Short analysis of 6-month performance report of Georgia’s 2019 state budget
I. Key findings and recommendations
- 6-month plans of Receipts and Expenditure of the 2019 state budget were fulfilled by 103.2% and 98.6%, respectively. Plans of Capital Expenses and Goods and Services were two categories of budget expenditure that had the lowest fulfillment rates
- Receipts from Privatization had the highest performance rate – 133%;
- The state budget received GEL 44m from fines, which is GEL 4m more than planned. Budget receipts from the fines specifically for violating traffic rules increased by 71%, compared with the previous year;
- As a result of over-performance in terms of receipts and less spending than planned, the budget remainder decreased by GEL 173m instead of 435m;
- Public debt to GDP ratio increased from 45% to 46.4% that was stemmed from the depreciation of GEL and growth of internal debt by GEL 250m;
- The following institutions had the lowest rates of budget fulfillment: Office of the State Minister of Georgia for Reconciliation and Civic Equality (67.5%), High Council of Justice (76.8%), and State Service for Veteran Affairs (77.7%).
- Programs and subprograms of the Ministry of Internally Displaced Persons from the Occupied Territories, Labor, Health and Social Affairs of Georgia were characterized with both under and over performance, which means that exact forecasting of certain expenses remains a problem. The Universal Healthcare was among the mentioned programs, which will require at least GEL 50m of additional funding;
- The Ministry of Environment Protection and Agriculture also was among the worst performers – its five subprograms were fulfilled by less than 50%.
Recommendations:
- The surplus in budget Receipts, underspending in budget Expenditure and keeping the budget remainder largely unspent, allowed the Government to save a certain amount of money, which should not be fully spent during the second half of the year. The Government should keep the budget deficit low in the fourth quarter since it is important for the stability of inflation rate and GEL exchange rate;
- The public debt to GDP ratio has already exceeded the target value (40%) given in Georgia’s Socio-Economic Development Strategy (Georgia 2020) and forecasted value (41.4%) for 2019 set in the public debt management strategy of the Minister of Finance. The Government should have a clear strategy of how it plans to reach the target and maintain it;
- Special attention should be paid to such programs and projects that stay behind their implementation schedules (especially investment projects), or their budgets are overspent. With this regard, programs aimed at providing services, for example in the healthcare sector, are worth mentioning
II. Introduction
Fulfillment of the state budget has become an interesting issue over the last years. The history showed that the beginning of the year is characterized by low fulfillment rates. By the end of the year, certain legislative amendments are made to the budget and it manages to be fulfilled by having much higher expenses in the fourth quarter, compared to an average rate of the first three quarters. Increased fourth-quarter spending leads to certain macroeconomic problems and bad spending practices, including speedy public procurement processes and frequent advance payments.
Therefore, it is important to pay proper attention to the fulfillment of the 6-month budget plan in order to avoid repeating the bad practices of the previous years.
Transparency International Georgia studied the basic features of the six-month performance report of the 2019 state budget and presented specific recommendations for remaining challenges. Taking these recommendations into account will make a budgetary policy more sustainable and effective.
III. Budget Receipts[1]
According to the Government forecasts, in 2019, the nominal GDP of Georgia should grow by 8.2% (real GDP growth rate should be 4.5% and the inflation rate (GDP deflator) – 3.7%).
Preliminary data of the National Statistics Office of Georgia (GeoStat) shows that in the first half of this year real GDP grew by 4.9%, 0.4 percentage points faster than expected.
Due to a higher growth rate of nominal GDP, in 2019 Georgia’s state budget received more money than expected. A 6-month plan of the Receipts was fulfilled by 103.2%, therefore, the state budget received additional GEL 178 million.
Data source: Ministry of Finance of Georgia
A 6-month plan of Revenues was fulfilled by 102.5%; therefore, the state budget got GEL 121m more than expected. In addition, all subcategories of Revenues also had a surplus.
Among five types of tax revenues, only the plan of profit tax has been fulfilled with the surplus – by 112.5%. The imports tax revenues had the worst performance – 81.2%. Revenues from excise taxes also were less than planned (83.7%), which was stemmed from the lower revenues from the cigarette excise tax.
The plan of revenues from Value-Added Tax (VAT) has been fulfilled by 96.2%. Underperformance in primary tax revenues has been compensated with a surplus (GEL 172m) in other types of revenues.
114.8% fulfillment of Other Revenues’ plan was caused primarily of additional money coming from state-owned assets (interest, dividend), administrative duties and fines. The state budget received GEL 44m from fines, which is GEL 4m more than planned. More specifically, GEL 24m was received from road traffic fines and GEL 9m – from criminal fines. In the first half of 2018, budget revenues received from the violation of traffic rules was GEL 14m, as for criminal fines – it was almost same as in 2019.
It was planned to get GEL 33m through Disposal of Non-Financial Assets (privatization); however, it actually amounted to GEL 44.5m, out of which GEL 30m came from the selling of state-owned real estate, GEL 5m from selling the land and GEL 9m - from selling of licenses for usage of radio frequencies.
GEL 47.4m came from Decrease of Financial Assets (returned loans), which is 114.1% fulfillment of a plan.
An increase of Liabilities (public debt) - the last category of the Receipts – was fulfilled by 106.7%. The Government of Georgia took 42% (GEL 81m) more domestic debt and 10.4% (GEL 42m) less foreign debt than planned. Underperformance in foreign debt was caused by 85.3% fulfillment of the long-term concessional investment loans plan, which in turn indicates the lower pace of implementation of infrastructure projects.
In the first half of 2019, compared to the relevant period of the previous year, the budget receipts increased by 2% (GEL 116m). In addition, revenues coming from taken debts increased by 20% (GEL 106m). However, the tax revenues decreased by 0.3%, which was caused by fiscal decentralization reform.
Starting from 2019, 19% of VAT revenues go to local budgets. Before that, VAT was fully transferred to the central budget.
Data source: Ministry of Finance of Georgia
IV. Budget Expenditure[2]
In the reporting period, the actual Expenditure of Georgia’s state budget was GEL 5.9b, which is 98.6% of the planned amount. Therefore, public institutions spent GEL 85m less than expected.
Data source: Ministry of Finance of Georgia
The Expenses - the largest category of the Expenditure – were fulfilled by 98.6%. Goods and Services – a subcategory of the Expenses – had the lowest fulfillment rate (95.3%). This subcategory includes purchasing of those goods and services that are necessary for the daily work of public institutions (for instance, office equipment, furniture, fuel, etc.). The government could save GEL 30m in this subcategory.
The plan of Remuneration of civil servants was fulfilled by 98.2% and GEL 27 million was saved.
Social Security expenses traditionally had the highest fulfillment rate (100%). It was not a surprise since this category includes such programs as Universal Healthcare, which, based on the practice of the previous years, usually, overspends the allocated money. This program will require at least GEL 50m additional funding for this year too.
The plan of Acquisition of Non-Financial Assets (also known as capital/infrastructure expenses) was fulfilled by 96.5% and GEL 28 million remained unspent.
The plan of Increase of Financial Assets (which mainly includes loans given from the state budget) was fulfilled by 110.9% therefore, GEL 10 million was overspent.
The last category of the Expenditure is Decrease of Liabilities that covers state liabilities coming from the loans taken in previous years. The plan of this category was fulfilled by 100%, thus GEL 450m of debt (GEL 426m foreign debt and GEL 24m domestic debt) has been paid back.
In the first half of 2019, compared to the relevant period of the previous year, the budget expenditure increased by 8.6% (GEL 470m). The largest contributors of this trend were social security (pension, healthcare) expenses – increased by GEL 236m, infrastructure projects – by GEL 197m and service of public debt – GEL 134m. Grants for local government institutions decreased significantly since the funding systems have changed and now they less depend on the state budget (19% of revenues from the VAT are directly transferred to local government institutions).
Data source: Ministry of Finance of Georgia
V. Budget deficit and public debt
GEL 143m of the budget deficit[3] was planned for the first half of the year. However, this number amounted to GEL 183m. While the Government got more income than it spent, it could take less public debt. However, against this logic, the Government took GEL 40m more debt than planned. This allowed the Government to spend less from the budget remainder than planned. It was planned to spend GEL 435m from the budget remainder, but GEL 262m less (GEL 173m) was spent from this source.
For this year the budget deficit is planned to be GEL 1,252 million, therefore, in case of 100% fulfillment of the expenditure plan for the second half of the year, the deficit will be much higher than it was in the first half. Ceteris paribus, this can cause certain macroeconomic instability similar to the previous years.
As of December 31, 2018, Georgia’s public debt amounted to GEL 18.5bn that was 45% of the previous year’s GDP. As of June 30, 2019, Georgia’s public debt was GEL 19.8bn which is 45.4% of the previous year’s GDP. Depreciation of GEL caused an increase of public debt. By the end of 2018, Georgia’s foreign public debt was USD 5.4bn, which was GEL 14.5bn calculated by that time’s exchange rate (2.68). As of June 30 of this year, Georgia’s foreign public debt again was USD 5.4bn, but it was GEL 15.6bn because of the depreciated Georgian currency.
Data source: Ministry of Finance of Georgia
VI. Public institutions and programs with the lowest fulfillment rates
Office of the State Minister of Georgia for Reconciliation and Civic Equality was a public institution, which spent the smallest share (67.5%) of its planned budget. Among other expenses of this institution purchasing of goods and services had the worst spending rate (65%). With this regard, the Ministry of Economy and Sustainable Development (82%), as well as the Ministry of Defense (92%) were worth mentioning since they are quite big spenders. In the case of the Ministry of Economy, infrastructure projects had the lowest rates of fulfillment.
Data source: Ministry of Finance of Georgia
Those programs and subprograms that had budget fulfillment rates less than 50% are given in table 4. The Assistance for reintegration of Georgian immigrants was a subprogram of the Ministry of Internally Displaced Persons from the Occupied Territories, Labor, Health and Social Affairs that had the lowest fulfillment rate. GEL 195 000 was allocated for this subprogram, but nothing was spent.
Another sub-program of this Ministry named Postgraduate medical education was fulfilled only by 6.5%. As for the subprogram – Provision of agricultural insurance – it was fulfilled by 15%.
Data source: Ministry of Finance of Georgia
GEL 447m was allocated from the state budget for investment projects in the first half of 2019, but, in fact, GEL 17m less was spent, which means that the plan was fulfilled by 96%. Table 5 provides more information on those projects that have less than 75% fulfillment rates. In total GEL 46m less than planned was spent on investment projects. This points to the low pace of spending.
GEL 300 000 was allocated for Rehabilitation of the irrigation system Zemo Samgori, but nothing was spent. Rehabilitation of Vardnili and Enguri Hydro Electro Stations, a project of the Ministry of Economy and Sustainable Development, was fulfilled by 3%. The large project for Capacity building of Georgia’s armed forces was worth mentioning since it was fulfilled by 25% (GEL 25m less spent than planned).
Data source: Ministry of Finance of Georgia
[1] Receipts are a sum of Revenues, Disposal of Non-financial Assets, Decrease of Financial Assets and Increase of Liabilities.
[2] Expenditure is a sum of expenses, acquisition of non-financial assets, increase of financial assets and the decrease of liabilities.
[3] According to the Georgian legislation, the budget deficit a gross negative budgetary balance. Since the gross balance does not fully include revenues and expenses, the definition of the budget deficit used in this report includes change of liabilities or sum of lacking money, which was financed by taking new loans.