GEO

Government spending priorities in 2012-2014: Analysis and recommendations

20 February, 2014

Mikheil Kukava


 The years 2012 to 2014 saw a dramatic change in the government’s spending priorities. Below, we: 1. visualize how these priorities have changed over the two years 2. analyse which changes are positive or a possible cause for concern 3.examine how the Government of Georgia (GoG) is going to finance its new priorities.

1.2012-2014 State Budgets

1.1. Overview of the GoG 2012-2014 Spending Priorities

In 2014 tax revenues will increase by GEL 510 million and government expenditures by GEL 1 billion compared to 2012 (for details on the Georgian government underspending its budget in 2013 see Ch 4.2. & 4.3.). 2014 will see a significant increase in spending on: 1. health and social care 2. education and science 3. regional development and infrastructure 4. agriculture.

The interactive visualizations below let you trace the GoG’s most important spending priorities in 2012-2014 by checking/unchecking the boxes of your choice.

Government of Georgia Priorities in Detail


 

 

 

 

 

 

Government of Georgia Priorities at a Glance

 

 

 

 

 

 

 

 

 

These are the programs predominantly behind the rise in public spending:

  • Health and social care: public health insurance, pensions and social assistance. However, public health insurance spending in 2014 decreased compared to 2013.

  • Education and science: 1. secondary education; 2. academic grants, PhD programmes, youth projects; 3. support for scientific research.

  • Regional Development and Infrastructure: 1. road construction and maintenance; 2. construction of freeways (compared to 2012); 3. rehabilitation of regional and municipal infrastructure (compared to 2012); 4. rehabilitation of water supply infrastructure.

  • Agriculture: 1. preferential agricultural loan schemes; 2.Modernization of systems of amelioration; 3. food security. Starting in 2013 the MoA added promotion of agricultural cooperatives and scientific research in agriculture to its priority list, it discontinued funding for its intensification of agricultural production and popularization of modern technologies, and decreased funding for its viticulture subprogramme.

  • Penitentiary (including probation): provision of quality health care to prisoners. In 2014 funding for this subprogram went up by 115 per cent and salaries for the subprogram staff increased by 64 per cent compared to 2012, while staff numbers decreased , which signals the current government’s willingness to provide better healthcare to inmates.

  • Sports: while funding for promoting national sports is on the decline, funding for social assistance for retired distinguished sportsmen has increased. Funding for Georgia’s participation in international sporting events (World and European Championships, Olympic Games, international tournaments, trainings, etc) comes from the national sports programme, which is set to decrease by 23 per cent in 2014. Apart from this, funding for sports and youth affairs policy planning will decrease from GEL 10 million in 2012 to GEL 3.2 million in 2014, an almost threefold decrease. The Ministry of Sports and Youth Affairs has not as yet offered any plan for how these cuts are going to affect Georgia’s performance in international sporting events.

  • Ministry of Internal Affairs: order and security programs have continued mostly unchanged over the 2012-2014 period, as shown by our visualizations above.

  • In 2013, the central government’s salaries line item increased by GEL 138.1 million from 2012 (as the statistics for the number of public sector workers is not reliable we do not know whether the increase is caused by increase in the number of public sector workers or increase in salaries). Although this increase in salaries is stimulating consumer spending, it leaves us wondering as to what it helped produce, i.e. the added value of the money.

1.2. Other Revenue

Other revenue includes all revenue not classified as taxes, including fines and penalties, property income, proceeds from sales of goods and services, etc.

The government’s other revenue in 2014 decreased by GEL 180 million from GEL 534.6 million in 2012 to GEL 355 million in 2014. The GEL 180 million decrease, however, does not signal underlying economic problems. Largest other income line items are dividends from state-run enterprises and licensing fees for radio frequencies. These two largest other income line items plummeted because 1. the current government has withdrawn less from state-run enterprises than its predecessor, a very positive sign (the previous government withdrew more than GEL 100 million in dividends from the Georgian Railways in summer 2012, 2.5 times more than the average withdrawal in 2009-2011, which makes it the largest dividend withdrawal in the history of the Georgian Railways) 2. GEL 112.6 million decrease in rent income (mainly due to a decrease in revenues from the licensing fees, which cannot be charged every year).

For more information on changes in Other Revenue go to:

 

 

 

 

 

 

 

 

1.3. Punitive Measures, 2012-2013

The current government states that it is moving away from the previous government’s policy of excessive tax collection, when businesses were coerced into paying more taxes than they actually owed. Tax non-compliance is discouraged through sanctions. The government’s income from sanctions is comprised of fines and penalties for failure to comply with tax, administrative and penal legislation. It is true the government’s income from sanctions for failure to comply with penal and administrative legislation decreased in 2013 as compared to 2012. However, comparing the State’s income from sanctions for tax non-compliance in the first three quarters of 2012 and of 2013 does not show a significant decrease.

Although there is a 155 per cent decrease in fines imposed on vendors for failing to issue cash receipts in the first nine months of 2013 (compared to the same period in 2012), income from fines and penalties from other tax violations has increased, so overall there is no substantial reduction in the application of punitive measures for failure to comply with tax legislation.

The data indicates that after the UNM government relaxed its tax administration in the run-up to the 2012 parliamentary elections, there was little room for further relaxation of tax administration.

Punitive measures, 2012-2013:

 

 

 

 

 

 

 

 

2. Draft 2014 Budget vs 2014 Approved Budget

The budget adopted for 2014 is a thorough revision of its first draft that was initially presented to Parliament – the first time such an in-depth update was made in over a decade. As a result, the final version of the budget appears to be more realistic than the initial draft budget – revising tax revenues down from GEL 6.95 billion to GEL 6.82 billion, a GEL 130 million decrease.

However, the government’s expenditures increased by GEL 57 million and the budget deficit is set to increase by GEL 185 million to GEL 875 million (this larger deficit will largely be financed by increased internal debt). The government’s total liabilities in 2014 budget will increase by GEL 504 million from GEL 1.132 billion in the 2014 draft budget. The internal debt, the money the government borrows from households, is increasing by GEL 200 million to GEL 600 million.

Another important change between the 2014 draft and the final budget is GEL 101 million decrease in universal healthcare. Funding for tourism promotion in 2014 draft budget was about half that in 2012, while in the 2014 budget funding for tourism promotion increased by 100 per cent. Funding for agriculture goes down by GEL 27 million, while funding for scientific research increases by GEL 11.3 million increase (for greater detail see Government of Georgia Priorities in Detail above).

3. Positive Changes, 2012-2014

3.1. More Ambitious Tax Revenue Goals

The current government has committed itself to the challenging but not impossible task of raising GEL 510 million more in tax revenues in 2014 than in 2012. It should be noted that the UNM government’s budgetary planning was less optimistic. To achieve this goal increased tax revenues from economic growth will not be enough – the government will also need to further discourage tax fraud and evasion. Pessimistic budgetary planning before 2013 certainly did not urge the previous government to improve tax administration. We believe upbeat revenue planning, even when this may result in a shortfall, is the right thing to do, albeit to a measure, as it urges the government to improve tax administration and collection.

Economic Activity 2012-2014:

To make sure that numbers from different years do not add up, please do not tick several years at a time

3.2. Expenditure Realignment

What allows the government to spend more is not only higher planned tax revenues but also expenditure realignment, meaning that the government frees up additional resource for its new spending priorities by decreasing or stopping expenditure in other programs. In 2014 funding for culture and monument protection, sports and youth affairs, defence and a number of other areas saw a significant decrease, while funding for health and social care, education, agriculture and infrastructure development programs was increased.

Between 2013 and 2014 more than GEL 1 billion of expenditures was realigned – more than between any other points since the Rose Revolution. The process of shifting funds to cover new policy priorities started in late 2012, when the Georgian Dream government took over. Under the Georgian Dream spending towards health care and a social safety net, education, agriculture, infrastructure and other priorities increased by a total of GEL 2 billion (approximately GEL 1 billion from additional government spending, approximately GEL 1 billion from expenditure realignment).

It appears that at least some of this realignment resulted in expenditure optimization: 1. in 2013 the government discontinued a programme for subsidizing electricity consumption to 1.2 million households. With no differentiation of beneficiaries based on actual needs/income in place, such a programme was an economically unwarranted intervention and should not have been initiated in the first place. 2.as of January 2013 the Ministry of Justice is no longer responsible for tourism, investment and infrastructure coordination and monitoring – responsibilities which looked to be misplaced there. 3. 2014 budget programs have been streamlined to eliminate the expenditures that do not belong in the programs, which, clearly, is a step forward, e.g. in 2012 the government funded some of the infrastructure rehabilitation through the Ministry of Economic Development subprogram for state property management (around GEL 103 million). In the 2012 budget, however, this did not show as infrastructure rehabilitation expenditure, which is understandable since this was a clearly misplaced responsibility: the subprogram had no room for infrastructure rehabilitation (see Ch 5 of the 2012 state budget). We found out that more than 95% of state property management appropriation went to infrastructure rehabilitation only after we requested public information from the Agency for State Property. This misplaced responsibility made it impossible to track the government’s infrastructure spending in the budget without requesting public information from the government.

Although some of the realignment resulted in expenditure optimization, we are not in a position to estimate to what extent the expenditure realignment of GEL 1 billion has helped the GoG to optimize its expenditures. This is a question for the State Audit Office to answer. Considering that this realignment is the largest in the past decade, it clearly warrants further enquiry.

Total of freed-up resource in 2012-2014:

 

3.3. Predictability and Transparency in Government Spending

3.3.1 Contingency Spending

The GoG has taken a number of positive steps towards greater transparency in contingency spending (a contingency fund is money put aside to pay for emergencies or unexpected costs that cannot be predicted or broken down in advance – and, as we have criticised a number of times in the past, have resulted in a high risk for electorally motivated and opaque spending):

  • Decrease in the Presidential Contingency Fund from GEL 50 million in 2012 to GEL 5 million in 2014.

  • Abolition of the Prime Minister’s Fund for Promoting Effective Functioning of Government Agencies, which was, in effect, a contingency fund.

 

 

 

 

 

 

 

 

3.3.2 Regional Projects Fund

In February 2013 the government introduced selection criteria and procedures for funding of local and regional projects from Regional Projects Fund, which will help increase both transparency and accountability of spending from this Fund. The Regional Projects Fund, which received GEL 250 million in 2014, operates like Georgian contingency funds even though it does not formally fall under the category because the Fund: 1. is not structured in advance to allow unplanned outflows 2. provided money to purposes that had nothing to do with regional development, such as improving combat-readiness of the Georgian armed forces in 2012, which received GEL 4.83 million (Government decree # 08-ს 13/02/2012).

4. Problems

4.1.Programme Budget

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. This links the resources to be spent with the results to be achieved.

Programmes chapter is the worst part of the 2014 budget. Programme budgeting, as was the case in 2011- 2013, continues to be a formal exercise. This is encouraged by the programme budget methodology, which allows for the programme budget not to be put to parliamentary vote.

We believe there is no other effective instrument that helps increase performance, transparency and accountability in the public sector to a comparable degree. Real programme budgeting implies commitment on the part of spending agencies, which the GoG is extremely loathe to make. Switching from traditional budgeting to programme budgeting is a question of political will, which, we believe, both the current and previous governments have had in short supply. By contrast, the Government of Ajara Autonomous Republic proved that it has what it takes to switch to programme budgeting -- political will.

2014-2017 government of Ajara budget, which we will examine in a separate publication, can safely be called programme budget, unlike the GoG’s 2014-2017 budget. Unfortunately, the Government of Ajara published its 2014-2017 budget without the program addendum, the most important chapter. We believe the Government of Ajara provides the Government of Georgia with a very good example of both political will and reforming zeal.

2014 as well as 2011-2013 GoG programme budgets give inputs where they should give performance indicators, fails to set objectives apart from inputs, copy-pastes lengthy programme descriptions from Chapter 5 of the state budget. There are very few, if any, performance indicators that are designed to measure anything in any of these budgets. For more detail see http://www.transparency.ge/en/blog/georgia-s-program-budget-should-be-voted-law

Minister of Finance of Georgia admitted that the country does not have a real programme budget. Considering his predecessor’s assertion that Georgia did switch from conventional to programme budgeting, this honest admission is a step forward. Rather than moving towards a more detailed budget, a comparison of the 2014 -2017 (supposed) program budget and the 2010 (conventional) budget shows a steadily decreasing level of detail in the program activities specified by government agencies.

4.2. The Government Underspending its Budget

Not only did the Georgian government face a shortfall in revenues in 2013 but also underspent its budget. Per preliminary treasury data, in 2013 the Georgian government underspent its budget by around half a billion laris. We think the underspend will increase to GEL 600 million after all the 2013 data comes in. The underspend has had a negative impact on the economy. In 2012 the government underspent its budget by GEL 213.7 million, while in 2011 the underspend was GEL 31 million. Delays in infrastructure was responsible for an underspend of GEL 220 million. The underspent budget signals both the government’s mismanagement and inadequate budget planning.

4.3. Infrastructure Rehabilitation

A number of commentators have argued that the decrease in government infrastructure spending has caused the economic slowdown — this conclusion is largely unfounded. Government spending on infrastructure (new and rehabilitation) in 2013 rose 40 per cent compared to 2012. In 2014 infrastructure spending will rise 32 per cent compared to 2013 levels. However, some of the infrastructure rehabilitation was financed from the Regional project Fund, which decreased by GEL 160 million, and state property management appropriation of the Ministry of Economy and Sustainable Development, which decreased by about GEL 94 million. The decrease largely offset the effect of the 32 per cent increase in government spending on infrastructure rehabilitation. This means that funding for infrastructure rehabilitation can hardly be said to have decreased.

The problem is that in 2013 the Ministry for Regional Development and Infrastructure (MRDI) underspent its budget by GEL 220 million. This has put a downward pressure on the construction sector as well as the overall economic growth. Failure to comply with creditor’s requirements on Tbilisi-Rustavi highway and delays in water supply infrastructure rehabilitation explains why the MRDI underspent its budget by GEL 220 million.

It is important that 1. in 2013 the government started new infrastructure projects of around GEL 200 million (freeways, road rehabilitation and water supply infrastructure). The MRDI, however, as noted above, underspent its budget by GEL 220 million 2. The projects that were put on hold have recently been resumed, e.g. Baku-Tbilisi-Karsi Railway, the Tbilisi Bypass Project, which carry a promise of boosting economic growth.

While the construction sector was growing at an average 31.9 per cent throughout Quarter 1-4 2012, as from Quarter 1 2013 the sector started to slow down. In Quarter 1-3 2013 the sector saw a 16.4 per cent decrease as compared to Quarter 1- 3 2012, which we can explain by the following four reasons: 1. uncertainty after 2012 parliamentary elections and the resulting slowdown in the private sector 2. The MRDI uderspending its 2013 budget by GEL 220 million 3. a number of large government infrastructure projects drew to their end: the GoG orchestrated a capital spending spree in 2011- 2012: the Tbilisi roundabout, the Houses of Justice, the new Parliament building in Kutaisi funded from both government and private sources have contributed to the growth of the construction sector 4. The projects that were put on hold and later resumed have not as yet boosted economic growth.

The infrastructure projects that have resumed will contribute to the growth of the construction sector in 2014 unless the MRDI underspends its budget again. Even so, government infrastructure projects alones cannot make a significant breakthrough as the government’s share in the sector is, most likely, lower than that of the private sector (Geostat data does not allow for such breakdown).

4.4. Overly Optimistic Budgetary Planning

Although we believe optimistic revenue planning urges the government to improve its tax administration, we also believe the MoF’s budgetary planning should not be overly optimistic, as was the case in 2013. Revenue planning is based on macroeconomic forecasting by the Ministry of Finance, which has regularly missed its economic growth targets in the past two years. 10% revenue shortfall (GEL 632.3 million) in 2013 shows that expectations should remain in the realm of the realistic. This indicates that the MoF’s macroeconomic forecasting requires a great deal of improvement.

Apart from this, the MoF needs to take a closer look at why tax revenues started to fall in the fourth quarter last year when there had been no shortfalls in the first three quarters.

4.5.Budget Deficit

The consolidated budget deficit was on decline in 2009-2013 (consolidated budget as opposed to state budget includes both the federal and local governments’ revenue and expenditures) . For the first time in the past 5 years the 2014 consolidated budget deficit overshot the 3 per cent threshold, hitting 3.9 per cent. This violates the Economic Liberty Act, which took effect as of December 31, 2013. Apart from being inflationary in the current period, deficit spending will most certainly require increased taxation in the future.

4.6. Government’s Liabilities

Government spending is set to increase by GEL 1 billion. The GoG is going to finance some of this GEL 1 billion increase in its expenditures through both external and internal debt. The internal debt is going to increase from GEL 100 million in 2012 to GEL 600 million in 2014, while the external debt (international loans, bonds, etc.) will rise from GEL 698.8 million in 2012 to 1.03 billion in 2014. This said, GEL 200 million of the internal debt of GEL 600 million will be used to bolster long-term deposits of commercial banks, which will help stimulate the economy by providing cheaper credit.

4.7 Contingency and the Regional Projects Funds

Although transparency in contingency fund spending has increased and the size of such funds has decreased

4.7.1. the government’s and president’s contingency funds continue to allow non-transparent spending for non-emergency purposes, which is a serious systemic flaw. Per EU best practices, contingency funds cover the expenditures that are impossible or difficult to predict, e.g. damage caused by natural disasters, delinquency on loans guaranteed by the government, rather than unforeseen expenditures, which is the broad definition used by the government. However, most of the past expenditures from the GoG’s and presidential contingency funds have neither been impossible nor difficult to predict.

If the Georgian government limits its contingency spending to expenditures that are impossible or difficult to predict rather than broadly termed unforeseen expenditures, which a government might have to incur because it did not properly plan its budget, contingency funds may safely bypass public procurement legislation.

4.7.2. the crediting and debiting of contingency funds can still be used. In the past years, contingency funds were almost entirely spent in the first six months and credited again in the remaining six months. With the crediting mechanism in place, the contingency funds of the president and the government overshot the 2 per cent limit – the allowed maximum ratio of contingency funds over government’s expenditures, set by Georgia’s budget code. The mechanism for this debiting and crediting is not described in or allowed by the applicable legislation and can best be described as a creative accounting approach by the Ministry of Finance.

4.7.3. Regional Projects Fund (RPF) continues to finance projects that have nothing to do with regional development, which flies in the face of the RPF selection criteria and procedures introduced by the GoG in February 2013, e.g. 1. in June 2013, GEL 200,000 of RPF funds was used to finance rehabilitation of the presidential headquarters in Atoneli str 2. with its August 22 #1103 decree the GoG gave the Chamber of Commerce GEL 1.45 million from the Regional Projects Fund for renovation of its office building in Tbilisi.

Until the current government respects budgetary discipline that it is statutorily required to, risks of accountability and transparency will continue.

4.8. Tax Incentives

What has put a further downward pressure on tax revenues is:

4.8.1. Tax exempt minimum income, which in 2014, according to the MoF, will cost Georgia’s state budget GEL 180 million.

4.8.2. Sole open-air market traders are exempt from using cash registers. After the 2012 parliamentary elections, the introduction of this tax incentive was a political decision, which was extended twice in the past year. The MoF has not yet assessed the impact of the incentive on tax revenue collection.

(Data not available on all policy areas):

 

 

 

 

 

 

 

 

 

To make sure that numbers from different years do not add up, please do not tick several years at a time

 

5. Recommendations:

Transparency International Georgia believes that:

1. the Government of Georgia needs to gather political will to introduce a genuine program budget. As noted above, the government of the Autonomous Republic of Ajara with its 2014-2017 budget provides a very good example in this regard.

2. the Government of Georgia should limit contingency spending to the expenditures that are neither impossible nor difficult to predict, e.g. damage caused by natural disasters, delinquency on loans guaranteed by the government, etc rather than allow broadly termed unforeseen expenditures to be financed from the funds.  

2.1. the Government of Georgia should discontinue the practice of debiting and crediting of the contingency funds, which, as noted above, is neither described in nor allowed by the applicable legislation (for detail see 4.7.2 above).

3.the Ministry of Finance needs to improve its macroeconomic forecasting so that it should be able to forecast economic growth with greater accuracy. Revenue planning is based on macroeconomic forecasting by the Ministry of Finance, which has regularly missed its economic growth targets in the past two years.

4. the Ministry of Finance should follow the GoG Decree of February 7, 2013, which sets out selection criteria and procedures for projects to be funded from the Regional Projects Fund. We believe the time has come when the RPF should not continue to function as a contingency fund.

5. the Ministry of Finance should balance the country’s budget in such a manner as to bring 3.9 per cent of  2014  consolidated budget deficit down to 3 per cent threshold as required by the Economic Liberty Act, which took effect as of December 31, 2013.

6. the Ministry of Finance should decide whether or not to introduce tax incentives based on a thorough examination of all pros and cons of any proposed tax incentive - before introducing it.

7.the Ministry for Regional Development and Infrastructure should closely examine the performance failure that led it to underspend its budget by GEL 220 million in 2013.