Increase in state budget revenues, progressive growth of expenditure, increase in deficit, increase in government debt: The planned budget for 2024 is the continuity of policies implemented in previous years.

A s every year, budget discussions took place in 2023 as well, as a result of which the RA Government approved the draft law of “The Republic of Armenia on the 2024 state budget”.

Taking into account the importance of fiscal policy in terms of state budget revenues, expenditures, reliable debt management, as well as ensuring the continuous development of the economy, the main directions and forecasts of fiscal policy implementation in the draft state budget were studied, presenting the key changes that are the main priorities of the Government’s long-term strategy for 2021-2026.

Progressive growth of expenditure relative to revenues

B ased on the main financial document of 2024, it is expected to ensure 7% economic growth as a result of the implementation of the fiscal policy, by significantly increasing the share of state investments (increasing the weight of capital expenditures in GDP to 6.3%) and increasing the efficiency of expenditure, as well as by maintaining debt stability. Moreover, fiscal policy is expected to have a neutral effect on full demand in the current year, while stimulating potential economic growth. At the same time, along with all this, we should also keep in mind the negative effects of the factors transferred from the external sector to the RA economy, existing uncertainties and challenges, unfavorable economic developments both in the region and around the world.

In recent years, state budget revenues have shown a dynamic growth rate, which was the basis for forecasting a high level of state budget revenues in 2024. Along with this, the current uncertainties, geopolitical challenges, and political tensions in the region related to the Russian-Ukrainian conflict remain, which, in turn, contain some fiscal risks, so in case of further developments events may deviate from expectations.

Based on the main financial document, the increase in revenues during last year was mainly due to a certain recovery of the economy and an increase in tax revenues as a result of changes in the tax legislation. It is predicted, that the share of the RA state budget revenues in GDP will be 25.9% in 2024, compared to 25.5% expected in 2023.  

Referring to the expanses planned by the state budget, we should note that the expenditure priorities of the state budget in 2024 will continue according to the logic of previous years. In 2024, state budget expenditures were predicted 3 trillion 206.5 bil. AMD, registering progressive growth compared to revenues. It is expected that 78.3% of the total volume of expenses or 2 trillion 511.2 bil. AMD will fall on the current account, and the remaining 21.7% or 695.3 bil. AMD will be spent on financial assets (capital expenses). Compared to the actual recorded indicator of the previous year, a decrease in the share of current expenses is planned due to an increase in the level of capital expenses.

According to the project, in the forecasts, great attention is paid to the macroeconomic and fiscal risks undermining the provision of the planned levels of state budget expenditures, which may lead to the emergence of additional financing requirements. Such are risks of reversal of significant inflow of people and capital from Russia to Armenia, slowing down of global economic growth, underperformance of capital expenditures, etc.

The 2024 budget envisages a significantly higher level of capital spending, amounting to 6.3% of GDP. However, taking into account the actual performances of previous years, there is a risk of underachievement of the programmed indicators, which may do harm to ensuring economic growth, as well as to the indicators of the fiscal framework.

Due to the increase in state budget expenditures, the deficit is expected to increase by 2% compared to last year. The deficit of the RA state budget was planned in the amount of 4.6% GDP, amounting to 482.9 bil. AMD.

Based on the project, the formation of the state budget in 2024 will continue with expenditures exceeding budget revenues, in which the attraction of funds for the financing of the deficit will be carried out from both internal and external sources, in the amount of 351.2 bil. AMD and 131.7 bil. AMD, respectively.

Based on the level of revenues of the RA state budget of 2024 predicted in the amount of 25.9% of the GDP and based on the possibilities of financing the deficit in the amount of 4.6% of the GDP, the RA Government has planned to ensure the expenses in the amount of 30.5% of the GDP in 2024. 

Are fiscal rules being followed?

W ithin the context of the implementation of the fiscal policy, the observance of the fiscal rules is important, so it is necessary to refer to the study and evaluation of the latter. The fiscal policy implemented by each country should be in line with the following “golden rules”:

• When the government debt/GDP ratio exceeds 40%, the capital expenditure of the state budget should not be less than the budget deficit.
• If the government debt/GDP ratio is in the range of 50-60%, the current primary expenditure growth rate is limited by the average GDP growth of the previous 7 years.
• When the government’s debt exceeds 60% of GDP, the current primary expenditure growth rate is limited by 0.5 percentage points less than the average GDP growth of the previous 7 years, current expenditure is limited by the amount of taxes and duties.
• Presented restrictions do not apply in exceptional cases defined by the Government’s decision, based on large-scale natural and man-made disasters, war operations, transition of the economy from peacetime to wartime, and negative economic developments caused by the circumstances of economic shock.  

Taking into account all the above-mentioned rules, the project envisages making the current year’s state budget in full compliance with the fiscal rules.

Maintenance of the “golden rules” of public finances will ensure the growth of the state assets leading to the net absorption of debt and to keep the real debt position of the country manageable, as well as the long-term fiscal risks.  

Similar to the previous year, the financing of the deficit of the state budget is planned to be carried out mostly at the expense of internal sources, the share of which, according to the project, will increase even more during 2024, but at the same time, an increase in the financing of the deficit at the expense of external sources is also planned.

Developments in 2023 – the basis for the 2024 budget

T he state budget of the current year was planned taking into account the economic developments recorded in Armenia in 2023, as well as global geopolitical changes and the current high level of uncertainties. Therefore, the summary study of fiscal indicators in RA during 2023 is also important.

In the conditions of high economic growth recorded in 2023, the impact of fiscal policy on total demand is estimated to be somewhat restraining. Compared to the state budget project, the Central Bank of Armenia expects a certain underperformance of budget expenditures, mainly in terms of capital expenditures, in the case of which a smaller deficit of the state budget will be formed compared to the planned one.

Adjusting the state budget expenditures and revenues from flows that have no impact on aggregate demand, fiscal policy is estimated to have a restraining effect of about 1.3 percent point last year compared to 2022. The latter is caused by restraining impulses of both expenditure and revenues.

Based on the 2024 budget and the Medium-Term Expenditure Plan for 2024-2026, the impact of fiscal policy on aggregate demand in the medium term is estimated to be neutral. This will be due to the expected increase in both current and capital expenditure during that period, as well as a gradual increase in the tax/GDP ratio as a result of the tax policy improvement.

In 2023, the RA state budget revenues continued to grow at a high rate, mainly due to sustained high economic growth and for some types of taxes increases in progressive tax bases for economic activity. In the same period, the growth of tax revenues is mainly caused by the growth of taxation bases.

In 2023, budget expenditures have increased due to increases in both current and capital expenditures. State budget expenditures amounted to 2 trillion. 547.6 bil. AMD, increasing by 25.9%. 

As a result of the above-mentioned developments, the state budget was actually in deficit. During 2023, a deficit of 245.3 bil. AMD was formed in the state budget, compared to 179.5 bil. AMD last year.

Based on the 2024 draft budget, as a result of the planned fiscal policy, the government debt/GDP ratio will be below 50% in 2023-2024, maintaining the fiscal space and policy flexibility to respond the possible shocks. Nevertheless, the debt burden will see some growth after the sharp decline in 2022 due to some increase in the government budget deficit and some slowdown in economic growth compared to the high base in 2022.

The analyses of the RA Government debt’s stability indicate that although it is stable, manageable and low-risk, it is sensitive to economic growth and exchange rate shocks.  

To sum up, recent events have had their impact on the fiscal framework, which is therefore reflected in the stages of planning and final approval of the current year’s budget. In particular, the expanses planned for support measures for the population forcibly displaced from Nagorno Karabakh will be financed at the expense of the resources intended for the interstate loan to Nagorno Karabakh.

At the same time, it should be taken into account that the fiscal forecasts are based on a number of assumptions, so they contain certain risks and uncertainties, in that the expectations may deviate from the actual recorded results.

In parallel, Armenia’s economy is significantly dependent on the global changes taking place in the world, which, in turn, can disrupt the provision of the specified indicators.

The state budget draft of the current year envisages a progressive increase in expenditures compared to revenues, and therefore, an even greater increase in the deficit. Compared to the previous year, significant increases in both budget expenditures and revenues are planned, which will have an impact in terms of ensuring the targeted economic growth.

Similar to last year, the budget deficit is planned to be financed mostly from internal sources. However, compared to last year, there is also a certain increase in terms of external sources, which proves the dependence of the RA state budget on external financing sources.