Reduced expenses on Armenia`s economic development to reduce budget  potential - Luys Foundation

ArmInfo. Reducing budget expenditures on the economic development of Armenia will further lead to a reduction in budgetary capacity with all possible negative  consequences. This is the conclusion reached by experts from the Luys  Foundation, who analyzed the advantages and disadvantages of the  country's draft state budget for 2025.

As noted in the foundation's report, the state budget of Armenia for  next year differs positively from the budgets of previous years. In  particular, the budget message presents macroeconomic forecasts for  the next 3 years, which makes it possible to get an idea of the  government's expectations regarding economic development. In  addition, the budget is based on projected economic growth, and not  on target growth, which increases the realism of its implementation.

The foundation's experts believe that, as in previous years, the  budget is based on a significant improvement in the ratio of taxes to  GDP (by about 0.7 percentage points), the implementation of which  will cause significant difficulties given the risks of shortfalls in  tax revenues by 0.3 percentage points.  Curiously, the tax-to-GDP  ratio has not improved at all in the first nine months of 2024. In  these circumstances, planning to increase tax revenues by 0.7  percentage points is at least risky.

The factors that ensured high rates of economic growth in the past  are gradually neutralizing, which will lead to a slowdown in growth.  According to government forecasts, economic growth is expected to be  5.8% in 2024 and 5.1% in 2025, which means that both the current and  next year will see a slowdown in GDP growth. At the same time,  economic growth this year is mainly supported by external and  temporary factors, such as re-export, high rates of construction  growth based on the income tax refund program for mortgage loans,  etc. These factors will no longer ensure growth next year, and the  export sector of the economy has suffered significantly in recent  years. All this creates risks of a more rapid slowdown in economic  growth, which will lead to a reduction in the already limited  influence of the government.

The government has planned to significantly increase the budget  deficit in 2025, which will also lead to an increase in the public  debt. The budget deficit will reach 5.5% of GDP, and then decrease to  3.0% in the medium term. Given such a significant deficit, the  government debt will increase significantly - from the expected 49.8%  at the end of 2025, reaching 54.3% in 2026 and 55.6% in 2027. At the  same time, the increase in the deficit will occur mainly due to an  increase in current expenditures, including interest payments on the  public debt, which threatens the formation of economic opportunities  necessary to service the debt in the coming years.

According to the state budget, both revenues and expenditures will  increase in 2025. Revenues are projected to grow by about 9.4%, while  expenditures are projected to grow by 11.9%. At the same time, the  growth rate of capital expenditures is projected to be higher -  14.9%, which is mainly due to the increase in capital expenditures in  the defense sector, while the growth in expenditures on economic  infrastructure is insignificant. The defense and internal security  sectors will become a priority in terms of spending public resources  in 2025. If the increase in defense spending can be explained by  current external challenges, then a significant increase in spending  on public order and security needs to be justified. Compared to the  planned amount, they will increase by about 24.1 billion drams, of  which 20.6 billion drams are only expenses on the police and national  security. If the economic growth rate slows down and continues in the  coming years, the expenditures aimed at economic development will be  reduced by approximately 36 billion drams or 13.5%. At the same time,  the expenditures include an amount of 5.7 billion drams intended for  the environmental patrol service. Such a strange approach to the  expenditure policy is naturally problematic, since the reduction of  expenditures aimed at economic development will further lead to a  reduction in budgetary capacity with all possible negative  consequences.

The day before, the National Assembly of Armenia approved the final  version of the draft state budget of the country for 2025. According  to the law, the revenue part of the state budget of Armenia next year  will be 2.837 trillion drams, the expenditure part - 3.441 trillion  drams, the deficit will be equal to 604 billion drams. At the same  time, the GDP growth rate is projected at 5.1%. It should be noted  that according to the preliminary version of the draft state budget  for 2025, under the conditions of ensuring GDP growth in the amount  of 5.6%, 3.5% GDP deflator and average inflation of 3.6%, the  revenues of the state budget of Armenia in 2025 were planned to  increase by 279.5 billion drams - to 2 trillion 873.1 billion drams  (about $ 7.4 billion), which is 11% higher than the expected figure  for the current year. State treasury expenditures were planned at the  level of 3 trillion 482.4 billion ($7.8 billion) or 31.5% of GDP. The  indicator is 13% higher than expectations for 2024 (30.4%), and 37%  higher than actual expenditures in 2023 (27.5%). Of the planned  expenditures for next year, 2 trillion 749.2 billion drams were  planned to be allocated for current expenditures (24.9% of GDP),  733.2 billion drams ($1.88 billion) or 6.6% of GDP - for expenses on  non-financial operations (capital investments), which is higher than  the planned figure for 2024 of 695 billion drams ($1.79 billion), and  expected by this project - 639.3 billion ($1.65 billion) - 6.3% of  GDP.