Pessimistic aspects of optimistic 2009 budget

From the Editorial Board

“Research Center of Economic Challenges” with financial support of the foundation “Open Society Georgia” is implementing the project – Increase of state budget 2009 transparency and accountability by means of monitoring”.

The goals of the project are: analysis of 2009 state budget in the view of revenue mobilization and budget execution; Monitoring of the budget, in the view of expenditure reasonability, effectiveness and transparency and analysis of relevance of budget priorities and social economic situation of Georgia; monitoring of relevance of main data and direction document of the government and the state budget; Assessment of the consequences of global financial crisis and the ways to overcome it and their consideration in the state budget; Design of the statement concerning “budgetary system” on the ways of perfection of law of Georgia; Active co-participation in the process of designing of the state budget 2010 by means of advocating the results of monitoring of 2009 budget; Encouraging of active participation of civil society in the budgetary processes.
David Narmania and Shota Murgulia, the experts of the center, have presented initial results of the current research and monitoring to the society on Oct 30. Experts have discussed macroeconomic aspects of 2009 state budget execution.
Despite the fact that in autumn 2008, the results of Russian-Georgian war and world financial crisis were already felt in the country, government of Georgia was excessively optimistic while drawing up the budget of 2009 and considerably increased operation factors of the budget.” – This is the opinion of the Center of Economic Challenges. The organization presented the following statistical showings as the evidence:
Aggregate amount of tax and social incomes of the 2007 state budget were GEL 3.7 billion. GEL 4.5 billion were raised in the state budget of 2008, while in 2009, GEL 4.76 billion tax incomes were planned in the 2009 state budget. Macroeconomic parameters considering 7.5% actual increase of the economy and 5% inflation were taken into account in the process of drawing up the 2009 state budget. At the same time, pro forma indices according to the document on main data and direction of 2009-2013 should have been completed with 10% economic growth and 9% inflation.
Unfortunately, due to well-known events (Russian-Georgian war, global financial crisis, inconsistent macroeconomic policy) neither 2008 and nor 2009 planned macroeconomic indexes were achieved. According to Department of Statistics, 2.1% economic growth and (according to GDP deflator) 9.9% inflation was observed in 2008. As a result, nominal GDP became equal of pro forma index.
However, it became obvious that it would not be possible to reach excessively optimistic economic growth in 2009. Initially, the prognosis has been reduced to 4% of economic growth, then to 1-1.5% and finally to 1% economic slump. While working on the budget of 2010, the government admitted 4% economic downturn of the current year. Accuracy of this index is doubtless, as according to official statistical information, in the first quarter of the current year 5.9% economic downturn has been observed, while in the first half of the year the slump made up 10.7%.
It seems that 10.6% reduction of tax incomes in the state budget made by the government is based on the above mentioned showings (the adopted project was considered raising of GEL 4.7 billion tax revenue of the budget; the number has been decreased to GEL 4.2 billion in July). At the same time, from January of the current year, tax rates has been decreased (profit tax – from 20% to 15% and income tax from 25% to 20%), that should have been resulted in objective reduction of tax incomes under the condition of anticipated economic recession.
“Weakest link of the state budgeting is realistic prognosis. This is proved by the history of every budget of the country. If one reviews the budgets of the country, starting from 1994Y up today one will see deplorable picture. Unfortunately, we have never had the budget that would not have been changed radically through the year. This is the indicator of the weaknesses in macroeconomic prognosticating. Amendments in 1995-2003 budgets were mainly made in tax incomes’ reduction. The situation changed in 2004. However, maintenance of stability of the state budget, as the country’s main financial document, has not been managed up today. 2009 state budget broke the tradition of making amendments and increasing tax revenue of the budget. In the first half of the year, the plan of tax revenue has been reduced by GEL 0.5 billion. Under such conditions, increase of expenditures of 2009 state budget and attempt to finance the difference by means of public debt seems even more inadequate.”
Other indexes are pointing to the downturn of economic activities also. For instance, average salary was 580 GEL last year, while this year, it has been decreased to 531 GEL in the first quarter and made up GEL 560 in the second quarter; level of unemployment is increased also.
Labour remuneration of employees has been decreased by 20% in agriculture, 17% reduction is observed in industrial sector and 10% in health care. There are comparatively stable prices; but despite general decrease, price of healthcare services has increased by 10.7% in September of this year in comparison with the same period of previous year; education prices have increased by 47.4%.
All this indicates that despite excessive execution of tax revenue of the budget within prognosticated eight months (GEL 6.5 million), forecasts of revenue taxes were not accomplished (budget shortfall made up GEL 12.6 million). This implies that at the expense of increased unemployment and salary reduction taxable base has been decreased by GEL 63 million, or the revenue derived from the country’s citizens.
Material is based on the data provided by “Research Center of Economic Challenges”