This paper presents a brief evaluation and recommendations prepared by Transparency International Georgia concerning the draft law on the 2023 State Budget [1] 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

• The total expenses (budget Expenditures) of the 2023 state budget will be GEL 22.2 billion, which is GEL 1.5 billion (7.5%) more than the same figure for 2022.
• 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 increases by GEL 561 million and becomes GEL 6.8 billion, the budget of the Ministry of Education and Science increases by GEL 294 million and becomes GEL 2 billion, the budget of the Ministry of Defense increases by GEL 178 million and becomes GEL 1.3 billion.
• The budget of two ministries will be reduced: that of the Ministry of Economy and Sustainable Development - by GEL 279 million and the Ministry of Environment Protection and Agriculture - by GEL 55 million. The decrease in the budget of the Ministry of Economy and Sustainable Development is caused by the reduction in the costs of the infrastructure development of ski resorts.
• The financing of the State Security Service will increase by GEL 29.3 million and become GEL 180 million. The main reason for the growth is the increase in salaries.
• Salaries of public sector employees will increase by at least 10%. Among them, the salaries of police officers and soldiers will increase by 20%. Public school teachers' monthly salaries will increase by GEL 100. The growth in salaries leads to an increase in the annual amount allocated for the remuneration budget line by GEL 378 million.
• From January 1, 2023, the monthly pension of pensioners under the age of 70 will increase by GEL 35 and will become GEL 295, and the pension of pensioners aged 70 and over will increase by GEL 65 and become GEL 365. The increase in pensions leads to the growth in budget expenses by GEL 494 million.
• Capital expenses will be reduced by GEL 276 million and amount to GEL 4.9 billion. The decrease is caused by the reduction of grants allocated to local governments. However, due to increased funding from local budgets, overall capital expenses will remain at the level of 2022.
• In some cases, the proper preparation of budget programs remains a problem. Among the high-cost agencies, the existing educational programs and sub-programs are particularly noteworthy. Although the low quality of education is one of the important problems of Georgia, the goal of the school financing sub-program is not to raise the quality of education, and it is not accompanied by relevant indicators.
• In 2023, the GoG will take a debt of up to GEL 3.6 billion, but at the same time, it will pay back the previously taken debt of GEL 1.2 billion. Out of the new debt of GEL 3.6 billion, GEL 1.4 billion will be domestic debt, and GEL 2.2 billion foreign debt.
• At the end of 2023, the government debt will reach GEL 31 billion, which will be 39% of the projected GDP. As of August 31, 2022, the government debt to GDP ratio is approximately 41%.
• In 2023, the Georgian State Budget Receipts will amount to GEL 21.3 billion, which exceeds the 2022 budget receipts by GEL 1.5 billion (7.3%). Such an increase is caused by the growth of tax revenues by GEL 1.5 billion.
• Compared to 2022, in 2023 the receivable Grants will decrease by GEL 63 million and amount to GEL 280 million. The largest decrease is in grants allocated by the European Union (EU). Compared to 2022, in 2023 the GoG will receive GEL 83 million fewer grants from the EU, and the total amount received from the EU will be GEL 145 million.
• It is planned to get GEL 200 million from privatization, which is GEL 100 million less than the plan for 2022.
• The deficit of the consolidated budget will be GEL 2.3 billion (2.9% of GDP). In the 2022 budget, this indicator is 3.1%. Although the budget deficit in 2023 is within the legal limits, it is still at a high level.
• Due to the domestic debt that was taken in recent years at high interest (up to 10%), the cost of servicing the government debt will increase by GEL 400 million. In 2023, the cost of repaying the loan interest will be GEL 1,155 million, which is quite a heavy burden for the budget. For example, debt principal and interest service (a total of GEL 2.4 billion) exceeds the budgetary funding allocated for education and is almost 2 times higher than defense expenses.
• According to the draft budget, the economy of Georgia will grow by 8.5% in 2022, and by 5% in 2023. Since the economy grew by 10.3% in January-August of this year, keeping the annual growth rate up to 8.5% seems realistic. Achieving 5% economic growth next year depends significantly on the course of the Russia-Ukraine war.
• The tentative US Dollar to the GEL exchange rate used for 2023 is 2.85. The expected annual inflation rate is 3.5%.

Recommendations

• The budget deficit is decreasing and returning to the limits allowed by the law, which is a good trend. However, it is still high and before the budget law is approved, the government should try to further reduce it. 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;
• Along with the reduction of the budget deficit, the GoG should reduce taking of high-interest domestic debt, the servicing of which significantly increases budget costs;
• 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, it is necessary to tighten the control over program budgeting. Special attention should be paid to the proper setting of the objectives of the programs and sub-programs and the selection of the 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 2023 State Budget of Georgia, the GoG forecasts an 8.5% economic growth for 2022. Since the economy grew by 10.3% in January-August, maintaining the annual growth rate of 8.5% seems realistic. The high economic growth recorded this year is due to the complete lifting of restrictions on economic activity stemming from the pandemic, the significant recovery of tourism, and increased migration and remittances from Russia to Georgia followed by the Russia-Ukraine war.

By 2023, the GoG expects a 5% growth of the economy, but how much the economy will actually grow in 2023 is very difficult to predict at this stage, because it depends significantly on the course of the Russia-Ukraine war and on how long the increased cash flows from Russia will last. Therefore, the 5% growth forecast can be considered a necessary benchmark for budget planning.

The tentative US Dollar to the GEL[1] exchange rate used for 2023 is 2.85. The expected annual inflation rate is 3.5%.

2.State Budget Receipts^[2]

In 2023, the Georgian State Budget Receipts will amount to GEL 21.3 billion, which exceeds the 2022 budget receipts by GEL 1.5 billion (7.3%).

The biggest line of the Receipts – Revenues – will amount to GEL 17.2 billion in 2023, which is GEL 1.4 billion more than the estimated revenues for 2022.

The Revenues include Tax Revenues, Grants, and Other Revenues. An increase in total revenues is conditioned by a GEL 1.5 billion increase in Tax Revenues. These include an expected GEL 600 million increase in the amount received from VAT^[3], a GEL 516 million increase from Income Tax, and a GEL 116 million increase from Profit Tax. The planning of GEL 1.5 billion more tax revenues in the 2023 budget is due to economic growth and inflation. In total, Tax Revenues of up to GEL 16 billion should be included in the state budget.

The receivable Grants will decrease by GEL 63 million and amount to GEL 280 million. Grants received from international organizations and governments of other states will decrease by GEL 73 million, while grants received from LEPLs[4] and N(N)LEs[5] of the GoG will increase by GEL 10 million. ^[6] The largest decrease will be in current grants allocated by the EU. Compared to 2022, in 2023 the GoG will receive GEL 83 million fewer grants from the EU, and the total amount will be GEL 145 million. In total, out of the GEL 280 million grants to be received in 2023, GEL 180 million will come from the EU and its member states, and GEL 100 million will be the grants received from the LEPLs and N(N)LEs.

In 2023, the Other Revenues budget line will increase by GEL 15 million, which is due to receiving more income from penalties.

It is planned to receive GEL 200 million from privatization (Disposal of Non-financial Assets), which is GEL 100 million less than was planned for 2022. It should also be noted that GEL 132 million was mobilized in the budget as a result of privatization in January-August of this year, while the annual plan is GEL 300 million.

The Disposal of Financial Assets, which implies repayment of previously issued loans, will bring GEL 280 million to the budget, which is GEL 130 million more than the indicator planned for 2022.

Source of data: the Ministry of Finance of Georgia

3.Budget Expenditures^[7]

According to the draft State Budget, the Expenditures in 2023 will amount to GEL 22.2 billion, which is GEL 1.5 billion (7.5%) more than the budget expenditures in 2022.

The largest line of expenditures – Expenses – will increase by GEL 856 million. This growth is due to the increase in Administrative^[8] Expenses (by GEL 675 million) and Social Security Expenses (by GEL 307 million).

The Remuneration expenses will increase by GEL 378 million and amount to GEL 2.2 billion in total, which is 21% more than the figure for 2022. Such high growth is caused by the 10% increase in the salaries of employees of budgetary organizations. For example, the salaries of policemen and soldiers will increase by 20%, and the monthly salary of public school teachers - by GEL 100. The amount allocated for remuneration in the Ministry of Defense will increase by GEL 115 million, and in the Ministry of Internal Affairs - by GEL 116 million.

The amendment is to be made to the Law on Remuneration in Public Institutions, according to which, until 2026, the official salary in the public sector must increase annually by at least half of the percentage by which the average salary of employees in the private sector will increase in the last 4 quarters. According to the Statistical Service of Georgia, the average salary in the public sector is 25% lower than the average salary in the private sector.

The expenses on purchasing goods and services will increase by GEL 298 million (by 18%), and amount to GEL 2 billion. The increase is largely caused by high inflation as the purchase of goods and services by the state has become more expensive.

The expenses on servicing the government debt, i.e. repaying interest on loans, will significantly increase. In 2022, the debt service costs are planned at GEL 755 million, and in 2023 it will be GEL 400 million more – GEL 1,155 million. Such an increase is caused by taking more expensive domestic debt (with an interest rate of up to 10%) in recent years.

The largest amount – GEL 6.4 billion will be allocated to social expenses, which include pensions, health care, and social assistance costs. Compared to 2022, this budget item will increase by GEL 307 million (by 5%).

After social expenses, the largest amount – GEL 4.9 billion will be allocated to capital expenses. This expense will be GEL 276 million (5.3%) less than the same figure for 2022. Capital expenses of GEL 4.9 billion include capital transfers of GEL 770 million allocated to local governments. This amount is less by GEL 191 million than the figure for the previous year. 27.4% of capital expenses will be funded by donors.

The Expenditures also include the repayment of the principal of the state debt, which will be GEL 1.2 billion in 2023. For comparison, in 2022, the state debt of GEL 1.1 billion will be repaid. Servicing the government debt is quite a heavy burden for the state budget. For example, debt principal and interest service (a total of GEL 2.4 billion) exceeds the budgetary funding allocated for education and is almost 2 times higher than defense costs.

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 2023 state budget, compared to 2022, the financing of the Ministry of Internally Displaced Persons From Occupied Territories, Labor, Health and Social Affairs will increase most - by GEL 561 million and its budget will reach GEL 6.8 billion. In particular, pension expenses will increase by GEL 494 million and will reach GEL 3.4 billion. From January 1, 2023, the monthly pension of pensioners under the age of 70 will increase by GEL 35 and will become GEL 295, and the pension of pensioners aged 70 and over will increase by GEL 65 and will become GEL 365. In addition, the funding of the cumulative pension scheme by the state increases by GEL 50 million, and it will reach GEL 310 million. The amount allocated for social assistance to target groups of the population will increase by GEL 188 million. This is due to the increase in the assistance of socially vulnerable children from GEL 100 to 150 starting from July 1, 2022, and the increase in the number of people receiving subsistence allowance in the last year. After September 2021, the number of people receiving subsistence allowance increased by 32,677 persons and in September 2022 it amounted to 660,833. The financing of the program for the resettlement of internally displaced persons and the creation of living conditions will increase by GEL 166 million.

The Ministry of Internally Displaced Persons From Occupied Territories, Labor, Health and Social Affairs will reduce funding allocated for the management of COVID-19 (the treatment of infected persons) by GEL 425 million. In 2023, GEL 120 million will be allocated in this direction. For comparison, in 2021, up to GEL 1.2 billion was spent for this purpose.

The budget of the Ministry of Education and Science will increase by GEL 294 million and it will equal GEL 2 billion. The increase is mainly caused by higher funding of schools. Public school teachers' salaries will be increased by GEL 100 from January 2023. Funding for infrastructure development of schools will increase by GEL 95 million.

The budget of the Ministry of Defense will increase by GEL 178 million and it will be GEL 1.3 billion. The increase in the budget of the Ministry is caused by the 20% increase in the salaries of soldiers and the additional GEL 53 million allocated for logistical support.

The budget of the Ministry of Internal Affairs will increase by GEL 107 million and it will exceed GEL 1 billion. This increase is mainly caused by a 20% growth in the salaries of police officers.

The budget of the Ministry of Regional Development and Infrastructure will increase by only GEL 1 million, although there will be significant changes in its programs. The financing of the regional and municipal infrastructure rehabilitation program will decrease by GEL 184 million, while the financing of the water supply infrastructure restoration-rehabilitation program will increase by GEL 75 million. The amount allocated for the construction of high-speed highways will increase by GEL 45 million.

In the draft 2023 State Budget, money is no longer provided for the pilot program of integrated development of regions, for which GEL 170 million has been allocated this year.

The budget of the Ministry of Justice will increase by GEL 49 million, the State Security Service - by GEL 29.3 million, and the general courts - by GEL 11 million. The main reason for the growth is the increase in salaries.

The funding of Georgian Public Broadcaster will increase by GEL 19 million and it will equal GEL 101 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. Therefore, based on the 2022 GDP, in 2023 the broadcaster should receive at least GEL 101 million from the budget.

The budget of two ministries will decrease the most: the Ministry of Economy and Sustainable Development - by GEL 279 million and the Ministry of Environment Protection and Agriculture - by GEL 54.6 million.

The reduction of the budget of the Ministry of Economy and Sustainable Development is caused by GEL 349 million less financing of the state property management program. In turn, the mentioned decrease is caused by the reduction in the costs of the infrastructure development of ski resorts.

The decrease in the budget of the Ministry of Environment and Agriculture is mainly caused by the reduction in the financing of two programs: more specifically, GEL 40 million less will be spent on the state program for the promotion of agricultural land owners, and GEL 30 million less - on the state program of co-financing of agricultural mechanization. At the same time, the amount allocated for concessional agro credits will increase by GEL 24 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 and 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 main 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. ^[9] 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 101 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 2023, the total negative budget balance^[10] will amount to GEL 2 billion, while in 2022, it is estimated at GEL 2.3 billion. The total negative budget balance to GDP ratio for 2023 is planned at 2.5%. This indicator for 2022 is 3.1%.

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^[11] rather than the state budget deficit. The total negative budget balance in 2023 will be GEL 2.3 billion, which stands at 2.9% of the projected GDP.

Although the budget deficit is within the legal limits, it is still at a high level and the government should reduce it more. Reducing 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 2023, the GoG will borrow GEL 3.6 billion but will, at the same time, repay GEL 1.2 billion of previous debt. As a result, the amount of public debt will increase by GEL 2.4 billion. Of the newly borrowed GEL 3.6 billion, domestic loans make up GEL 1.4 billion, while GEL 2.2 billion is foreign debt. GEL 300 million of the new external loans are budget support, while GEL 1.9 billion are long-term investment loans.

By the end of 2023, Georgia’s government debt will amount to GEL 31 billion, which will be 38.9% of the estimated GDP. As of 31 August 2022, Georgia’s government debt is GEL 27.6 billion, which stands at approximately 41% of GDP. For information, at the end of 2021, the government debt-to-GDP ratio was 49.5%. In the current year, the significant decrease in the debt-to-GDP ratio (by 8.5% points) was caused by the 20% increase in the nominal GDP in January-August and the appreciation of the GEL. As 76% of the government debt is in foreign currency, the appreciation of the GEL exchange rate reduces the debt expressed in GEL.

Source of data: the Ministry of Finance of Georgia

*For 2022 and 2023 projected figures are given