The Ministry of Finance has responded to those seeking "weak points" in next year's state budget

(11.11.19)  The press service of the Ministry of Finance made a statement regarding the article "20 Weak Points in the State Budget of 2020" recently published on the Internet resources of the Turan Information Agency.

The Ministry notes that, at first glance, this article lacks a clear and in-depth analysis of key budget parameters, and based on traditional, template and nonsensical ideas, attempts to shadow government's budgetary policies and budgetary efforts to improve progressive international standards and government’s activity in the direction of ensuring transparency, openness and greater public participation in budget discussions are evident.

“It is interesting that author, who wrote in the first paragraph of the article that the Ministry of Finance announces the draft state budget of Azerbaijan for 2020, makes certain accusations, claiming that the budget document is closed and thus denies himself afterwards. If the public is not aware of budget spending, where and how the information is provided?”

The ministry, responding to the claims of the Agency as classified as 20 parts, answered them individually:

1) Aren’t there budget negotiations in Azerbaijan?

Government-funded and financial aid organizations have prepared budget projects for the next year and the following three years (including sectoral strategic plans, current and ongoing expenditures on existing and ongoing projects, and new policy initiatives) and submitted their applications to the Ministry of Finance by March 1. In accordance with Article 11.12 of the Budget System Law, budget projects submitted for the next fiscal year are discussed and recorded with the participation of relevant budget organizations on all parameters. In addition, the draft budget is discussed at meetings of the Cabinet of Ministers of the Republic of Azerbaijan with the participation of government members. A comprehensive and detailed data collection on all budget parameters to ensure public access is available on the Ministry of Finance website. Therefore, it is not clear what is meant by "budget negotiations".

2) Is the role of parliament nominal in the budget process?

The budget of each country is drawn up, discussed and approved in accordance with its legislation.

According to Article 15 of the Law “On Budget System” in Azerbaijan, the discussion and approval of the draft state budget for the next budget year is carried out in accordance with the Internal Regulations of the Milli Majlis. In other words, any request from the Milli Majlis for a budget envelope submitted by the government is answered for its relevance, and all initiatives concerning the organization of the budget envelope discussion at any time, format or timeline are in parliament.

With also law, Milli Majlis discusses the draft budget by December 20 at three readings in all committees and plenary sessions and adopts the relevant law by voting. At the same time, it should be noted that the wider involvement of the press in all discussions, including both parliamentary committees and plenary sessions. The comments and suggestions made during the discussions are analyzed and, as a rule, some of them are taken into account in the budget project of the year under consideration or in the budget projects of subsequent years. To illustrate, proposals and recommendations to strengthen the defense capacity of the country, develop entrepreneurship, attract additional budgetary funds for, education, health, culture, increase salaries and other social payments, improve public support for the agrarian sector, the construction and major overhaul of social, road, gas, water, sewer and agricultural infrastructure, and the implementation of such activities were taken into account during the preparation of budget projects, which have been mentioned in recent years during budget discussions in the Parliament.

3) Why is the “result-based budget” not designed?

The organization of the result-based budgeting mechanism is a rather complex reform process, and it is advisable to implement it step by step, as has been the case in other countries that have been successful in this area. The full implementation of these reforms should be established by mechanisms such as strategic planning and forecasting of all budget organizations, prioritizing government development programs in various areas, conducting comprehensive cost-benefit analyzes, and determining the budget. Once the full-scale implementation of the Medium-Term Expenditure Framework has been fully implemented, step-by-step organization of result-based budgeting mechanism will be possible.

According to international experience, the transition to a result-based budget system takes approximately 8-11 years (Croatia - 8 years, Slovakia - 9 years, Latvia - 11 years, etc.). At the same time, it should be noted that in many countries the result-based budgeting mechanism has not yet been implemented or has been being implemented for many years.

4) Doesn’t the newly adopted financial regulation limit the expenditure of oil revenues?

In order to ensure macroeconomic stability, the budgetary regulations have been launched since last year to create a sustainable fiscal framework, limit budgetary policies, and support the transformation of natural assets into permanent financial assets.

In order to ensure budget stability and long-term sustainability of the public financial system, the upper limit of consolidated budget expenditures is determined in accordance with budgetary rules. Accordingly, in the process of defining the macro-fiscal framework for the state budget for 2020, consolidated budget expenditures, possible oil revenues, as well as higher limits of transfers from the State Oil Fund have been identified, first of all, taking into account the net financial assets of the country and then the projected non-oil revenues.

Medium-term forecasting of $ 55 per barrel on the basis of various multifactor simulations has been considered more appropriate in terms of ensuring the medium-term sustainability and contractility of the budget, which is our approach.

According to the Decree of the President of the Republic of Azerbaijan dated December 22, 2018, target indicators for the gross budget deficit of non-oil gross domestic product in 2020, 2021 and 2022 are set at 30.1, 29.1 and 28.1 percent, respectively. Given the defined fiscal framework and state budget expenditures by 2020, it is projected that the consolidated budget deficit in non-oil GDP will be 29.1% by 2020, which is lower than the target figure of 30.1%. If the Ministry of Economy's forecasts for non-oil GDP growth in the medium term are based, the ratio of non-oil base deficit to non-oil GDP may fall faster than targeting decline in the medium term.

The upper limit of budgetary expenditures related to budgetary rules is calculated on the basis of pessimistic assumptions on the conservative scenario, which is characterized by the determination of net financial assets below realistic expectations. Accordingly, the cost-effective oil revenues calculated on the basis of net financial assets are well below the real expectations, which is a feasible measure for the economical use of oil revenues. At the same time, the 3-percent limit, which is based on budgetary aggregate budget expenditures, aims at preventing budgetary procedural bias and, consequently, the economically feasible use of oil revenues.

5) Is price per barrel of oil in the budget based on optimistic scenario, is it not realistic?

The cost of 1 barrel of crude oil was calculated at the level of $ 55 when calculating state budget revenues. Given the trends in the global energy market, the forecasts given by international financial institutions are more optimistic. Thus, according to IMF forecasts, the average annual Brent oil price for 2020 is expected to be $ 57.94 per barrel and according to World Bank forecasts – $ 58.0 per barrel. At the same time, the US Energy Information Administration estimates for 2020 that the average Brent crude oil price will be $ 60.0.

As we have noted, based on various scenarios, it is more appropriate to forecast oil in the medium term at $ 55 per barrel, while the upper limit of the consolidated budget expenditures was calculated based on pessimistic assumptions on the conservative scenario in accordance with the budgetary rules. This approach is characterized by the fact that the projected net financial assets (in other words, the budget revenue forecast) are lower than the real expectations, so calling it unrealistic by writing it as an optimistic scenario is a manifestation of a biased and unprofessional approach.

At the same time, the state budget for next year is compiled in accordance with budgetary rules, which essentially support the implementation of contractual expenditure policy and significantly neutralize the impact of the change in world oil prices on the annual budget of the state budget. However, it is well known that no country can be fully insured against significant shocks in the global market.

6) Is the budget inadequate to the financial potential of the economy?

The non-oil sector's GDP is reported to have low budget revenues, while its share in total GDP is high. Such a comparison, by itself, is a very basic logic. Thus, the development of the non-oil sector is one of the main goals defined in the strategic roadmap. To this end, the tax and customs legislation has identified major discounts on agriculture, financial services, industrial and technology parks, and areas for investment promotion. While these areas are part of the GDP formation, they do not increase budget revenues as a result of the exemption. It should be noted that it would be more to take into account the factors that show the comparison of budget revenue per capita with other countries.

7) Does the budget dependency on oil revenues increase?

An analysis of the dynamics of non-oil budget revenues shows a steady increase in revenues from that sector. Thus, the share of non-oil sector revenues in the state budget for next year is projected to be 19.4% of GDP, which is 0.6 percentage points more than

the forecast for 2019. At the same time, revenues from that sector is predicted to increase by 1.1 billion manat or 12% compared to the current year, and 1.5 billion manat or 16.4% compared to 2018. Apparently, there is an increase in revenues from the non-oil sector, despite tax and customs privileges of more than 10 percent of GDP for the development of the non-oil sector.

8) The budget smells like oil. Of the 100 manat of Azerbaijan's projected budget for 2020, 56.10 manat will be formed by oil revenues and 43.90 manat by non-oil revenues. Of each 100 manat of the budget, the SOFAZ will collect 47 manat, the Ministry of Taxes –  32.60 manat, the State Customs Committee – 16.60 manat, and 3.50 manat will be collected due to fines and sanctions. As for budget expenditure, of each 100 manat, 60.20 manat will be directed to current expenditures, i.e. consumption, 29 manat to capital expenditures, i.e. development, and 6.80 manat to public debt service expenses.

The Ministry of Finance's expertise on the "smell" issue is much less than the olfaction ability (to detect organoleptic features) of critics.

It is well known that the high share of oil in budget revenues, as it is known, the oil and gas sector is one of the main traditional sectors of the Azerbaijani economy. At the same time, it should be noted that the agreement on the Azeri-Chirag-Guneshli oil fields has been revised and extended until 2050, while the Shah Deniz project has been in full force and other fields are underway. Undoubtedly, some of the revenues from these projects will be included in the consolidated budget in the coming years and will form an important part of the state budget.

As for the share of fines in the budget structure, the statement that 3.50 manat of 100 manat of each budget's revenue will be generated by fines and sanctions is nonsense. Thus, no sources of fines and sanctions are included in the sources of income specified in Article 2 of the Law “On State Budget of the Republic of Azerbaijan 2020”. Fines and sanctions on a number of organizations are attributed to extra-budgetary revenues, which is 1.1% of total revenues (AZN 270.0 million). This means that fiens and sanctions are only 1.1 percent of total budget revenues, or only 1.1 manat.

9) Are the costs of accumulating budget revenues increasing each year?

At present, effective measures are being taken to eliminate tax evasion by improving and enriching the technological database to eliminate subjectivity and minimizing the role of human factors without having to go through scrutiny. In the area of ​​tax collection, digitalization and the expansion of e-services remains a priority. In the following year, the expansion of e-services, the organization of control over import-export operations by tax and customs authorities, the installation of new generation cash registers and integration into the centralized system of tax authorities, the creation of access to fiscal services through mobile devices, the development of software for the return of a particular part require additional expenses.

In addition, allocation of additional 650 staff units in connection with the assignment of authority to tax authorities in the area of social insurance and collection of unemployment insurance since 2019, application of control equipment to accelerate the movement of goods and vehicles from the customs border crossing points, improving the quality of services provided to improve the efficiency and transparency of customs clearance, as well as salary increases in accordance with social sector reforms have certainly led to an increase in the costs of those bodies.

Taking into account the aforementioned factors, by 2020, expenses of tax authorities increased by 83.7 million manat compared to the current year. 21.6 million manat or 25.8% of this is salary payments, 60.0 million manat or 71.7% of this is the cost of building an office building to improve working conditions for employees.

10) Is there no consistent policy for budget transfers from SOFAZ?

As a logical continuation of the work done on the backdrop of a reduction in oil revenues, by 2020, the oil sector's share of state budget revenues is forecasted to be 56.1 percent, which is 3.7 percent lower than the corresponding figure for 2019. Reducing dependence on oil revenues involves increasing the share of non-oil revenues in budget revenues.

In addition, the current budgeting scheme will not become the driving force of the country's economy in the future, given the optimal choice between combining consumption and accumulation of natural resources, as well as the depletion and non-renewable resources of natural resources. This is fully in line with our economic strategy.

The application of this rule will also help to eliminate the dependence of costs on the conjuncture and to provide fiscal stability.

11) Will fines and sanctions increase next year?

It should be noted that the budget revenues from fines and sanctions are expected to be reduced by 2 times next year compared to the current year. According to the results of 9 months of the current year, the estimated amount of financial sanctions is $ 42.6 million, which is 154.6 million manat or 3 times less compared to the same period last year. Thus, reducing the number of tax inspections in accordance with tax and customs reforms, improving electronic services to improve accounting, launching new generation cash registers, eliminating informal employment, enhancing control over import-export operations by third parties have a positive impact on the reduction of revenues due to fines and sanctions.

12) Is the region's contribution to budget revenues still low?

By 2020, revenues from other cities and regions, excluding Baku, will be 840.6 million manat, which is 187.0 million manat or 28.6% more compared to the approved state budget 2019. It should be noted that the increase in local revenues exceeds the country's overall growth rate more than three times.

13) Are there subsidies from the budget to the regions?

All of this is completely nonsense and lie. Thus, while in 2016, 6 districts and cities will cover their current expenses at their own expense, in the next year, 39 districts and cities will cover their own expenses. At the same time, allocation of funds from the state budget for development of regions will be continued for the creation and reconstruction of social and physical infrastructure in the regions and cities.

14) Does the current budget growth rate surpass the nominal growth rate of non-oil GDP?

Increase in the share of current expenditures in the structure of the state budget 2020 is due to a number of objective reasons.

First of all, it should be noted that the state budget since 2020 has been prepared in accordance with a unified budget classification that meets the new international standards. According to this classification, the structure of budget expenditures at the level of functional and economic classification has changed significantly, and a number of expenditure related to capital expenditure has been given current expenditure status in accordance with international standards.

Thus, expenditures for       the construction, reconstruction and overhaul of socio-cultural and domestic, administrative, production and construction projects, buildings and structures, roads, including light, gas, water and other utilities, landscaping, communications, internet etc. were directly attributed to current expenditures, which naturally led to an increase in current budget expenditures.

Secondly, there is a significant increase in social spending in 2019.

In March and September of 2019, the normal implementation of a two-stage social package, approved by the President of the Republic of Azerbaijan in connection with an increase in salaries, pensions, social benefits, pensions and other social payments, began. One of the important steps in this area is to increase the minimum wage by almost twice, from 130 manat to 250 manat, and to increase the minimum pensions from 116 manat to 200 manat.

The increases also include salaries for employees working in state-financed organizations (up to 50% on average in 2019, with different sector growth rates applied).

At the same time, it is planned to increase the size of the standard of living and the cost of living in the country from next year.

As a result, the significant financial capacity of the increases in 2019 and their impact by 2020 are taken into account in the current budget expenditures.

All of this has created a serious basis for the growth of current expenses.

15) Is budget allocation unfair?

This is another nonsense and slander. One of the key features of the state budget 2020 is the significant increase in the share of social expenditure in total budget expenditures. As it is known, in 2019, a number of important decisions aimed at further strengthening the social protection of the population have led to a significant increase in the social benefits and pensions of the low-income population, the minimum pension, the salaries of the employees who receive state-financed and financial assistance. As a result of these socially-oriented decisions, the state budget for 2020 has been created with appropriate financial security and changes in the budget structure have been made.

In addition, the new stage of the application of compulsory health insurance and the increase in the number of students enrolled in higher education on the basis of state orders are reflected in the social expenditures.

The share of social expenditures in the budget expenditures (consolidated budget) will be 40.7%, which is 9.9% or 2 billion 664.2 million manat more than in 2019. The budget provides for significant increases in each of the other areas (excluding capital expenditures).

Now the question is, is it unfair to spend 40.7% of budget expenditures on social spending? Or what is the “criterion of justice” for those who criticize us?

16) Are half of budget expenditures not disclosed?

The statements “About half of budget expenditures are not transparent”, “46.5% of budget expenditures are closed” do not reflect the truth at all.

Thus, the budget envelope submitted to the Milli Majlis of the Republic of Azerbaijan contains comparative information covering all parameters of the single budget classification (at the level of income classification, functional, economic and administrative classification of expenditures) for each expenditure direction.

At the same time, it should be noted that the budget envelope includes the main directions of the state investment program for 2020-2023.

As a rule, investment costs are analyzed before the end of the current budget year (mainly in December), after the completion of completed projects, transition projects and projects deemed necessary to begin next year, the distribution of investment costs for the next year is approved by the relevant regulatory act.

Also, detailed information on the structure and main directions of incomes and expenditures can be found in the Draft Law of the Republic of Azerbaijan "On State Budget of the Republic of Azerbaijan 2020", the documents of "Presentation of draft state and consolidated budgets of the Republic of Azerbaijan" and other documents which are available on the Ministry of Finance website.

In addition, it should be noted that the relevant decree on the implementation of the State Budget Law for each year is approved and made available to the public by the functional and administrative classification (for each organization) of state budget expenditures.

Press freedom is restored in the country. Any legal or physical person has the access and the right to obtain other information related to the budget, except for the state secret, from the Ministry of Finance, the Ministry of Economy and the Milli Majlis.

Finally, it is worth repeating the above question: If the public is not aware of budget spending, where and how did this information come from?

17) Will next year's budget create inflation?

First and foremost, the main factor in inflation is the growth of the money supply, which is proportional to the supply of goods.

Increasing social expenditure in the next year will in theory increase the risk of inflation. This approach is reflected in the government's macroeconomic forecast for next year. Despite inflation of 2.4% this year, inflation is projected at 4.6% next year.

However, the balanced fiscal and monetary policies implemented in the country, including the use of budgetary rules, the efficient management of the money supply and the stability of the purchasing power of the national currency, are aimed at creating anti-inflation policies and maintaining inflation at a manageable level. Experience of the current year, especially with no significant increase in inflation against the backdrop of rising wages, pensions and benefits, gives us confidence that countermeasures in this area will be effective.

18) Will the closed budget increase the amount of corruption?

Putting a “closed” stamp on the budget is another nonsensical attempt. Thus, a budget envelope containing 1880 pages of comprehensive and detailed information was presented by the government to the Milli Majlis for discussion. Earlier, on September 13, the Ministry of Finance issued a "Disclosure on Preliminary Indicators of State and Consolidated Budgets" ("Preliminary Budget Statement").

Subsequently, “Presentation of projects for state and consolidated budgets for 2020” and parameters, as well as “Macroeconomic forecast for 2020 and next three years”, “Budget indicators for 2020”, “State budget act for 2020”, “Indicators of functional, economic and administrative classifications of state budget expenditures for 2018-2020”, “Medium-term period for the next fiscal year and total budget taxes and non-tax income for the preceding 2 years, as well as indicators for sources of access for both categories”, "On budget transfers for 2020", "Subsidies for state companies and enterprises in the state budget of 2020", “Impact and explanation of new policy initiatives for budget expenditures and revenue for the next budget year”, “A written explanation of policies to support the poor”, "The purpose of the tax exemptions, the beneficiaries and their breakdown by sectors, the income loss created by these concessions, and the assumptions made in calculating them", “Information on state budget programs for 2018-2020 and the next three years and measures for this”, “Factual indicators for the past 2 years, 2020 and next three years, ”Composition of total debt indebtedness at the end of next year (expected) and past 2 years”, “Commitments from last year for next fiscal year”, “Grants from financial and non-financial donors”, “Proposed amendments to the tax legislation of the Republic of Azerbaijan in the state budget envelope of 2020 and its explanation”, "On the budget of the authority (authority) to implement the social security and defense executive body 2020", "On the unemployment insurance fund budget 2020", "Indicators of the State Oil Fund's budget for 2020” and other documents have been posted on the website of the Ministry of Finance and made available to the public. Thus, despite the fact that the aforementioned sufficiently detailed and comprehensive information is available to the public, it is an obvious prejudice to call that the budget is closed and that no budget spending is disclosed. The budget parameters are open, transparent and clear!

19) Is the budget for next year not insured against external shocks and excluded from external risks?

The economy of any country is not fully insured from external shocks. The Government of Azerbaijan recognizes the risks of budget revenues and expenditures, including the risks of external origin, and it has been explicitly stated in the "Presentation of state and consolidated budget projects 2020". The most important thing is government’s having responses to these risks and effective implementation of these responses.

20) Will the budget deficit exceed crisis level next year?

The term "crisis level of budget deficit" is probably the invention of the Turan agency. There is no universal level of deficit, that is, no recommended level for all countries in the world. The larger the gap, the harder it is to provide sources for its closure. State budget deficit is predicted to be 2779.2 million manat of which ratio to GDP is 3.3%. When the 3 percent threshold was established in the Eurozone, it was defined in the Maastricht Agreement for developed European countries. It is important to remember that the adoption of such a restriction is essential for countries entering a single customs and monetary space. According to the leading experts in this field, including experts of the International Monetary Fund, this criterion is quite rigid for developing countries (including Azerbaijan).

It should be noted that increasing the budget deficit and the use of more debt instruments for its financing can pose threats to medium and long term budget sustainability as well as macroeconomic stability. As far as Azerbaijan is concerned, it will be used as a single treasury to finance the state budget deficit for the next year, in addition to the accumulated state budget reserves from previous years, including additional tax and customs revenues for the current year. 60% of the budget deficit will be covered by the aforementioned sources. On the other hand, in our opinion, the level of review budget deficit is more important for Azerbaijan.