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The budget with many unknown variables
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At the beginning of September the Government web site www.moldova.md published the draft of the state budget of the Republic of Moldova for 2004. This is a good example of “glasnost”. Moreover, since this draft will be presented to the Parliament only in October and then legislators will discuss it, all of us who are now called “civil society” have the opportunity to take part in this process.
At first sight, the optimism of the 2004 budget is astounding. The budget is envisaged to entail no deficit. As before, it is remarkable for its “social orientation” — 38.7% of all expenditure will be directed to social assistance, healthcare, education, science and culture. Besides, 340 million MDL are envisaged for raising wages of budget workers. There is an intention to reduce the tax burden: income tax is planned to be cut down from 22% to 20%, social fund payments — from 29% to 27%. Agriculture is not forgotten either and 30 million MDL are allotted to form a fund to subsidise agricultural producers.
All this is to occur against the background of positive macroeconomic reference points of the next year — 5.0% GDP growth, low inflation of 4.5% and a national currency exchange rate of 15,2 MDL per US$1.
The question that begs itself, though, is where could one get these revenues from? Most of them (65.0%) — as before — will be provided by VAT and excises. Non-fiscal revenues are estimated at just 421,5 million MDL. Unlike in the budgets of European countries, land and real estate tax collections are quite paltry — only 4.2%. Moreover, the Ministry of Finance hopes to obtain donor grants (289 million MDL) and the proceeds from privatisation are forecast at 304 million MDL.
Upon examination of the draft one has an involuntary feeling of compassion for its authors, the Government and, in the end, the country’s overall life during the next year. It contains too many “unknown variables”. The main questionable issues are the following:
- Will the country enjoy external financial support? Who will give money and how much? How are old debts to be paid? There are 371,9 million MDL (24,5 million USD) foreseen for these goals, which is three times less than the impending payments;
- How effective for rendering the economic activity more dynamic will the tax rate reduction turn out? Will it not destabilise budget revenues?
- Will it be possible to reduce the shadow economy (according to the Department of Statistics, it accounts for no less than 1/3 of the GDP), especially in its most significant “strongholds” — alcohol, tobacco, fuel, medicines, real estate and export-import operations?
- What will be possible to privatise? “Moldtelecom”? Northern electric power distribution networks? Wine factories? “Zorile” or “Viorica”? It was not possible this year;
- Do we still have to increase expenditures for maintaining the state apparatus? Shouldn’t we still this year bring into effect Vasile Iovv’s plan to reorganise the Government structure and functions? After all, the apparatus of some branch ministries “devours” more money per year than enterprises “under their jurisdiction” bring into the state budget! What state apparatus quality are we talking about when only 14 out of the 32 new raions (second tier administrative entities) have presented draft raion budgets to the Ministry of Finance on term (1 August 2003)?
- How can wages be raised when wage arrears are already estimated at 176,5 million MDL (12,7 million USD) having grown over the last month by 23,9 million MDL? What are the sources of funding (384,8 million MDL) for social compensations to some categories of the population (invalids, war veterans, families with many children etc.)? This year most of the means for such purposes have been provided by the European Commission, USAID and other donors.
Everything indicates that there have been difficulties in designing the draft. Its social orientation is due to poverty. Other countries make up “budgets of development”, while we allot only 90 million MDL for investment (1.7% of expenditures!), 66 million MDL for scientific research (including 3,2 million MDL to the Academy of Sciences, which is less than the cost of maintaining some ministries).
The initial variant of the 2004 budget is an offspring of the Ministry of Finances. The participation of other state bodies, including the Ministry of Economy, has been minimal. It is interesting that the Ministry of Finances is found within the state budget structure in the honourable section 1 — “State Services of Special Destination”, together with the Parliament, Presidential apparatus and State Chancellery of the Government, while the Ministry of Economy, as a poor relation, follows all branch ministries in the final section 19 — “Other Economic Activity Related Services”.
In the meantime, one would expect the participation of the Ministry of Economy to be decisive during the elaboration of the philosophy and main allocations of the budget for 2004. For the sake of the cause, the Ministry of Finance that manages the technique of budget design and execution quite well does need a partner and an opponent.
To tell the truth, one should admit that it was the Ministry of Economy that placed itself in such a humiliating position. It was as early as spring this year when the Ministry (by 31 March, as co-ordinated with the IMF and WB) was to finish the work on the Economic Growth and Poverty Reduction Strategy for 2004–2006. In this case, the budget for 2004 would have been a tool to implement this strategy in the first year and would have been linked with the solution of key problems in this mid-term.
Since there is still no Economic Growth and Poverty Reduction Strategy (it is to be discussed with the civil society as promised in autumn) and the state budget for 2004 has been drafted separately, two paths of development are possible:
- The Parliament will discuss and approve the budget quickly (and formally), aware of so many “unknown variables” that it will inevitably have to introduce multiple amendments during execution of the budget in 2004 (as in 2003).
- Consideration of the budget will last till the end of the year and it will be already the 2004 Q1 when it will be approved. In this case, one would be able to discuss the realities and unclear positions of the budget with the autumn missions of the IMF, WB and other donors, and perhaps take more determined actions to launch the “second wave” of reforms in the country and the practical participation of the Republic of Moldova in the European integration processes.
Naturally, the second variant is more preferable. But its realisation requires the united creative work of the Parliament and Government, rather than the Ministry of Finances alone. One thing is clear: we are in for a very difficult financial year.
The paradox is that the country’s threatening budget problems intensify against the background of the sprightly GDP growth rate: +2.1% in 2000, +6.1% in 2001, +7.2% in 2002 and no less than +7–8% in the current year. The forecast for 2004 of both the Government (+5.0%) and external experts (+4–5%) is still optimistic. No one is talking about default yet. Perhaps, in fact, we will make it once more and we will experience the viability of the old slogan “There are no such fortresses the Bolsheviks cannot storm” again?