share of expenditures changes, but in the process of budget changes, both shares of expenditures and shares of income are subject to reduction. As a matter of fact, if budget changes are made, the income plan will reduce and there will appear an illusion of budget implementation. Because of the last year cut, the budget plan was not implemented by 92%. First of all, we must put an end to demagogy and to attend to real business. Treasury reimbursement must make up approximately 300 million dollars during the 4 months’ period, which amounts to 73 million GEL per month. This index is larger as compared with the last year one. The Central budget itself must be reimbursed by 47 million GEL per month. This is an unreal figure in accordance with tax tendencies. On account of the fact that someone planned the budget on the basis of monthly layout, the great burden was to fall on the last three months so that we would be able to achieve “numerical display”. This tendency is ruinous for the country, it is time for Georgia to put an end to this practice. Unfortunately, the Y2002 budget testifies to the fact that we do not intend to change either the methods or the style. The parameters of the Y2002 budget are less than those of last year and, what is important, it does not have any ideology about the development of the country. According to the data of the Ministry of Economics, the existing economic situation is as follows:
After the years of economic recovery in 96/97 the increase of entire domestic product has slowed down since the Russian crisis and afterward-energetic crisis. In the given schedule you can see that the influence of these regressive factors has been completed by the first half of 2001. The expectable rate of economic recovery in 2001 makes up 6,5%, in 2002 ? 6,6%. 5,2 % growth is indicative of economic revival in the first half of 2001.
Georgia still belongs to the list of poorest countries
Social parameters are deteriorated once again. Both average and minimum salaries are small in a public as well as in a private sector. The Government can not solve the tasks in this way. If we want the Government to function and the tasks to be fulfilled, it is necessary to perform significant, principal reforms in economic policy and in the Government. The final task consists in overcoming poverty and increasing the well-being of people. According to the Ministry of Economics, it is necessary to perform the following measures with the purpose of achieving this aim:
? Economic growth
? Stable macroeconomic environment;
? Development of economy on the basis of private property, commercial marketplace and international investments.
The development of mechanisms of civilized society and institutions (Representative democracy, legal environment, non-government sector and mass media, etc)
General parameters of taxes: (table)
Rates of tax administration has slowed down since 1999. We would describe the present tendency as catastrophic. Rates of growth by 2001 must not be less than in 1999 ? or they must amount to 10%. Reserves are said to be rather great. According to the minister of economics, if we want to regulate the budget, we must not plan less than 10% improvement in the administration. In this case, tax income plans for the Y2002 amounts to 1,229,0 million GEL. Vano Chkhartishvili thinks that this plan will be a tense one. The forced growth of income can not be achieved without the tense plan. The counterarguments about the growth of income will be of no use. First, we cannot plan the non-implementation of passed and real laws. Besides, amortizations in the share of expenditures can be taken into consideration. Investment expenditures and ways of extinguishing debts under the terms of the plan can also be considered. In this case, we may succeed in struggling for reserves.
Black economy and tax reserves:
Vano Chkhartishvili (minister of industry and trade). “Black economy” is not “native” for Georgia only. It exist in all countries. The difference is in its scale and forms of disclosure. In the countries of developed market economy, the specific gravity of black economic activity makes up 5-10% of the domestic product. The specific gravity of black economy is much higher in developing countries. In Philippines, Mexico and Columbia black economy makes up 50-60% on the whole. It is also high in Italy. A high level of black economy is characteristic of Post-soviet countries. The index in Georgia is quite high, too ? 3,046,2 million GEL of the production, which amounts to 32%
Black sector has a very negative effect on the development of economy. The breach of game rules leads to disorganization in the organizational process; contraband goods affect the society functioning and, therefore, budget revenues. In 2000 fiscal losses exceeded 830
Million GEL insofar as VAT and profits are concerned.
The total reserve amounts to 131 million GEL. Consumption of wheat and flour in Georgia makes up averagely 1 million tons. However, in 2000, 340,0 thousand tons of wheat and flour import was registered in Georgia. The local production does not exceed 150,0-200,0 thousand tons. It is obvious that approximately 500 thousand tons of wheat and flour are/ smuggled. Customs receipts from wheat and flour import makes up 40 million GEL. Apart from the budget losses, the decline of local production in the conditions of unfair competition is observed. Georgia has the real opportunities for both local production and export or re-export. To experts’ mind, if it were not for contraband goods that destroy the market and break the balance of cost price, local production of Georgia would be able to meet home demands. Georgia has necessary capacities, experience and advantages for the execution of this plan. There is a chance of increasing the level of grain production so that budget will additionally receive 50 million GEL per year. Added to this, are new work places and incomes in private sector.
– According to the data of Tobacco National Centre, there are 2 million smokers in Georgia who consume 1,8 million boxes of cigarettes during the day or 650 million boxes during the year. According to the data of Customs Department, the maximum of import makes up 180-200 million boxes. Taking into consideration the local production, budget receipts from tobacco in the conditions of the existing tax regime should make up 100 million GEL. The maximum revenue of the last period makes up 30 million GEL where 30% are legal and 70% come from incomplete taxation of black tobacco. It is an interesting fact that during the budget planning the Finance Ministry considered 200-210 boxes of cigarette consumption as tax basis. Does it mean that the authorities officially allow the significant part (70%) of black economy. As far as energy materials, namely diesel, are concerned, its consumption makes up 360,0 ?400 thousand tons per year. The officially registered import in 1998 made up 284,0 thousand tons, in 1999 this index decreased to 77,0 thousand tons, in 2000-47,8. If we consider the real level of local production, we will see that contraband diesel meets 80-85% of local demands.
Much damage is caused by contraband petrol. The consumption of petrol in the country makes up 600,0-625,0 thousand tons. The Customs statistics registered 304 thousand tons of petrol import in 1999, in 2000 this index reduced to 183 thousand tons. Only third part of petrol is legally imported. The lack of Customs tax in 2000 amounts approximately to 40,0 million GEL, but, if we take into consideration excise, the lack will amount to 80,0-90,0 million GEL. As a result of it, local oil-refining enterprises suffer damage.
According to the official statistics, the turnout of one city restaurant makes up averagely 168 GEL per day. it turns out to be that 33% of restaurants operate in the red. These data are unbelievable, in this state of affairs there is no sense in starting entrepreneurial business. The research showed that there are 367 restaurants in Tbilisi; in average 20 000 customers use the service of restaurants every day. One restaurant receives daily 55 customers The sum spent by each customer amounts to 12,0 GEL. In high-grade restaurants this index is higher running into 22,0-30,0 GEL and in the most fashionable restaurants it makes up 50,0-80,0 GEL. In accordance with the results of the research, the real minimum turnout of the restaurants makes up averagely 617,0 GEL per day or 18,505 per month, which exceeds the official indices by 3,8.
There are many tax reserves in Georgia. The estimation of Barenz’ group showed that the existing tax base runs into 1,664 million GEL, one half of which is already paid. In these conditions 10% growth of administration is a necessary task. Priority must be given to the administration. From this point of view, it would be interesting to estimate the work performed. Some progress is already observed. The social authority of the Department has improved, the qualification of employees has considerably increased, computerization process has not yet been fully completed, but it will bring results in the future. However, there was no principal improvement in the work of the Department. The final result ? improvement of tax mobilization ? is indicative of this fact.
The improvement of the Y2000 administration is by 3,0% unsatisfactory, it makes up a third part of the Y1999 result The index of contraband strategic products has deteriorated. There is only one explanation to it: there are mistakes in the reform policy (main problems are not yet solved, the whole administration is fragile)
As far as mistakes are concerned, the problem of inspectors’ corruption was left unsolved. One change would be effective ? legalization of inspectors’ legalized sums. Our suggestion is that this offer should be realized immediately. We said this earlier and we still say that taxes must be aimed at satisfying our opportunities.
The Ministry of Economics demands that the budget should acquire a constructive nature. The budget policy is the first weapon in the struggle with corruption. The debate about the Y2002 budget has already reached its climax. Ordinary citizens are confused; they cannot understand who is right and who is wrong ? Chkhartishvili’s or Nogaideli’s group. Bourgeois can hardly see the causation of economic processes. We will not be able to get rid of black economy neither in 2002 nor in 2005. Yet, its processes of legalization must be on the rise. The fact that we do not have ability of administration does not mean that we should put up with the situation.