On 14 November 2014, at the session of the Parliament of Georgia, Minister of Finance of Georgia, Nodar Khaduri, stated that the budget deficit would equal 3.7% of the GDP by the end of 2014 and that his Ministry was planning to reduce it to 3% next year.

FactCheck

took interest in this statement and verified its accuracy.

The budget deficit is the difference between the spending and the revenues of the state. The state takes loans to finance the budget deficit. In order to maintain solvency, it is important to keep the budget deficit at a certain level with regard to the country’s GDP. The Law of Georgia on Economic Freedom determines that the budget deficit must not exceed 3% of the GDP.

According to the Budget Code of Georgia, the budget deficit is determined based upon the condition of the overall balance[1].

A negative overall balance indicates a budget deficit whilst a positive balance shows a surplus. According to the 2014 State Budget Plan, the expected overall balance amounts to GEL 875 million whilst the nominal GDP equals GEL 29,352 million. Hence, according to the initial plan, the overall balance constituted 3% of the nominal GDP. In addition, the expected amount of the GDP decreased to GEL 29,176 million in 2014; however, the deficit plan has not been changed and it is around 3%.

As for the budget deficit,[2]

traditionally speaking it includes both the current operations and the spending on non-financial assets as well as the expenditure on the financial asset (deposits, bonds) operations and the income from these operations.  According to this method, the planned amount of the 2014 budget deficit is GEL 1,038 million which constitutes 3.6% of the GDP. In his statement, the Minister of Finance talked about the budget deficit calculated by this method. According to the 2015 State Budget Plan, the budget deficit amounts to GEL 1,191 million whilst the expected amount of the GDP equals GEL 31,860 million, setting the deficit at 3.7%.

Table 1: 2014-2015

State Budget Plans and Implementation of the First Three Quarters of 2014

2014

I Quarter

I-II Quarter

I-III Quarter

2015

 

Project

Plan

 Fact

Plan

Fact

Plan

Fact

Project

Overall Balance

874.7

320.3

-51.7

559.2

176.4

737.3

181.9

683.7

Change of Financial Assets

163.2

-140.3

208.6

-208.7

35.9

-65.7

414.3

507.1

Budget Deficit

1,037.9

180.0

156.9

350.5

212.3

671.6

596.2

1,190.8

Source: Ministry of Finance of Georgia

The implementation statistics of the 2014 State Budget can be found in the quarterly reports published by the Ministry of Finance of Georgia. According to the Budget Implementation Report, the budget deficit equalled GEL 596 million in the third quarter of 2014 instead of the initially planned GEL 672 million which is mainly due to the shortfall in spending (see Table 2). The actual spending equalled GEL 5,209 million in the first three quarters of 2014 which is GEL 340 million less than initially planned.

It should also be noted that the growth of the external debt is GEL 109 million less than originally planned whilst the growth of the domestic debt is higher than planned. Taking into account that the external debt is mainly used to fund targeted infrastructural projects we can assume that the implementation of these projects is slower than planned.

Table 2 reflects the plan and the implementation of the first three quarters of the 2014 State Budget. As the Table shows, the actual implementation of the budget is significantly less than initially planned.

According to the data of the State Treasury of Georgia, the budget deficit equals GEL 679 million in the first eleven months of 2014 whilst the 2014 State Budget Plan forecasts a total of GEL 1,038 million in budget deficit. Hence, to meet the plan, the state would have to increase the budget deficit by GEL 359 million in December which is not likely as well as dangerous. In order to increase the budget deficit to the planned level, the state would have to significantly increase spending in a very short period of time which would cause an influx of GEL in the economy. This would negatively affect the exchange rate of the national currency and increase the risks of inflation.

Table 2:

State Spending and Debt (2014 Plan and Implementation)

2014

Project

I Quarter

I-II Quarter

I-III Quarter

Project

Plan

Fact

Plan

Fact

Plan

Fact

Revenues

7,319

1,744.4

1,695.6

3,364.2

3,376.4

5,307.9

5,362.6

Spending

7,539.6

1,932.4

1,616.5

3,665.8

3,373.2

5,548.8

5,209

Change of Obligations

1,037.9

180

157

350.5

212.3

671.6

596.2

Growth of Obligations

1,636

322

292

641.3

493

1,119.2

1,023.1

Growth of External Debt

1,036

127

228

276.3

147

629.2

519.4

Growth of Domestic Debt

600

195

64

365

346

490

503.7

Source: Ministry of Finance of Georgia

Conclusion

The planned amount of the State Budget deficit amounts to GEL 1,038 million by the end of 2014 which is 3.6% of the GDP. According to the 11-month implementation data of the State Budget, the budget deficit equalled GEL 679 million which is GEL 359 million less than initially planned. Hence, in order to increase the budget deficit to the planned level, the state would have to significantly increase spending in a very short period of time which would negatively affect the exchange rate of the national currency and increase the risks of inflation. The 5 December 2014 statement of the President of the National Bank of Georgia should also be taken into account according to which, after a consultation with the government, there would be no deficit spending in December which would reduce the pressure on the inflation processes.

Hence, the 2014 State Budget deficit will not be implemented at the level of GEL 1,038 million. This is partly positive. However, the statement of the Minister of Finance that the deficit will constitute 3.7% of the GDP by the end of 2014 is incorrect. The deficit remains under 3.2%.

The planned deficit will increase to GEL 1,191 million in 2015 which is 3.7% of the planned GDP. Hence, the budget deficit will be increased in both nominal terms and with regard to the GDP as well.

FactCheck concludes that Nodar Khaduri’s statement: “The budget deficit will equal 3.7% of the GDP by the end of 2014. We are planning to reduce it to 3% next year,” is FALSE.


[1]

Overall Balance=Revenues - Spending - Change of Non-Financial Assets

[2]

Traditional Budget Deficit=Overall Balance - Change of Financial Assets


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