Draft 2024 State Budget of Georgia: Brief Analysis and Recommendations - საერთაშორისო გამჭვირვალობა - საქართველო
GEO

Draft 2024 State Budget of Georgia: Brief Analysis and Recommendations

27 October, 2023

This paper presents a brief evaluation and recommendations prepared by Transparency International Georgia concerning the draft law on the 2024 State Budget that the Government of Georgia (GoG) has submitted to the Parliament. The draft considered here is an initial version of the budget, which will be returned to the government for amendments twice before it is finally approved. It cannot be ruled out that, in December, the Parliament will approve a budget that considerably differs from the current version.

Key findings

  • According to the draft budget, the economy of Georgia will grow by 6.5% in 2023 and by 5.2% in 2024. Since the economy grew by 7% in January-August of this year, keeping the annual growth rate up to 6.5% seems realistic. Achieving 5.2% economic growth next year will significantly depend on the course of the Russia-Ukraine war;
  • In 2024, state Budget Receipts will increase by GEL 1.7 billion and reach GEL 23.9 billion. Such an increase is caused by the planned growth of Tax Revenues by GEL 1.6 billion;
  • Compared to 2023, in 2024, the GoG will receive GEL 44 million less in grants from the European Union. Of the GEL 261 million grants to be received in 2024, GEL 146 million will come from the European Union and its member states. GEL 115 million will be obtained from LEPLs and N(N)LEs;
  • The total costs (the Expenditures) of the 2024 state budget will be GEL 24.2 billion, which is GEL 1.8 billion more than the 2023 budget expenditure;
  • The budget of 3 ministries will increase the most: the budget of the Ministry of Internally Displaced Persons From Occupied Territories, Labor, Health and Social Affairs grows by GEL 627 million and becomes GEL 7.7 billion, the budget of the Ministry of Education and Science increases by GEL 262 million and becomes GEL 2.3 billion, the budget of the Ministry of Defense increases by GEL 100 million and becomes GEL 1.4 billion.
  • The financing of the State Security Service will increase by GEL 25 million and become GEL 205 million. The main reason for the growth is the increase in salaries. The number of employees will not increase; 3,850 people will be employed again;
  • Salaries of public sector employees will grow by at least 10%. Among them, the wages of police officers and soldiers will increase by 20%. The increase in wages leads to a GEL 282 million rise in Remuneration Expenses;
  • From 2024, the pension of persons under 70 will increase by GEL 20 and become GEL 315, while the pension of persons 70 and older will increase by GEL 50 and become GEL 415. The growth in pensions causes an increase in budget expenses by GEL 446 million;
  • The budget deficit will be GEL 2.3 billion (2.7% of GDP). Although the budget deficit is within the legal limits (does not exceed 3% of GDP), it is still at a high level;
  • In 2024, the GoG will take on a debt of up to GEL 3.5 billion. At the end of 2024, the government debt will reach GEL 32.6 billion, 38.2% of the projected GDP;
  • In 2024, the cost of repaying the principal and interest of the government debt will be up to GEL 3 billion, which is, for example, 2.4 times more than the budgetary funding allocated for school education and two times more than defense costs;
  • In some cases, the proper preparation of budget programs remains a problem. For instance, although the low quality of education is one of the critical problems of Georgia, the goal of the school financing sub-program is not to raise the quality of education, and relevant indicators do not accompany it.

Recommendations

  • The budget deficit is decreasing and returning to the limits the law allows, which is a good trend. However, it is still high, and before the budget law is approved, the government should try to reduce it further. Reducing the deficit will contribute to the stability of prices and the exchange rate of the GEL. In addition, it will help the National Bank to ease the monetary policy, further reduce the government debt burden and improve the country's credit rating. The ongoing wars in the region should also be taken into account, which makes it difficult to predict economic indicators;
  • To get more foreign grants, the GoG must fulfill the recommendations necessary for the EU candidate country status by the end of the year. Based on the experience of EU candidate countries for 2014-2021, in case of obtaining this status, Georgia will have the opportunity to receive an additional grant of up to GEL 400 million annually from the EU;
  • To increase the effectiveness of spending money from the budget, tightening the control over program budgeting is necessary. Particular attention should be paid to properly setting the objectives of the programs and sub-programs and selecting indicators for evaluating the expected results. To date, program budgeting principles remain only formal, and in reality, it is reflected only in the technical part of the budget;
  • The expected outcomes and indicators of the programs envisaged by the budget, which are provided as an annex, must become part of the main text of the Law on State Budget.

1.Macroeconomic Environment

According to the draft 2024 State Budget of Georgia, the GoG forecasts a 6.5% economic growth for 2023. Since the economy grew by 7% in January-August, maintaining the annual growth rate of 6.5% seems realistic.

By 2024, the GoG expects a 5.2% growth of the economy. This growth rate is significantly lower than the economic growth observed in 2021-2023. Still, as the level of uncertainty is high due to the Russia-Ukraine war and Georgia’s growing economic dependence on Russia, even 5.2% economic growth may become challenging to achieve. It should also be noted here that in a pessimistic scenario, the GoG predicts a 2.4% growth of the economy in 2024. Next year, the expected level of annual inflation is 3%.

2.State Budget Receipts[1]

In 2024, the Georgian State Budget Receipts will amount to GEL 23.9 billion, surpassing 2023 by GEL 1.7 billion (7.7%).

The most significant contribution to the increase in the Budget Receipts is Tax Revenues, which will increase by GEL 1.6 billion in 2024 and become GEL 18.3 billion. Among others, the Tax Revenues will increase by GEL 683 million from Income Tax, by GEL 584 million from Value Added Tax (VAT), and by GEL 145 million from Excise Tax. The expectation of having GEL 1.7 billion more Tax Revenues in the 2024 budget stems from economic growth and inflation forecasts.

The receivable Grants will decrease by GEL 19 million and amount to GEL 261 million. Grants received from international organizations and governments of other states will be reduced by GEL 33 million. In contrast, grants received from LEPLs[2] and N(N)LEs[3] of the GoG will increase by GEL 15 million.[4] The most significant decrease will be in current grants allocated by the EU. Compared to 2023, in 2024, the GoG will receive GEL 44 million fewer grants from the EU. In total, out of the GEL 261 million grants to be received in 2024, GEL 146 million will come from the EU and its member states, and GEL 115 million will be the grants received from the LEPLs and N(N)LEs.

For 2024, like 2023, it is planned to receive GEL 200 million from privatization (Disposal of Non-financial Assets). GEL 72 million was mobilized in the budget due to privatization in January-August of this year.

The Disposal of Financial Assets, which implies repayment of previously issued loans, will bring GEL 580 million to the 2024 budget, which is GEL 11 million less than the indicator planned for 2023.

Source of data: the Ministry of Finance of Georgia

3.Budget Expenditures[5]

According to the draft 2024 State Budget, the Budget Expenditures will amount to GEL 24.2 billion, which is GEL 1.8 billion (7.7%) more than in 2023.

The most significant increase (GEL 678 million) will be observed in Social Expenses, reaching GEL 7.4 billion. GEL 3.9 billion will be spent on pensions. From 2024, the pension of persons under 70 will increase by GEL 20 and become GEL 315, while the pension of persons 70 and older will increase by GEL 50 and become GEL 415. The amount allocated for social assistance increases by GEL 124 million. The assistance for severely disabled and disabled persons under 18 increases by GEL 50, and the allowance for other categories of disabled persons rises by GEL 20. Moreover, budget expenses will grow due to the increased children’s social assistance to 200 GEL starting from July 2023 and planned for an entire year in 2024.

The expenses on servicing the government debt will increase by GEL 644 million. In total, up to GEL 3 billion will be spent on debt service, which is quite a heavy burden for the budget. For example, debt service is 2.4 times higher than budgeted funding for school education and almost two times higher than defense spending.

Administrative Expenses, which include public sector wages and the Purchasing Goods and Services, will grow by GEL 367 million. GEL 2.5 billion (an increase of GEL 282 million) will be spent on Remuneration Expenses, and GEL 2.2 billion (an increase of GEL 85 million) will be spent on Purchasing Goods and Services. The wages of employees in the public sector will increase by 10% and will be at least GEL 1,330 per month.

The number of employees in the public sector will grow by 303, which also increases the amount allocated for wages. The number of employees in the Ministry of Internal Affairs system will most significantly increase (by 130). 86 persons will be employed in the Anti-corruption Bureau, a LEPL created in 2023. The number of employees in the LEPL State Service of Veterans Affairs will grow by 49, and the number of employees in the Ministry of Economy increase by 28.

After social expenses, the most considerable amount – GEL 5.6 billion is allocated to capital projects, which is equal to the figure of 2023.

Source of data: the Ministry of Finance of Georgia

4.Agencies and programs which will experience significant changes in their funding

According to the draft 2024 state budget, compared to 2023, the financing of the Ministry of Internally Displaced Persons From Occupied Territories, Labor, Health and Social Affairs will increase most - by GEL 627 million and its budget will reach GEL 7.7 billion. In particular, pension expenses will increase by GEL 446 million and become GEL 3.9 billion. The amount allocated for social assistance to target groups of the population increases by GEL 124 million. Funding for Universal Healthcare increases by GEL 50 million and will reach GEL 1,030 million. The financing of patients with rare diseases increases by GEL 14 million, and a total of GEL 44 million will be spent. Funds will no longer be allocated to manage the illnesses caused by “coronavirus”. GEL 40 million has been given in this direction in 2023.

The Ministry of Education and Science budget will increase by GEL 262 million, equal to GEL 2.3 billion. The increase mainly concerns public schools. Teachers’ salaries will grow, although it is not yet specified in what scheme. The financing of infrastructure development of schools increases by GEL 36 million. GEL 78 million will be allocated to providing schools with information technologies.

The budget of the Ministry of Defense will increase by GEL 100 million and will be GEL 1.4 billion. The increase in the Ministry’s budget is caused by the 20% growth of the salaries of soldiers and the additional GEL 46 million allocated for the development of defense capabilities.

The Ministry of Economy and Sustainable Development budget increases by GEL 65 million and will reach GEL 646 million. The growth is mainly due to financing two programs: an increase of GEL 44 million in the financing of the regional power transmission program and an increase of GEL 37 million in the entrepreneurship development promotion program.

The Ministry of Internal Affairs budget increases by GEL 64 million and will be GEL 1.2 billion. A 20% growth in police officers’ wages and the hiring of additional personnel will cause the increase.

The financing of the State Security Service increases by GEL 25 million and will reach GEL 205 million. The increase is caused by a 20% increase in the salaries of employees in the system. The number of employees will not increase, and 3,850 persons will be employed again.

Due to the parliamentary elections to be held in 2024, the budget of the Central Election Commission will increase by GEL 69 million.

The funding of Georgian Public Broadcaster will grow by GEL 9 million, equaling GEL 110 million. The increase in the broadcaster’s budget is based on the Law on Broadcasting, according to which the funding of the broadcaster’s budget should be at least 0.14% of the country’s GDP.

Table 1. Agencies and programs which will experience significant changes in their funding, GEL Million

Source of data: the Ministry of Finance of Georgia

Similar to previous years, the expected outcomes and indicators of the programs envisaged by the budget are once again provided in the annex to the budget. They are not part of the text of the Law on the State Budget. For the past several years, one of the recommendations made by the State Audit Office of Georgia has been precisely to make the expected outcomes and indicators of programs part of the document containing the law, which will strengthen a goal-oriented budgetary policy, instead of the current approach, whereby the primary goal of the budgetary policy is to fulfill plans and fully utilize the allocated funds.

It is worth noting that part of the budget programs and sub-programs are not aimed at solving the problem and, therefore, do not correspond to the essence and purpose of program budgeting. This problem has been remaining for years. For example, the Ministry of Education and Science of Georgia operates with outdated approaches and only aims at proper financing of schools. Improving the quality of education, which is the biggest challenge of school education, is not even the goal of the school funding sub-program, as in previous years. Despite the GEL 129 million funding increase for the school education program in 2023, the government does not make any commitment to raise the quality of education.

5.Budget Deficit and Government Debt

In 2024, the state budget deficit will amount to GEL 2.3 billion, while in 2023, it is planned at GEL 2.4 billion. The state budget deficit to GDP ratio for 2024 is planned at 2.7%. This indicator for 2023 is 3.1%.

In 2024, the total negative balance of the unified budget of the state, which also includes the budgets of local self-governing units, will be GEL 2.2 billion GEL, which is 2.5% of GDP.

Although the budget deficit is within the legal limits and does not exceed 3% of GDP, it is still high, and the government should reduce it more. Lowering the deficit will contribute to the stability of prices and the exchange rate of the GEL and will also help the National Bank to ease monetary policy. In addition, the government will take on less new debt, further reducing the debt burden and improving the country’s credit rating.

In 2024, the GoG will borrow GEL 3.5 billion but will, at the same time, repay GEL 1.4 billion of previous debt. As a result, the amount of public debt will increase by GEL 2.1 billion. Of the newly borrowed GEL 3.5 billion, domestic loans make up GEL 1.5 billion, while GEL 2 billion is foreign debt. GEL 1.5 of the foreign debt are long-term investment loans.