2019 Draft State Budget of Georgia: Analysis and Recommendations

According to the 2019 draft state budget, slower economic growth (4.5%) is expected for the next year.

The rule for local self-government budgetary funding will be changed. Instead of equalizing transfer and share of income tax revenues, municipalities will receive 19% of VAT from the state budget. Ultimately, the income of local self-government will increase. In addition, their funding will not go through the state budget anymore and it will solely depend on the economic growth of the country.

The Law on Economic Freedom will be significantly changed. The most unacceptable change of the draft state budget will be a removal of budget expenses to GDP ratio It means that law will not limit the growth of “Government Size” anymore, therefore, government’s involvement might increase and this happens in a reality when a new Prime Minister presented his small government program.

The amount of government debt will be restricted, which seems logical. The budget deficit will become more comprehensive, which, on the one hand, is good, but, on the other hand, it could simplify overcoming of budget deficit ceiling (3% of GDP).

Due to fiscal decentralization reform, the state budget will increase only by GEL 270 million. Pension expenses and capital expenditure will also significantly increase. The number of people employed in budgetary organizations will decrease by 1 513. However, 60 million more will be spent on the remuneration of the mentioned employees.

Expenses on healthcare and education will also increase. However, in both cases, program budgeting has certain problems and they are not focused on the increase of effectiveness of expenses.

The information about In addition, the budget of GPB will increase by GEL 6 million.number of employees of Georgian Public Broadcaster (GPB) and their salaries are absent in the budget.

The budget deficit is set to 2.7% of GDP. In order to cover the budget deficit, the Government of Georgia (GoG) will borrow GEL 1 226 million, out of which GEL 500 million will be a domestic debt.

The setting of budgetary programs remains problematic. Education programs and subprograms are worth mentioning in this regard. Low quality of education is a big problem of Georgia, but the school education program does not aim at improving the situation and there is not a single indicator for measuring the quality.

Expected outcomes and indicators of the budget are still given in the appendixes of the main text, which means that they are not a part of the text of the draft law on the state budget. It demonstrates the GoG’s improper approaches towards program budgeting.

Recommendations

The GoG should refrain from removing specific restrictive norms on budgetary expenditure from the Law on Economic Freedom. If not, this will worsen the fiscal reliability of the country.

It should be clarified in which cases the budget deficit can exceed 3% of GDP and this should be allowed only as an exception.

Due to slower GDP growth rate and unpredictability of national currency exchange rate, it would be better to plan a smaller budget deficit and fewer new debts.

Supervision over program budgeting should be improved in order to increase the efficiency of budget spending. The special attention should be paid to specific indicators for measuring the outcomes.

Expected outcomes and indicators of the budget, which are given in the appendixes, should become a part of the main text of the law on the state budget. (TI Georgia)