The 2013 state budget has increased by a total of GEL 657 million compared to 2012, a rise of 8.1%. The 2013 budget reflects priorities of the new administration, which are agriculture, healthcare and social security, education and science. The government began the process of implementing its commitments in these priority areas in December 2012.

The three priorities will receive GEL 3.256 billion, which is approximately GEL 646.7 million more than the appropriations by the previous government (to compare the appropriations by the previous and the new governments we used the budget data of 2013 and July 2012 rather than December 2012). The government also cut down expenditures which were deemed unreasonable, thus making it possible to actually increase appropriations for the three priorities by GEL 870 million.

Funding for the ministry of Labor, Health Care and Social Affairs has increased by 29.5% to GEL 535 million. GEL 69.3 million, 11.5% more, will go to the Ministry of Education and Science, while the Ministry of Agriculture will have GEL 92 million more to spend, a rise of 61.8% over the last year. Interestingly, 63% of the social and health care appropriation will go to health insurance (GEL 335.2 million increase over 2012).

Priorities of the New Administration (in thousands of GEL)

Expenditure retrenchment by the new administration helped free up resources that were channeled to fund the new priorities. The defence appropriation decreased by GEL 16.5 million (2.4%). Appropriations of the Ministry of Internal Affairs and Ministry of Sports and Youth Affairs were cut by GEL 18.2 million (15%) and GEL 12 million (20%) respectively. Appropriations of a number of other institutions have been decreased as well.

1.   2013 State Budget: Positive Changes

• For the first time after the formal switch to program-based budgeting the Ministry of Finance admitted that the state budget is in effect a conventional budget[1], which we have repeatedly highlighted in our publications since 2011.
• The most important positive change is the expenditure retrenchment, which is the first serious move towards optimizing expenditures in the past eight years. The expenditure retrenchment is made possible through cuts in administrative costs and discontinuing electorally motivated programmes, such as the ‘Summer Jobs Programme’ for students, electricity vouchers, etc.
• Other Expense is now broken down according to objectives, making it easier to account for, which was never done in the previous budgets.
• The budget deficit is planned at around 2.8% of GDP, while in 2012 the budget deficit neared 3.5%. Reducing the deficit, an important move towards fiscal consolidation, suggests a more responsible attitude by the government. While a higher deficit would have enabled the government to allot more funds to its new social priorities and other commitments, the government decided to improve its fiscal position (MoF calculation of budget deficit is based on the IMF Government Finance Statistics-1986, which is not comparable with the budget deficit calculated in accordance with IMF Government Finance Statistics-2001: 2013 budget deficit as calculated in line with GFS-2001 methodology increased from 1.5% in 2012 to 1.9% of GDP in 2013, while GFS-1986 deficit decreased from 3.5% in 2012 to 2.8% of GDP in 2013).
• Social and healthcare programs will see a jump in funding, while much of the increase in the appropriation of the Ministry of Education and Science will go to the remuneration of teachers and administrative staff.
• Income tax rate, which was to decrease by 2% in 2013 and 3% in 2014, will not change, which, considering that the decrease would have affected higher-income people, is the right decision. Instead, the GoG introduced a tax-exempt income, which makes it possible for individuals to have GEL 1800 deducted from their annual maximum pay of GEL 6000. Interestingly, income tax revenue is expected to increase by 11.7% despite introduction of the tax-exempt minimum income. 
• The law on Legal Entities of Public Law was amended to give the government new powers to determine the inventory of the legal entities of public law that will be responsible for agreeing with the Ministry of Finance on their individual annual budgets and payrolls, which will help increase transparency of public funds. The government will have the right to request an LEPL to transfer its budget surplus back to the state budget. Although in conditions of poor accountability and when there is no effective performance audit in place in the country, the freedom to allocate their own revenue – which legal entities will retain – should be examined to determine to what degree it is justified. As things stand, we do not know to what extent the freedom of allocating one’s own income helps legal entities of public law be more effective.

For example, if a legal entity of public law had a budget surplus on its accounts in 2011, then in 2012 it was planning as many more activities which should have been funded from the 2011 surplus. In the case of having to return a budget surplus, there is the risk of the so-called “December fever”, which describes the accelerated rate of spending in December in an attempt to avoid returning funds. However, the negative effect of having the right to carry the balance to the next year is much worse than the negative effect of the December fever. Having the right to carry the balance to the next year means that instead of a legal entity of public law spending in an accelerated manner in December (in this case they are only able to spend a small portion of the budget), the balance is divided up over the course of the next 12 months. In the case of carrying the balance to the next year, legal entities of public law create additional activities for 2012 in order to spend the balance, which they otherwise would not have implemented. It is for this reason that spending organizations do not have the right to carry the balance to the next year. The principle is a simple one: return the surplus to the treasury and next year they will give you as much as you really need. The responsibility of legal entities of public law to return a budget surplus can in no way interfere in the implementation of their goals and neither can it restrict their independence, since they can request additional support from the state budget as they need it. In addition, according to the changes in the law, a legal entity of public law’s responsibility to return a budget surplus is only relevant when the government makes a decision to that effect.

• In 2013, tax revenues will increase by GEL 620 million, which points to the government’s intention to improve the tax collection administration. If improvements to the tax administration fail to be made, it will be impossible to collect this additional GEL 620 million. The first signs of improvements to the administration have already appeared: In 2012, the number of cases of proven contraband in the period November-December  grew by 74% compared to the period September-October.

• It is worth welcoming the shift in emphasis from punitive actions to non-punitive actions: reducing the minimum sanctions for late declarations and reducing the fines and penalties for violations in the use of sales recording devices and for first and repeat offenders who operate without goods waybills.
• Other steps forward are: in addition to tax-collecting and dispute settlement bodies, courts will also have the right to waive fines for good faith taxpayers; the forced collection of unpaid taxes will take place only after a case is settled; a decision regarding tax agreements will already be taken at a Georgian government session and not unilaterally by the prime minister; the period for the forced collection of unpaid taxes will be extended from one year to three years; it will be possible for a taxpayer to put up his property as collateral/take a mortgage as a guarantee to collect unpaid taxes.

2.  2013 State Budget: Problems

2.1 Format of the Programme Budget

• Despite the Ministry of Finance’s critical evaluation of the format of the state programme budget, the 2013 programme budget is not only significantly less detailed than the 2012 programme budget, but provides even less information than the 2008 and 2009 conventional budgets and in many cases completely disregards indicators of achievement.
• In the description for the health insurance program in the 2012 budget, for example, three expected outcomes are given: 1. Increase in the accessibility of medical services for specific population groups. 2. Easing the financial burden of healthcare for specific groups. 3. Reducing the amount of out-of-pocket medical expenses. Three indicators are given to assess the expected outcomes of this programme: 1. The number of people insured by the state. 2. A 10% reduction in out-of-pocket payments out of all healthcare expenses. 3.  A 2-3% increase in the utilization of in-patient and ambulatory care services for 2010 levels of the insured. In the description for the healthcare programme in the 2013 budget, however, the one and only expected outcome given is “providing the country’s population with medical insurance”, while the sole evaluation indicator for the intermediate outcome is given as “increase in the number of insured persons”. In contrast with the same programme’s expected outcomes and indicators for 2012, neither the first nor second measure tells us anything.
• First of all a programme budget requires performance indicators – not expected outcomes. The determination of expected outcomes is obtained from the indicators of priorities, goals, tasks and achievement. For example, “providing the country’s population with medical insurance”, which is given as an expected outcome, is actually a goal or a task. If we measure the outcomeof achieving this goal, we get the performance indicator.

Apart from this, the performance indicator would not be a growth in the number of insured persons, but rather, for instance, a demonstration of percentage increases in inpatient admissions or re-hospitalization.

• Compared to the 2012 budget, the 2013 budget lacks significant detail about several other programmes, such as “Managing Diabetes”. If funding for this programme had been decreased, it would have been understandable why fewer activities were planned. However,funding for this programme, while rather insignificant in amount, is increasing and therefore, it is difficult to understand why we have significantly fewer activities in the programme compared to 2012.
• The format of the logical framework has not changed for the programme budget, by which priorities, goals, tasks, activities, the previous year’s cost-effectiveness coefficients, indicators of achievement, risks, number of beneficiaries, responsibility for completion and time frames should be identified. The majority of these elements are not to be found in the 2013 budget.
• Quantitative or qualitative indicators of achievements are especially important for the programme budget. There are virtually no indicators in the 2013 budget which could be used to measure or otherwise assess achieved outcomes.

2.2 Other Problems

• In 2013 the number of civil servants will increase by 755 persons, which is an increase of 0.7% compared to 2012, but the budget line for employee salaries will grow by GEL 49.1 million. The increase in salaries without the increase in the number of employees would be understandable, since work compensation in the public sector has not reached the limit above which increasing salaries would be unwise. Taking into consideration the fact that the country is supposed to be striving for limited government and fiscal consolidation is taking place, increasing the number of civil servants is an incomprehensible step.
• Article 56 of the budget code remains in effect, according to which, beginning 1 January 2013, an annual report about the spending of the state budgetshould account for any discrepancy between approved and revised appropriations according to the spending organizations’ programmes, if such discrepancy exceeds 30% or the discrepancy between the revised and actually spent amounts exceeds 15%. These thresholds for requiring explanations give the wrong stimulus to spending organizations and promote careless budget planning. In order to optimize budget planning and increase its transparency, it is necessary to lower the aforementioned thresholds for requiring an explanation.  
• Without these corresponding explanations, it is impossible to increase transparency of the state budget and the accountability of the government. Other income in the 2013 budget similar to the 2012 budget does not include income from profit made by the National Bank. The reason for this is the fall in interest rates on international financial markets, losses due to the strengthening of the lari (the National Bank's reserves are in foreign currencies), etc. However, the Ministry of Finance does not give these explanations.
• The mechanism for administering the tax-exempt income minimum in income tax collection needs to be more clearly defined; in particular, the rules regarding the return of taxes (including rules of retroactive accounting) and time frames. Here, the greatest challenge is the creation of a database for all employees, which should make the declaration and the return of tax-exempt income possible.
• The changes to the law regarding the State Audit Office and the corresponding resolution passed by parliament[2] are important for increasing transparency of the spending of public funds. According to the resolution's explanatory statement, the legislature will have full oversight of the State Audit Office, including the quality of SAO audits and the legality of its implementation powers rather than just spending by SAO.
• Assessing the quality of audits implemented by the State Audit Office requires the experience of correspondingly experienced audit firms. The parliamentary commission, even if it is staffed with qualified auditors and has an apparatus, cannot be in a position to professionally assess the quality of audits. A professional assessment of audit services is a complex task which requires planning, hierarchical distribution of functions and other specific procedures. A qualified parliamentary commission, in accordance with legally-prescribed demands, could investigate the legality of the powers implemented by the State Audit Office rather than quality of audit, and competitively select an audit firm to audit the State Audit Office.
• Just as it is accountable before parliament, the auditing body is also accountable in several other countries (the United Kingdom, Netherlands, Estonia, etc). The activities of the United Kingdom's National Audit Office fall under the oversight of the House of Commons' Public Accounts Committee, which approves the NAO’s budget and can appoint external auditors, but does not interfere in the decision-making and management of the NAO’s administrative affairs, which Georgia might take into consideration. However, in these countries the supreme auditors are audited by external audit firms rather than commissions of law-making bodies, as is the case in Georgia. We believe the Georgian State Audit Office can ill afford to do without external audit.

3. Recommendations

Transparency International Georgia believes that:

• The 2013 state budget detail programme priorities, goals, objectives, activities, coefficients of cost-effectiveness of the previous year, indicators of achievement, risks, number of beneficiaries, responsible agencies, and timeframes.
• Special attention must be given to the quantitative/qualitative indicators of achievement. In the 2013 budget there are virtually no indicators that will be used to measure or otherwise assess outcomes.
• The sharp increase in funding for social and healthcare programmes together with increased salaries for primary and secondary school teachers and administrative personnel creates a serious risk of inflation, which the government should prepare itself for.
• In order to increase transparency of the state budget and the government’s accountability, it is necessary to make corresponding explanations: e.g. why the number of civil servants is growing by 755 people when the country has committed itself to minimal government and fiscal consolidation; why the 2013 budget’s other income does not include NBG’s profit, or why property income is decreasing, which together with the decrease in other line items, sees a reduction of GEL 120 million in other income.
• The mechanism for administering the tax-exempt income minimum in income tax collection needs to be more clearly defined; in particular, the rules regarding the return of taxes (including rules of retroactive accounting) and time frames. Here, the greatest challenge is the creation of a database for all employees, which should make the declaration and the return of untaxed income possible.
• According to Article 56 of the budget code, the thresholds for requiring explanations for discrepancies between approved and revised appropriations (30%) and revised and actually spent amounts (15%) should be lowered, since high thresholds encourage wasteful budget planning.
• Only audit firms with the relevant experience should conduct quality audits of the SAO audits, not a parliamentary commission. The parliamentary commission, even if it is staffed with qualified auditors and has an apparatus, will not be in a position to professionally audit quality of audits, since this is a complex task requiring careful planning, segregation of duties, verification of findings and recommendations by the auditor, in report form, on the quality of SAO audits. A qualified parliamentary commission could, in accordance with the legally-prescribed demands, investigate legality of the powers implemented by the State Audit Office, but not the quality of the audit, select, competitively, an audit firm to audit the State Audit Office. It is necessary for the law to clearly stipulate that the quality of the audit conducted by the State Audit Office is assessed by an audit company hired by parliament as well as the qualification demands that the latter must meet.
• The Ministry of Finance should examine to what extent: 1. the right to allocate their own income helps increase LEPLs’[3] motivation for better discharge of their functions 2. the freedom to allocate one’s own revenue – which legal entities of public law will retain – is justified in conditions of poor accountability and absence of effective performance audit.

We urge the the Ministry of Finance to engage with us in a discussion of the recommendations presented in this report.