HOW DOES BUDJET FORM

MAIA RAZMADZE

By November 2002 the budget gap was 100 millions. The figure is expected to grow by the end of the year.

Though, some experts do not rule out the possibility that the budget might be implemented provided there is usual support of international financial institutions. However, is the implementation of figures the main thing? How does budget implementation determine the situation and strength of economy?
Experts say that budget has been made in accordance with one scheme for years. This is one of the reasons of the preservation of seven years’ budget gap tradition. Some say that the Y2003 budget will not be different from the previous one.
Emzar Djgerenaia – During the development of a country such attributes as budget, national currency, army, flag, hymn, etc. are formed in the first place. For the last 10-12 years after Georgia declared freedom, its most complicated state attributive institutional pillars have been formed since 1990-92. They were as follows: tax system, revenues mobilisation system that state is based on, and on the other hand, budget of expenditure – how and what a state keeps, what it spends money for. This laid foundation for the budget formation. I would not say Georgia had no budget before. Georgia had budget during the Communist era. It was budget of Georgian Republic that was planned on the basis of macroeconomic indices of the so-called Plan Committee (Gosplan) by the USSR and accordingly, Georgian Finance Ministry through well-thought-out methods. The well thought-out method reflected the route of party meeting or growth rates determined by the meeting. As a result of it, the five-year plan was made. Each year it was planned which parameter it would grow by. It was planned how much production we would produce and what expenses we would make, what would be the level of social defence level. We would say it was a mechanic work. In accordance with the five-year plan the growth rate would make up 15-18%; 15-18% would be added to everything and the same figures would vary. Afterwards, sums were distributed within the list in accordance with functions belonging to a certain structure or direction.
I accentuate this method on purpose because after Georgia declared independence, the process of national budget formation has completely been connected with the previous years’ experience and methods. We have adopted a new plan of calculation with time, we have also introduced the world standards in the distribution and registration of public revenues, but it was, mainly, based on inertia. The plan depended on political will. I would not say that situation in Georgia has changed and budget is planned without any political will. 1992-1993 were years of currency transmogrification – we had Russian roubles, little revenues, export was taxed and import was not taxed due to trade deficit. We lacked some laws, there was disorder and civil war in the country. In fact, we moved with inertia, but since 1994-1995 lari came into circulation (prognosis of coupon rate), there was no sense in budget implementation without currency rate, tax balance and macroeconomic planning. In 1994 some of parameters coincided with each other: The first one was introduction of lari, the second – interest of foreign and international financial organisations in Georgia. The first programmes started at this very time, and it was very important for budget development. The third country became, in fact, independent from expenses on bandit military formations, and civil construction started.
Since 1996 the real contours of the first budget took form. In 1995 the parliament was elected. It was responsible for settling the issues. The process of building a state has started. The GDP growth, dynamics of currency rate, and financing become real. All this takes place after 1995. 1995-1997 were years of stable currency rate – lari was new money supported from outward. Business impact was comparatively liberal – within the limits of tax code. Thus, free trade situation has existed up to 1998 when the new tax code came in force and the crisis occurred in Russia. Indebtedness has appeared since 1997-1998. Why was that so? Where before pensions and salaries were absolutely symbolic, in 1997 they became real due to the stability of currency. In 1996-1997 when budget was made, we evaded this indebtedness, but at what expense. Of the last ten years the Y1997 was the most successful one for the development of our country, which can be seen in the dynamics of GDP growth. We could argue about whether this index is accurate, but we would not be justified in ignoring what was before. The great, serious increase was attributed to potentially absolute indices of 1997. Thus, economic environment was very productive. We could say that there was business development boom, production development; both parliament and the government were involved in business. The Y2003 budget project was similar to 1997 indices. In spite of many flaws, there was serious growth in 1996-1997. This very year there was a stable exchange rate (table).
In 1997 the nominal gross domestic product in million US dollars increased from 3 billion to 470 billion dollars up from 2 and 900 billions in 1996. In 1998 this figure was almost the same. In 1999 there was a significant decrease.
1997 was a stable year with 7% inflation rate, and it decreased even more as compared with previous years when the nominal gross domestic product per head was 755 dollars. Georgia has not reached such indices in subsequent years, instead GDP has reduced to 600. The share of tax revenues in GDP was 13% due to the fact that in 1997 there was no severe and non-adaptable tax code. It is a great index. In 1997 it was possible to overcome the burden of pensions and salaries thanks to productive, quite healthy and effective economic situation. The new tax code with quite severe parameters has come in force since 1997, and the process of business legalisation was launched. Since that we have been facing continuous problems. This process was quite slow; it was a bit accelerated in 1998 after the August crisis in Russia. As we are closely connected with Russia, the crisis had its effect on us, too. Most of our parameters have dwindled. Thus, consumer prices started to decrease due to the tax code and the crisis that ended in the inflation of our currency. In 1998 GDP did not increase, instead the ratio of tax revenues in GDP has deteriorated falling from 13% to 8,5. Naturally enough, here lies the key reason of indebtedness. This happens in the end of 1998. Little by little, budget indebtedness gaps appeared. The budget indebtedness ignored anatomy of this process. The inertia that came from USSR, continues and it does not take into account the existing dynamics and reality. The then finance ministry did not make real prognoses and calculations. Therefore, we have received a picture showing that this trend and the existing mechanism of budget-making affected the Y1999 budget in the deteriorated business environment when in 1999 GDP fell from 3 billions to 440 billions, from 2 billions to 800 billions. It was a serious GDP decrease. Despite the catastrophic decline, the finance ministry planned approximately 50-60% increase of budget revenues of which 70-80% fell at the share of customs, and 100% at other kinds of customs taxes. The revenues plan from tax system increased by 30-50%. Why were tax revenues planned with such an increase at the time when the economic situation was deteriorating? It was because there were elections in 1999 and the budget was popularised – some politicians needed unimplemented budget – a good subject for criticism, others resorted to promises – they promised to provide financing for schools and institutions. All this was necessary for the accumulation of elective dividends. As a result of it, we received inflated budget. Taking into consideration the shadow economy, this budget might not have been so inflated, but given the legal framework, tax business environment in Georgia and population’s purchasing ability, there were significantly boosted figures then. We have repeatedly said it was a great mistake. For one thing, budget is made absolutely mechanically without well thought-out calculations, trends and prognoses; it reflects political will and political situation. 1999 was the worst year from the viewpoint of economy. There was no such decrease in 1999. The economic environment dwindled. Despite this, tax revenues increased by 10%. The first budget gap was noticed through the consideration of this reality. In 1998 it was arrears of pensions and salaries that grew even more in 1999. This budget gap was planned in advance by politicians and people that made boosted figures and failed to consider the critical state of economy. The budget was made mechanically. Of course, it is a bad style of work that continues even up to now.
2000 was a normal year for economy. The economy averted crisis and became healthy. Despite this, a famous game started that continues up to the present – “pingpong” of budget offices and treasury. When some say that budget is made, others contradict by saying that it is not. Some say that there have been positive trends for years from the viewpoint of tax revenues, and others say there is no growth. If we convert the tax revenues of 1997-1998-1999-2000 into dollars, we will see that despite everything there has almost been no growth of budget revenues since 1999 (table). We should use inflation level, currency rate against lari. The nominal index might grow in laris, but not real index. In reality, in the end of 1999 the exchange rate has significantly increased, then it fell and increased again in 2002. The index seems to improve in nominal value, but it is absolutely stopped when calculated in dollars. Thus, we have received the same revenue in the conditions of bad economic state. The figure seemed to be the same. It is very important for us. After this, the indebtedness grows annually. In 2001 the austere policy of the finance ministry postponed the process. The austerity of policy and proportions between protected and unprotected articles served to stop the growth of indebtedness. However, indebtedness, certainly, increases; unforeseen budget expenses will increase this year, too. The number of revenues attainment of which is under question remains to be unclear. These are tax revenues within 15-20%, 10% is presumable external financing and property privatisation share. In fact, we balance budget mechanically. The external financing depends on whether Peter Show was really kidnapped.
This trend will continue in the Y2003 budget, too. Given the macroeconomic indices in Georgia, 2003 is quite a productive economic year. More investments were made in communications, transport. Pipeline construction was launched. From this point of view, 2003 was a productive year. Despite this, there is minimal growth in budget revenues.
2003 was a year of elections. The events of 1999 reiterate. Thus, there is populist budget, and in this context we face a danger again – do we repeat the previous years’ mechanic method marked by political (elective) will? From this point of view, there is a serious mistake in budget planning – detachment from reality. The second question under consideration is budget preparation, relations between the centre and regions that are not so simple – some transfer sums and others do not. We should make this clear. During the budgeting we have the same approach towards Tbilisi, Poti and Kutaisi. Do we have priorities and do we observe the principle of justice? What is our attitude to regional economy that is on the verge of destruction and catastrophe. Naturally enough, itwill not fulfil its functions on the spot. On the other hand, the centre itself faces deficit of fulfilling central activities and therefore, its direction is natural. We, certainly, need money for this, but we should not stand in the way of regions that constitute potential for our survival. Another thing is to what extent the region is ready to use the left sum for the development of regional economy. We do not ask our regional authorities about the increase of production and tax base, we ask them about the non-implementation of central budget, which, I think, is none of their business.
Budget preparation, budget planning and tax environment on the whole will give us a real budget that would be subject to implementation. Though, there is no budget without deficit. There is not much danger in deficit provided it is not chronic. It should be controllable and kept within real limits.
Gela Khanishvili: It is often said that nothing changes during budgeting, but it is far from being so. Those who watch budget processes and can draw parallel with even the Y1995 budget, will notice the changes and positive trends that approach our budget to world standards. This is made step by step on the yearly basis. Some imagine that the budget can immediately and completely change on the declaration level, but it is not so. It is really impossible even due to the fact that we did not have budget legislature. However, this legislature has been formed and perfected, which is, certainly, a positive move. The grounds for its perfection and the new budget code was laid already during Nogaideli’s ministerial office. Later on, a very serious and practically basic document was made in David Onoprishivili’s time. The work continued during Nogaideli’s ministerial term, and it continues now during Mirian Gogiashvili’s ministerial term. This, in fact, shows that the process cannot be finished immediately, even one year later. It is a continuous process that is yet far from the desirable results, but positive trends have already become observable. Not only Georgian specialists, but also the World Bank and International Monetary Fund experts work on the perfection of the budget. They improve this process each year by means of various recommendations, approaches and forms. Presently, the budget of expenditure has been developed in accordance with their requirements. Serious works are performed on the perfection of budget revenues. Let me remind you about a reform in the national treasury. As a result of it, all revenues will be concentrated in the treasury from the viewpoint of registration and various grouping. We should not imagine that this is a very simple process. It is a unity of approximately 300 thousand different lines in the revenue. It is difficult to group it within the system. You should not think that this process is not desirable. I am sure the state structures and even the finance ministry wished and wish even now the process to be a more transparent and perfect one, but subjects of budget expenses as well as subjects of budget revenues contributors or other state structures should be regulated by one legislation, which will make it possible for them to take part in these processes.
The processes, certainly, have their own subjective negative moments and trends. There are objective ones, too. We can subjectively view actions of particular persons obstructing single budget that involves special expenses. The objective things are that in particular cases these very special expenses are the way out of the critical situation in the conditions of inconsistent budget financing. Thus, this issue cannot be either criticised or praised. Though, there are really very many positive trends. Those who observe and make non-subjective criticism and who are really interested in the perspective of the country’s development, will see that during the visits of any international organisations, estimations are made and measures are taken towards the perfection of the system. It is, certainly, difficult to assert that everything is perfect, but the fact that the treasury already holds its own place and has the ability to control the processes in the budget of expenditure testifies to the fact that a positive step has been made. Budget preparation in general and, certainly, the legal framework has the ability to make its own serious influence on the correct budget planing and its subsequent implementation. Budget reflects economic events in the country (in any case, it should be so) and shows why there should be or not this or that revenue, why this or that expense should be made. As there is a cause-effect relation between revenues and expenses, there is a serious connection among the revenues of a country and the further pursuance of expenditure policy. Our expenditure policy is built on objective demands of the expenditure subject, but at the same time we understand subjective factors, too, as there are many structures in the country, establishments that is threaded with Soviet Union nostalgia. It is necessary to overcome the subjective moments, and the legal framework will help to do this.
There is another point – we try to plan revenues of our country correctly. There are plenty of laws for the regulation of these revenues, but it is impossible to see what this or that revenue should be due to the close interrelations with budget processes and their non-transparency. If we imagine that the budget processes face a whole number of obstructive factors from the viewpoint of these very regional formations and that there are a number of subjective factors in the regions, It would become difficult to reflect budget processes without grouping them within one system.
There is a very serious problem with regards to the budget planning process. Of course, a more perfect analysis is made from the macroeconomic point of view. We often wish this to be settled on the micro level. It is not so unimaginable, but it is impossible to study the issue well on the level of each revenue and expenditure subject given the present registration system and work of our tax structures. However, when the country’s potential is studied, it is considered in accordance with general parameters connected with macroeconomic events. Very often budget implementation is caused not by macroeconomic problems, but rather by its failure to be reflected in state dependence. For instance, when we plan income from cigarettes, this figure is not incorrect. The planning and execution of the figure is incorrect. In planning figures and budget processes, they are very reduced in accordance with the positions in tax administration of Georgia. However, despite this, very often arbitrariness exceeds all prognoses. The same situation is observed in the registration of wheat. It is such an arbitrary behaviour that cannot be planned, even within these parameters. Adapting to the present situation and its recognition as a norm means worse consequences in the future. The country has a different potential. Despite everything, the country still made great progress, but, unfortunately, it is obstructed by mobilisation of sums in the public sector. The successful development of service sphere in the country – a network of restaurants, beauty saloons and other economic spheres, t banking sphere indicates at progress. Assets of TBC bank reached 185 millions. It is a great step forward – an almost 74% growth as compared with previous years. We cannot but admit that it is a result of economic development and not just a figure written on the paper by someone. Unfortunately, the scale of legalisation is very small. Competition became insignificant as it is more in illegal sphere than in legal one. All this affects budget implementation process.
The most significant budget parameter was in 1997. The present figure is greater in the current prices and current revenues, which is a positive trend, but considering this more objectively, we will see when this figure was better. If we analyse why it was so, which tax legislature was in force, we can understand the main reason of the permanent non-implementation of the budget. The tax code of 1997 has significantly reduced activity of legal sector. I have repeatedly said this since the enactment of the tax code. The VAT scheme has not only caused mobilisation of taxes in the country, but also established vicious practice that led to the concentration of tax-payers’ sum in the hands of various vultures who are busy with taking back money from the budget. Can not one but see that the 200 million tax liability with no VAT reached billions today and VAT has hold a significant place. Therefore, we have such a subjective ground as the code. Of course, the positive role of the finance ministry leadership cannot be underestimated either. Here the role of Mr. Levan Dzneladze should be mentioned. He laid the foundation for the real implementation of budget parameters. I cannot understand why Levan Dzneladze was relieved of the post. He laid a serious foundation for this, and today the cadres he appointed continue mobilisation of tax revenues in absolute figures. But when facing the same Adjara problem that has always existed even since Mikheil Chkuaseli’s time and if you see diagrams concerning Adjara with there being no indebtedness in 1997, you will see that this trend existed even then. Budget implementation should be viewed in a wider spectre. No finance or tax minister will settle these problems unless it is settled in the political angle, unless unpunished actions of this or that person are not nipped in the rip. We dismiss one minister after another, but the results are still negative every year. We should settle the problems, and the results will be positive then. We make many changes in the tax code, which deteriorate the situation even more. Bread-related issues became a subject of political speculations, and no one says that there has been a complete chaos and arbitrariness in this sphere. No one pays anything to the budget. Our budget has lost millions of laris due to political speculations. Any political statement pronounced from the tribune – be this government or parliament one, or statements calling for payment or non-payment – is a significant ground for both officials and entrepreneurs to enter into agreement and make a deal instead of paying taxes.
Unfortunately, budget processes are not analysed. The 35 millions decrease in a certain segment is not merely 35 millions. When there are budget expenditures, this part is always in circulation and returns. 20-22 millions of the 35 millions returns in the form of paid salaries. 65% of the sum returns in the form of social contributions and income taxes. I say nothing of the taxes that are subject to organisation’s payment. Thus, it is not only shortage of the 35 millions. The same shortage of Euro Union sums does not literally mean shortage of 40 millions. It is 40 millions plus 20 millions. 60-70% of the sum returns to the budget in various forms. It is a difficult sphere. Making someone perform a plan and figures means that you do not know a thing or two about economy. It is even worse if you are aware of this because then you try to mislead society.
The general criticism – this was not done – is very easy. However, it is much difficult to make even one step forward towards positive trends. We must create, build and develop Georgian budget. We need economy with sustained development that would provide security for the country. It must be built, the legal framework must change not only on paper. It is mentality, attitude of society towards processes and tax events. It is difficult to advance with there being continuous discussions in the society about whether different subjects of expenditure should exist. This is, certainly, a hangover of the Communist era.