On 30 November, the Government of Georgia (GoG) submitted to the Parliament the final version of the draft law On the 2021 State Budget [1] which differs considerably from the version submitted on 5 November. The significant changes in the draft budget were caused by including in the budget the factors related to the coronavirus pandemic. Transparency International Georgia (TI Georgia) has prepared a brief evaluation and recommendations on the final draft budget.

Main Findings

• According to the updated draft budget, the Georgian economy will contract by 5% in 2020 and will grow by 4.3% in 2021. The initial version of the draft budget estimated a 5% growth for next year. TI Georgia then recommended that, given the real situation, the budget projections be made based on a lower indicator of economic growth;
• In 2021, the state budget receipts will amount to GEL 16.8bn, which is GEL 1.7bn less than the budget receipts in 2020. The decrease is conditioned by the fact that the government is borrowing GEL 8bn in 2020, while in 2021, it plans to borrow GEL 5.3bn;
• Income tax reliefs will continue until May. Individuals whose salary does not exceed GEL 1,500 will not pay tax on GEL 750;
• The budget expenditures will increase by GEL 2.5bn and amount to GEL 18.4bn; this includes an increase in expenses by GEL 222m. Repayment of the debt in the amount of GEL 2.8bn accounts for the largest portion of increase in expenditures;
• Administrative expenses will increase by GEL 221m, amounting to about GEL 3.3bn in total. An increase in these expenses is caused by spending GEL 60m more on remuneration and GEL 151m more on the procurement of goods and services. Compared to 2019, administrative expenses are increased by GEL 520m;
• The total number of employees in budgetary organisations will increase by 356 people and reach 112,570. Of these, 227 persons will be added to the management of the healthcare programme and 176 – to the labour and employment system reform programme. The number of policemen will increase by 82 and the number of employees of the Parliamentary Staff will increase by 50 people;
• Four ministries will have their budgets increased the most: Ministry of Regional Development and Infrastructure – by GEL 551m; Ministry of Education, Science, Culture and Sport – by GEL 264m; Ministry of Defence – by GEL 95m; and Ministry of Internal Affairs – by GEL 30m;
• From 1 January 2021, the pension of the pensioners aged under 70 will increase by GEL 20 and amount to GEL 240, while for those aged 70 or older, the pension will increase by GEL 25 and amount to 275. The increase in pensions will cause the budget expenses to increase by GEL 370m;
• An allocation of GEL 400m is made for the management of coronavirus-related diseases, which includes expenses for treating the infected patients, tests, vaccine procurement and expenses related to the prevention of the spread of the pandemic;
• Due to the deterioration of the situation caused by the coronavirus pandemic, GEL 310m is allocated for assistance to the population. For six months, individuals who have lost their jobs will receive assistance in the amount of GEL 200. For six months, socially vulnerable families, children with disabilities and persons with pronounced disabilities will receive additional GEL 100 per month. Also, families with three or more children aged under 16 years will receive GEL 100 per month for six months. In January and February, utility expenses will be covered according to this year’s model;
• Only the Ministry of Economy will experience a significant budget cut of GEL 353m. The reason for the cut is the reduction of the allocation for the loan and guarantee facility by GEL 280m and the completion and annulment of the programme of support for small, medium and family-run hotels for which GEL 70m was allocated this year;
• The financing of the universal health coverage programme is reduced by GEL 2m with GEL 800m allocated to this end, while GEL 882m from the universal health coverage programme has already been spent this year and it is likely that more than GEL 900m will be spent by the end of the year;
• The budget deficit will be GEL 4.1bn (7.7% of GDP), of which GEL 2.5bn will be covered by taking a new loan and GEL 1.6bn – by using the budget remainder;
• In 2021, the government will take a loan amounting to the total of GEL 5.3bn but, at the same time, will use GEL 2.8bn to repay previous loan. In 2021, the government will not be taking a new domestic loan. Next year, in order to repay “Euro-obligations” worth USD 500m issued in 2008, the government is going to issue new “Euro-obligations” worth GEL 1,657m. According to the previous version of the 2021 draft budget, the government was not planning to issue new “Euro-obligations”, intending to repay this debt using the budget remainder;
• Towards the end of 2021, the public debt will amount to GEL 32.1bn which will constitute 60.1% of the projected GDP. The amount of debt will thus exceed the 60% threshold which is considered to be critical;
• The expected outcomes and indicators of the programmes envisaged by the budget are, once again, provided as an annex and are not included in the text of the law on the budget, which indicates an incorrect approach to programme budgeting.

Recommendations

• Including the funds for mitigating the damage caused by the coronavirus in the budget expenses was necessary but this should have been done mainly by making savings within the budget rather than taking new loans;
• According to the previous version of the budget, the government was planning to cover the existing foreign debt by using part of the foreign assistance received this year, which would reduce the burden of servicing the debt in the future. To a certain extent, this approach should be retained. According to the presented draft, the public debt exceeds the critical threshold of 60% of GDP. Moving to the group of highly indebted countries will reduce Georgia’s attractiveness for investments and weaken its macroeconomic stability;
• Similar to past years and this year, an insufficient amount is allocated for the universal health coverage programme. The Ministry of Health needs to determine the amount required for funding this programme with as much precision as possible and to significantly improve its administration;
• The expected outcomes and indicators of the programmes envisaged by the budget, which are provided as an annex, must become part of the main text of the law on the budget.

1. Macroeconomic Environment

According to the final draft 2021 State Budget of Georgia, the government estimates that the economy will contract by 5% in 2020. Since the average rate of contraction of the economy in January-October was 5.1% and, at the same time, the contraction indicator in October fell to 3.9%, despite the restrictions that were imposed on 28 November, the estimated 5% annual contraction is a realistic one.

The government estimates a 4.3% economic growth for 2021. According to the previous version of the draft budget, the government estimated a 5% growth but reduced this indicator due to the deterioration of the pandemic-related situation. In general, it is easier to achieve economic growth after a crisis year since the economy is returning to its pre-crisis state. However, it is clear that the pandemic will remain a problem at least in the beginning of next year and the Georgian economy will shrink in January-February 2021. The economy will likely start growing in March next year.

The tentative Georgian Lari to US Dollar exchange rate used for 2021 is 3.3. Income per capita in 2021 is expected to increase to USD 4,353, which is 7.3% less than the 2019 indicator. The expected annual inflation rate is 3%.

2. State Budget Receipts^[1]

In 2021, the Georgian state budget receipts will amount to GEL 16.8bn, which is GEL 1.7bn (9%) less than the budget receipts in 2020. The decrease in receipts is caused by the fact that, in 2020, the government is borrowing GEL 8bn, while in 2021, it will borrow GEL 5.3bn.

The largest line of receipts – revenues – will amount GEL 11.2bn in 2021, which is GEL 966m more than the revenues estimated for 2020. The revenues include tax revenues, grants and other income. The increase in the total amount of revenues is caused by the GEL 1.4bn increase in tax revenues, including the receipts from VAT increased by GEL 593m, from income tax increased by GEL 325m and from excise duty increase by GEL 257m. Due to the economic crisis and tax relief^[2] measures, the income from taxes in 2020 decreased by GEL 686m compared to 2019. The GEL 10.3bn in tax revenues estimated for 2021 is to be received as a result of economic growth and termination of temporary tax relief measures. However, the income tax relief measures will remain in effect until May 2021: specifically, individuals whose salary does not exceed GEL 1,500 will not pay tax on GEL 750.^[3] This tax relief will cost the budget GEL 220m.

Compared to 2020, the amount of grants to be received will decrease by GEL 271m and amount to GEL 287m. The decrease is caused by the fact that the grants from international organisations increased during this year due to the pandemic.

Other income will decrease by GEL 125m. The reduction is conditioned by the fact that the GEL 133.5m mobilised in the StopCov Fund was reflected in the 2020 budget under Other Income. There are no plans to replenish this Fund with any income in 2021.

It is estimated that GEL 150m will be received from privatisation (disposal of non-financial assets), which is GEL 60m more than was projected for 2020.

Financial assets will decrease by GEL 1,776m. Of these, GEL 1,626 will be the use of the budget remainder while GEL 150m will be the repayment of previous loans issued from the budget. The use of the remainder and the repayment of loans are both part of the budget receipts.

The disposal of financial assets, which means repayment of loans issued in the past, will bring GEL 150m into the budget.

Data source: Ministry of Finance

3. Budget Expenditures^[4]

In 2021, the state budget expenditures will amount to GEL 18.4bn, which is GEL 2.5bn (15%) more than the budget expenditures in 2020.

The biggest expenditure line – expenses – is increased by GEL 222m. This includes extra GEL 60m to be spent on remuneration. The increased remuneration expenses include GEL 27m allocated to the Ministry of Internal Affairs and GEL 13m – to the Ministry of Defence. The salary of policemen in 2021 will not be increased but the number of employees will grow larger. The salary fund is also increased by GEL 6.9m for the Ministry of Health, by GEL 5.9m for the Ministry of Environmental Protection and Agriculture, by GEL 1.5m for the Parliamentary Staff and by GEL 1.4m for the State Audit Office.

The goods and services procurement expenses are increased by GEL 151m. The total amount allocated for remuneration and goods and services procurement, which represents so-called administrative expenses, is increased by GEL 222m, amounting to GEL 3.3bn. Compared to 2019, the administrative expenses are increased by GEL 520m.

The total number of employees of the budgetary organisations is increased by 356 people, reaching 112,570. The number of employees is increased the most at the Ministry of Health – by 438 people, 227 of whom are added to the management of the healthcare programme and 176 – to the programme of reforming the labour and employment system. The number of policemen is increased by 82. The Parliamentary Staff will have 50 additional employees. No significant changes are made in the number of employees in other agencies.

The largest amount – GEL 5.3bn – is allocated for social expenses, which include pensions, healthcare and social assistance. The largest amount after the social expenses – GEL 3.5bn – is allocated for capital projects, which is GEL 500m more than in 2020. The capital expenses in the amount of GEL 3.5bn include a capital transfer of GEL 578m allocated for local governments.

The amount allocated for subsidies is decreased by GEL 346m, which is conditioned by a decrease of funding to the programmes compensating the damages caused by the coronavirus.

The expenditures also include the repayment of the principal amount of the public debt, which will be record high in 2021, amounting to GEL 2.8bn. Next year, the government is planning to repay the obligations issued in 2008 in the amount of EUR 500m. In addition, GEL 918m from the budget will be spent to pay the interest on the public debt.

Data source: Ministry of Finance

4. Budget Deficit and Public Debt

The total budget balance^_[5] of the state budget in 2021 is projected at GEL 3.8bn, compared to GEL 4.3bn estimated for 2020. Relative to GDP projected for 2021, the total budget balance will stand at 7.2%. This indicator for the 2020 budget is 8.6%.

It is noteworthy that the Organic Law of Georgia on Economic Freedom implies that the 3% ceiling of the budget deficit is the negative total budget balance (deficit, according to the Budget Code) of the consolidated budget_^[6] rather than the state budget deficit. The total budget balance of the 2021 consolidated budget will be negative GEL 4.1bn which stands at 7.7% of the projected GDP.

Since the total budget balance of the consolidated budget is higher than 3% of GDP, the government is under the obligation to present to the Parliament a plan of restoring the parameters determined by the law. The duration of the plan of parameter restoration must not exceed three years. This plan is laid out in the document of the key economic and financial indicators, according to which the 2022 consolidated budget deficit will stand at -4.0%, while the 2023 one will stand at -2.9%.

Calculated using a traditional method,_^[7] the 2021 state budget deficit will be GEL 4.1bn (7.7% of GDP), of which GEL 2.5bn will be covered by taking a new loan and GEL 1.6bn – by using the budget remainder. The budget remainder of GEL 1.6bn is the amount of foreign finances received this year for mitigating the damage caused by the pandemic which the government is not spending fully this year. The 2020 budget deficit in a traditional sense is GEL 4.5bn (9% of GDP).

In 2021, the GoG will borrow up to GEL 5.3bn but, at the same time, will use GEL 2.8bn for servicing previous debt. As a result, the public debt will increase by GEL 2.5bn. The increase will only concern foreign debt. The government will not take any new domestic loans in 2021. Next year, in order to repay the “Euro-obligations” issued in 2008 in the amount of USD 500m, the government will issue new “Euro-obligations” in the amount of GEL 1,657m. According to the previous version of the 2021 draft budget, the government was not planning to issue new “Euro-obligations”, the debt was to be repaid with the money from the budget remainder.

By the end of 2021, the government’s debt will amount to GEL 32.1bn, which stands at 60.1% of estimated GDP. As of 31 October 2020, the debt of the GoG stands at GEL 28.6bn, which is 58% of GDP. According to the Law on Economic Freedom, the acceptable ceiling of public debt is 60% of GDP. Since the debt is higher than 60% of GDP, the government is under the obligation to present to the Parliament a plan of restoring the parameters determined by the law. According to the presented plan, the public debt will fall below 60% of GDP by 2022 and will stand at 58.6%.

Up to 80% of Georgia’s public debt is foreign debt. For this reason, if GEL depreciates, foreign debt calculated in GEL and its ratio to GDP (which is an indicator of the debt burden for the economy) will increase. Correspondingly, the depreciation of GEL is one of the important risk factors in terms of debt burden. Along with the depreciation of GEL, an increased budget deficit causes the debt to increase.

Data source: Ministry of Finance
* Estimated indicators are provided for 2020 and 2021

5. Agencies and programmes which will experience significant changes in their funding

According to the 2021 budget, compared to 2020, the Ministry of Regional Development and Infrastructure will enjoy the largest increase in funding – GEL 551m, caused by the increase in expenses for the construction of highways, improvement of the road infrastructure and restoration and rehabilitation of water supply infrastructure. GEL 853m is allocated for the construction of highways in 2021, which is GEL 234m more than the funding allocated to this end in 2020.

The budget of the Ministry of Education, Science, Culture and Sport is increased by GEL 264m, amounting to GEL 1.8bn. The increase mostly covers schools. The salary of senior, lead and mentor teachers of public schools increased by GEL 150 starting from 1 September 2020. In 2021, teachers will receive an increased salary during 12 months, which increases the expenses compared to 2020. In addition, the salary of teachers who have a certain rank will increase by GEL 100 starting from January 2021. Over GEL 1m in total will be allocated for school funding. The funding allocated for the development of sports will increase by GEL 38m, amounting to GEL 122.4m. This increase will bring the funding of sports back to the 2019 level.

The budget of the Ministry of Defence is increased by GEL 95m, amounting to GEL 900m, which is the largest annual amount allocated for defence since 2008.

The budget of the Ministry of Health is increased by GEL 48m. The pension-related expenses are increased the most – by GEL 370m. Starting from 1 January 2021, the pension of the pensioners aged under 70 years will increase by GEL 20 and amount to GEL 240, while for those aged 70 years or older, the pension will increase by GEL 25 and amount to 275.

The allocation of funds for the management of coronavirus-related diseases is increased by GEL 161m, amounting to GEL 400m, which includes the expenses related to the treatment of diseases as well as testing, vaccine procurement and measures to prevent the spread of the pandemic.

There is GEL 310m allocated for assistance to the population due to the deterioration of the situation caused by the coronavirus. This amount is GEL 470m less than what was spent for this purpose in 2020. In 2021, individuals who lose their jobs will receive GEL 200 per month for six months; the total of GEL 150m is allocated to this end. GEL 60m is allocated for covering the population’s utility costs. GEL 55m is allocated for paying additional assistance in the amount of GEL 100 to socially vulnerable families in the course of six months. GEL 15m is allocated for paying families with three or more children under the age of 16 an assistance of GEL 100 in the course of six months. Also, additional assistance in the amount of GEL 100 to be paid in the course of six months is allocated for children with disabilities and persons with pronounced disabilities, which will cost the budget GEL 27m.

The funding of the universal health coverage programme is cut by GEL 2m: there is GEL 802m allocated for it in 2020 and GEL 800m in 2021, however, as of 2 December 2020, GEL 882m has already been spent under the universal health coverage programme and its costs are expected to exceed GEL 900m by the end of the year. Initially, GEL 760m was allocated for universal health coverage in 2020 but, like in previous years, this amount proved to be insufficient.

The costs of the programme to rehabilitate and equip medical institutions are cut by GEL 55m.

The budget of the Ministry of Internal Affairs will increase by GEL 30m, amounting to GEL 790m. The increase is caused by hiring 82 additional policemen and increasing the salary of firefighters-rescuers, policemen and equal-status persons by GEL 125 starting from 1 July 2020. They will receive the increased salary for 12 months in 2021 (they are receiving it for six months in 2020), which increases the costs compared to 2020.

The funding is increased by GEL 23m for the Ministry of Justice and by GEL 18m for the Ministry of Foreign Affairs.

Only the budget of the Ministry of Economy and Sustainable Development will experience a significant cut in the amount of GEL 353m. The decrease is unequivocally linked to the reduction of the expenses related to the coronavirus. In the 2020 budget, there is GEL 330m allocated for the loan and guarantee facility, which is reduced to GEL 50m in the 2021 budget. The cut is logical since, as of 2 December 2020, only GEL 16.4m was spent under the loan and guarantee facility. No funds are allocated to support small, medium and family-run hotels next year, which reduces the costs by GEL 70m.

The Ministry of Economy will spend GEL 50m to rent and equip quarantine spaces to manage the coronavirus. GEL 45m is allocated to this end in this year’s budget.

Data source: Ministry of Finance

Similar to previous years, in 2021 too, there is an incorrect approach to programme budgeting, which is demonstrated by the fact that the expected outcomes and indicators of the programmes envisaged by the budget are once again provided in the annex to the budget and are not part of the text of the law on the 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 programmes part of the document containing the law, which will strengthen a goal-oriented budgetary policy, instead of the current approach, whereby the main goal of the budgetary policy is to fulfil plans and fully utilise the allocated funds.