GEO

Draft 2020 State Budget of Georgia: Analysis and Recommendations

25 October, 2019

 

The Government of Georgia (GoG) has submitted a draft law on Georgia’s State Budget of 2020 to the Parliament. Transparency International Georgia (TI Georgia) presents a brief assessment and recommendations on this project.

Key Findings and Recommendations

  • According to the draft 2020 state budget, the economic growth rate will be 5% next year, which is a very optimistic goal. The expected USD/GEL exchange rate is 2.95. The expected level of annual inflation is set on 3%.
  • The budget receipts increase by GEL 1.2 billion, of which GEL 675 million comes from tax revenues and GEL 570 million - from public debt.
  • The state budget expenditures for 2020 will be GEL 14.2 billion. The budget expenses increase by GEL one billion, with the largest amount - GEL 451 million – going to increased social spending.
  • The administrative expenses will increase by GEL 194 million. Remuneration expenses will increase by GEL 91 million. In total, the administrative expenses will be GEL 2.9 billion. 76% of the increased remuneration expense comes from three agencies: the Ministry of Internal Affairs (GEL 30 million), the Central Election Commission (GEL 20 million) and the Ministry of Defense (GEL 20 million).
  • Total number of employees in budgetary organizations will increase by 111 persons. There is a significant change in the Ministry of Internal Affairs and the Ministry of Defense. The number of employees in the Ministry of Internal Affairs will increase by 1,000, while the number of employees in the Ministry of Defense will decrease by 1,250.
  • From 2020, the state pensions (by GEL 20-50), and salaries of public kindergarten employees (by GEL 100), teachers (by GEL 150), police officers (by GEL 125), some doctors (by GEL 100) and other employees will increase. In some cases, increases in pensions and salaries are expected from July 1 or September 1, which may be motivated by the October 2020 parliamentary elections.
  • Compared to 2019, the budget operating balance will decrease by GEL 482 million, which is undesirable for sustainable long-term economic growth.
  • Both the official (gross balance) and the traditional budget deficits are increasing. The negative gross balance will be 3.5% of GDP and the traditional deficit will be 4% of GDP.
  • In 2020, the debt of the GoG will increase by GEL 1,757 million, of which GEL 856 million will be a domestic debt and GEL 901 million will be a foreign debt.
  • At the end of 2020, the public debt will reach GEL 22.7 billion, which will be 46.8% of projected GDP. According to the Socio-Economic Development Strategy adopted by the GoG in 2013, Georgia's public debt should have been less than 40% of GDP by 2020.
  • Funding for the Universal Healthcare Program will not increase, with GEL 754 million still allocated. However, this year's expenses show that the program will need an additional funding of about GEL 40 million.
  • In some cases, proper program budgeting remains a problem. Among large spending institutions, the programs and sub-programs in the field of education are particularly noteworthy. Although the low quality of education is one of the major problems in Georgia, the goal of the School Education program is not to improve the quality of education, nor to provide relevant progress indicators.
  • Expected outputs and indicators of budget programs are still annexed and do not appear in the main text of the Law on 2020 State Budget. This shows that there is no appropriate approach to program budgeting. At present, the main purpose of budgetary policy is to execute the plans and fully utilize the allocated funds.

Recommendations

  • As parliamentary elections are due to be held in October 2020, the government should refrain from implementing projects such as increase of state pensions and salaries of budgetary organizations during a couple of months before the elections. Such actions are perceived as a misuse of administration resources, which can significantly damage the electoral environment;
  • In light of tightened monetary policy and reduced FDI, it is better for the government to plan its budget at a more realistic economic growth rate;
  • In light of rising inflation and a significant depreciation of the GEL, budgetary policy should be highly compatible with tightened monetary policy. Government spending, budget deficits and increased public debt will have a negative impact on the GEL exchange rate and inflation;
  • The government should take into account the requirements of the strategic documents it has adopted and should think about reducing public debt, instead of raising it;
  • Proper control over budgeting needs to be tightened to maximize cost-effectiveness. Particular attention should be paid to the proper selection of performance evaluation indicators;
  • Expected results and indicators of the programs specified in the budget annexes should become part of the main text of the law.

1.Macroeconomic landscape

According to a draft law on Georgia’s 2020 State Budget, the GoG predicts 4.5% economic growth in 2019. Since the average rate of economic growth in January-August was 5%, achieving 4.5% annual growth is real. For 2020, 5% growth rate is projected. Georgia's GDP should reach GEL 48.5 billion in 2019. Amid tight monetary policy and reduced FDI, achieving 5% economic growth in 2020 is quite an optimistic scenario.

For 2020, the USD/GEL exchange rate is set at 2.95. GDP per capita is projected to reach USD 4,400 in 2020 (from USD 4,265 in 2019). The expected level of annual inflation is 3%. Exports should increase by 11.2% and imports - by 10.3%.

2.Receipts[1] of the State Budget

In 2020, the receipts of the state budget will amount to GEL 14 billion, which is GEL 1.2 billion (9.1%) higher than the budget receipts of 2019.

Budget revenues, which include taxes, grants and other revenues, will be GEL 546 million more in 2020 than in 2019. Among them, tax revenues will increase by GEL 675 million, but grants from international organizations will decrease by GEL 150 million. Other revenues (dividends, rent, penalties, etc.) increase by GEL 55 million. Only the excise tax revenue (GEL 82 million) is less than planned for 2019. Revenues from all other taxes increase.

GEL 120 million is planned to be received from privatization (Disposal of Non-financial Assets), which is GEL 50 million more than the 2019 plan. GEL 302 million will go into the budget from the Decrease in Financial Assets, which includes repayment of previously issued loans and use of the budget remainder[2].

Data source: The Ministry of Finance

3.Expenditures[3] of the State Budget

The state budget expenditures for 2020 will be GEL 14.2 billion, which is GEL 1.1 billion (8%) more than those of 2019.

Current budget expenses will increase by GEL 1 billion, with the largest share - GEL 451 million spent on social expenses. A total of GEL 4.3 billion will be spent on it.

Administrative expenses increase by GEL 194 million, including the remuneration that should increase by GEL 91 million and procurement of goods and services that will increase by GEL 103 million. In total, the administrative expenses will be GEL 2.9 billion in 2020. 76% of the increased remuneration expense comes from three agencies: the Ministry of Internal Affairs (GEL 30 million), the Central Election Commission (GEL 20 million) and the Ministry of Defense (GEL 20 million). The salaries of the Ministry of Internal Affairs and the Ministry of Defense will amount to GEL 900 million, which is 57% of the total remuneration expenses.

A total number of employees of budgetary organizations will increase by 111 persons. There is a significant change in the Ministry of Internal Affairs and the Ministry of Defense. The number of employees in the Ministry of Internal Affairs will increase by 1,000, while the number of employees in the Ministry of Defense will decrease by 1,250. A reduction in the number of defense personnel is planned for the Scientific Research and Military Industry Development Program. However, the funding of the program remains unchanged.

Data source: The Ministry of Finance

After social spending, the largest sum – GEL 3.1 billion - is allocated for capital expenses, which is GEL 207 million (7%) higher than the 2019 figure. Capital expenses of GEL 3.1 billion include GEL 489 million of capital transfers to local government institutions.

4.Budget deficit and public debt

Operating balance[4] of the state budget for 2020 is projected at GEL 365 million, compared to GEL 847 million of the 2019 budget. Such a decrease in operating balance means an increase in the share of current spending and a reduction in government savings, which is undesirable for sustained long-term economic growth and can be attributed to short-term, one-year effects.

The decline in operating balance will lead to a deterioration in the overall budget balance[5]. The negative balance of the budget in 2020 will be GEL 1.7 billion, while in 2019 it is GEL 1.2 billion. By 2020, the negative budget balance will stand at 3.5% of the projected GDP. The similar indicator in the 2019 budget is 2.8%.

It should be noted that under the Organic Law of Georgia on Economic Freedom, the ceiling of 3% of GDP is set for the total negative balance of the consolidated budget[6] (the deficit under the Budget Code), not for the state budget deficit. In 2020, the deficit of the consolidated budget will be GEL 1.3 billion, which is 2.6% of projected GDP.

Consolidated budget spending and Acquisition of Nonfinancial Assets are projected to be 30.6% of GDP, but according to the December 2018 amendment to the Law on Economic Freedom, if it exceeds the 30% ceiling, it is no longer considered a violation. Prior to 2019, 30% of GDP was set as the ceiling for budget expenses and Acquisition of Nonfinancial Assets.

The state budget deficit calculated by the traditional method[7] will be GEL 1.9 billion (4% of GDP) in 2020, of which GEL 1,757 million will be covered by taking a new loans and GEL 172 million will be compensated from the budget remainder. To be noted, in 2019, GEL 1.5 billion (3.3% of GDP) will be the state budget deficit calculated by the traditional method.

Data source: The Ministry of Finance

*For 2019 and 2020 projected figures are given

In 2020, the GoG will borrow up to GEL 2.8 billion, but at the same time it will spend up to GEL 1 billion on debt service. As a result, the public debt will increase by GEL 1,757 million, of which GEL 856 million will be a domestic debt and GEL 901 million will be a foreign debt. At the end of 2020, public debt will reach GEL 22.7 billion, or 46.8% of the projected GDP. As of September 30 of this year, the public debt of Georgia is GEL 20.2 billion, which is 46.2% of GDP.

Up to 80% of Georgia's public debt is a foreign debt. Therefore, in case of a depreciation of GEL, the foreign debt (calculated in GEL) and its ratio to GDP (which indicates the debt burden on the economy) will increase. Therefore, the depreciation of the GEL is one of the important risk factors.

Along with the depreciation of GEL, the higher indebtedness is caused by the increased budget deficit. The GoG does not set a goal to decrease the public debt in the process of budget planning. According to the Socio-economic Development Strategy (Georgia 2020) adopted by the GoG in 2013, Georgia's public debt should have been less than 40% of GDP by 2020. According to the Public Debt Management Strategy for 2019-2021 approved by the Ministry of Finance this year, the public debt should be 41.4% of GDP in 2019 and 41.5% of GDP in 2020. According to the draft state budget of 2020, the government debt will be 44.3% of GDP by the end of 2019 and 45% of GDP by the end of 2020.

Data source: The Ministry of Finance

*For 2019 and 2020 projected figures are given

5.Public institutions and budgetary programs, which will have a significantly higher/lower funding

According to the 2020 draft state budget, funding of the Ministry of Internally Displaced Persons from the Occupied Territories, Labor, Health and Social Affairs will most significantly increase. The added amount will mainly cover social expenses. From January 1, the state pensions for those who reached the retirement age and social assistance for persons with special needs, including persons under 18 years of age, will increase by GEL 20. From July 1, the social assistance for the above-mentioned persons and pensions for persons 70 years of age and older will increase by an additional GEL 30 GEL. In 2020, GEL 305 million more will be spent in this direction than in 2019. State funding on the priority areas of healthcare will increase by GEL 36 million and on ambulance service - by GEL 38 million. The funding allocated for medicines for chronic diseases will decrease by GEL 10 million. In 2019, GEL 20 million was allocated for this program, but only GEL 3.4 million was spent in 9 months.

Similar to 2019, the funding for the Universal Healthcare Program will be GEL 754 million. However, during the first three quarters of 2019, the average monthly expenditure on this program was GEL 66 million. It means that this year the Universal Healthcare Program will need approximately GEL 40 million of extra funding. Accordingly, extra funding may also be required in 2020. The situation is similar in other public health programs, where 42% more was spent in the three quarters of this year. In the 2020 draft budget, these expenses will be GEL 4 million less in 2019.

From July 1, 2020, the salaries of ambulance and village doctors will increase by GEL 100, which will require an additional GEL 39 million.

The budget of the Ministry of Education, Science, Culture and Sports is increasing by GEL 132 million and will amount to GEL 1.6 billion. The additional funding mainly goes to schools. More specifically, from September 1, 2020, the salaries of senior, leading and mentor teachers of public schools will increase by GEL 150. By the way, since October 1, 2019, teachers of the same category have already received salaries increased by GEL 150. In total GEL 140 million will be spent on teachers’ salary increase in 2020. Moreover, from September 1, 2020, the salaries of kindergarten employees will increase by GEL 100, with an additional GEL 15 million planned to be spent.

Higher education funding will be reduced by GEL 27 million. The decrease is planned in scholarships. The reason for this reduction is not mentioned in the draft law.

The funding of the Ministry of Regional Development and Infrastructure of Georgia increases by GEL 72 million. This is due to the increase in the expense of reconstruction-rehabilitation of water supply infrastructure and construction and rehabilitation of education infrastructure.

The budget of the Ministry of Internal Affairs increases by GEL 28 million, which is due to an increase of salaries (by GEL 125) of firefighters, police officers and those with equal status. This change will be enacted from July 1, 2020.

Co-financing of the defined contribution pension scheme increases by GEL 110 million and will amount to GEL 200 million.

Data source: The Ministry of Finance

6.Program budgeting

In terms of program budgeting there also are problems in the 2020 draft state budget. Some programs including large ones are poorly designed. The consistency and interoperability of the objectives of the programs and sub-programs, the final and intermediate results and the evaluation indicators are particularly problematic. Some programs and sub-programs are not intended to address the problem, therefore, do not fit the purpose and essence of program budgeting.

For example, the Ministry of Education, Science, Culture and Sport operates with outdated approaches and aims only at funding of schools.[8] Improving the quality of education, which is the biggest challenge of school education, is not even a policy goal like in previous years. Despite a GEL 163 million increase in funding for the school education program in 2020, the government takes no obligation to improve the quality of education.

An indication of an inappropriate approach to program budgeting is that the expected outputs and indicators of the budget programs are still included in the budget annexes and are not in the main text of the Budget Law. For the last few years, the State Audit Office has been recommending to put the expected results and indicators in the main text of the law to strengthen the policy-oriented budgeting, instead of the current approach, in which the main objective of the budgetary policy is to fulfill plans and spending of allocated funds.

 

[1] Receipts are the sum of revenue, disposal of non-financial and financial assets, and newly taken loans. It includes all funds that go to the budget while the revenue includes only tax revenues, grants and other specific sources of income.

[2] The remainder of the budget is the sum of the money unspent from previous years and the accrued interest.

[3] Expenditures are the sum of expenses, increase of non-financial and financial assets and repayments of previously taken loans. It includes any funds that go out of the budget, while the expenses include only funds spent for specific purposes, such as administrative, social, education, etc.

[4] Operating balance is the difference between budget revenues and expenses

[5] Total budget balance is the difference between the operational balance and change in the non-financial assets.  If the total budget balance is negative the budget is deficient, if it is positive the budget has a surplus.

[6] The consolidated budget is the sum of state, autonomous republican and local self-government budgets.

[7] Since the total budget balance does not fully cover all budget revenues and expenditures, in the traditional sense, the budget deficit means how much the budget has been reduced by using new debt and budget remainder.

[8] Baseline indicator: 100% of public schools are provided with voucher funding to fully implement the national curriculum.

Target Indicator: Maintain the baseline indicator

 
 
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