On 1 October, 2015 the Government sent the 2016 draft budget to the Parliament of Georgia. It is notable that:

1. The draft budget presented by the government was the first to be presented, since the transition to program budgeting, which can be counted as a program budget. This represents a significant step forward;

2. Funding for education and science increased (by GEL 134.3 million or 15.98%);

3. For the first time, the government presented analysis of macroeconomic risks to the financial sector for 2015-2019.

Despite these positive steps forward, the draft budget still has a number of issues.

1. Increases in government spending

The 2016 Georgian state budget assumes 3% economic growth for 2016, while budgetary spending will increase by GEL 356.6 million, a  4.45% increase over  2015. The government plans to increase its revenues by GEL 404 million, a  5.08% increase over 2015. Given that the government attempted to reduce spending in 2015 to alleviate downward pressure on the national currency it is unclear what prompted this spending growth.

Chart 1. Increases in GoG ministry funding in 2016 compared with 2015 (thousands of GEL)

1.1 Increased government employee salaries

In 2016, salaries increased by GEL 57.2 million in the central government administration alone, compared with 2015. In 2015 compared with 2014, central government salaries increased by GEL 85.1 million. Compared with 2012, salaries have increased by GEL 389.2 million. GEL 57.2 million increase in salaries in 2016 is due to fire and rescue services moving from local to central budget (GEL 44.2 million) as well as GEL 620.4 thousand increase in the salaries of the Central Election Commission over 2014, which was the year of the local elections, total increase of GEL 45 million. 

Chart 2 Central government employee salaries, 2012-2016 (Thousands of GEL)

2. The budget’s social orientation

As in recent years, it should be noted that the budget is oriented towards social spending, while infrastructure funding is insufficient. Spending on infrastructure projects creates jobs and supports economic growth.Compared with the previous year, in 2016 the Ministry of Labor, Health, and Social Affairs’ funding increased by GEL 285 million (10.23%). The funding will be directed toward health and social affairs. The increases in social affairs spending mainly come from: (1) social protection for the population (6.96%, GEL 142 million); (2) pensions (6.47%, GEL 90 million). In 2016 compared with 2015, social affairs spending rose by GEL 232 million in total. Health care spending increases come from: (1) the universal healthcare program (by 21.28%; Gel 100 million); (2) the Hepatits C program (GEL 22 million). The 2015 state budget did not have the Hepatitis C program.

It is possible that the above increases in social spending might be caused by the fact that 2016 is an election year in Georgia.

3. Inadequate tax revenue forecasting

In 2016, a GEL 380 million (5.14%) increase in tax revenues is planned, despite the fact that the projected growth in GDP for 2016 is only 3%. This means that a GEL 380 million increase in tax revenue may be unreachable. In addition, there have been serious problems with tax collection over the past three years. Despite the fact that mobilizing other income remains a serious problem, in 2016 compared with 2015, other income is expected to increase by GEL 25 million (8.47%) even though, other income has declined since the beginning of 2013. In 2015, compared with 2012, other income declined by 67.06% (GEL 214.6 million). Other income mainly consists of non-tax income, income from the sale of property, goods, and services, and from fines and fees. Considering that in 2014 compared with 2012 other income declined by approximately GEL 180 million, the government should carefully analyze the reasons for the continued decline in other income.

It should also be noted that tax evasion and the shadow economy remain two of the most serious challenges for the government.

4.  Insufficient increase in infrastructure spending

In 2016 compared with 2015, financing for the Ministry of Regional Development and Infrastructure increased by only GEL 5 million (from GEL 945 million to GEL 950 million, 0.45%). In total, more than GEL 1 billion will be spent on infrastructure according to the 2016 state budget.

5. Determining the administrative costs of the Ministry of Internal Affairs and Ministry of Defence

As usual, in 2016 the information presented by the Ministry of Internal Affairs and Ministry of Defence does not allow for the calculation of administrative costs as it did not in 2015. Even so, the budget  of the Ministry of Defence allows for the calculation of administrative costs with a high margin of error, whereas  that of the the Ministry of Internal Affairs does not.

6. Transitioning to a program budget: Progress and challenges

Program budgeting is a results-oriented budgeting system, which, contrary to conventional budgeting, gives detailed costs of every activity and program rather than just the agency spending the money over a period of four years. This links the resources to be spent with the results to be achieved.

First, it should be noted that the draft budget presented by the Government of Georgia can be considered a program budget, which is a significant achievement. The budget provides every major indicator, in line with the demands of program budgeting.

Hence, the 2016-2019 program budget isa significant step forward compared with the 2015-2018 program budget.

There is significant progress in the format as well as the content of the 2016-2019 draft program budget. Specifically, key data such as baseline, targets, margin of error, and possible risks were added to the budget. Of these, baseline indicators are critically important.Without baseline indicators, it is impossible to measure whether or not  the government has clearly accomplished anything with the resources it spent. A large share of the programs and subprograms contained within the 2016-2019 budget have these indicators. We welcome the progress and hope that the Government of Georgia’s program budget continues to improve.

The main problems with the 2016-2019 program budget are that:

1.  In the 2016 draft budget, the Ministry of Finance, Ministry of the Environment and Natural Resources Protection, Ministry of Defence, Ministry of Internal Affairs, and in large part the Ministry of Culture and Monument Protection provide information about what they will do in 2016-2019, although they do not provide as specific information as other ministries in 2016. Specifically, the budgets of the Ministry of Finance, Ministry of the Environment and Natural Resources Protection, Ministry of Defense, and Ministry of Internal Affairs and in large part the Ministry of Culture and Monument Protection are only broken down by program, over a four year period, whereas other ministries have budgets that are broken down by program over a four year period and by subprogram over a one year period.

2. Some of the program and subprogram baseline indicators, targets, margins of error, and potential risks give data that are entirely unmeasurable.

3. The margin of error in some programs and subprograms is 7%, 12%, 15%, 18%, 25%, which are too large to be considered margins of error.