Sergei Gulyaev: State budget and its distribution in Kazakhstan
“If we treated the issues of budget planning with more understanding and attention on the ground, understood our responsibility for budget revenues from local sources available, diversified our local economy, it would not be so painful today, when we have to face the problems of global proportions”, said Sergei Gulyaev, CEO of PF “Decenta “(Almaty, Kazakhstan), in an article written exclusively for CABAR.asia.
The budget, in terms of ordinary citizens’ interest in it, in the language of marketing, is a topic subject to “seasonal fluctuations”. Normally, the interest in this topic arises at the end of the financial year, when MPs begin discussing the submitted draft budget for the next financial period. Then, after the approval, the interest in the budget is gradually fading. Another surge of interest may be associated with the adjustment or clarification of budget, or with some budget scandals. And even in these cases, who is interested in the budget?
As a rule, these people are journalists, MPs and government officials themselves, a small number of NGOs. Perhaps, there are not any other interested parties.
But, in fact, we citizens must be the most interested stakeholders in the budget process. Are we interested in reality?
If there is no any specific event, the situation with the budget process and the interest in it are not changed. Traditionally, citizens do not pay any particular attention to the development of budget. There is a certain interest in the fall, when discussion begins around the draft budget and its subsequent approval, and even this interest is there only thanks to the media, which begin to publish more information about it. That is, in this case, we citizens are reactive.
The reporting meetings with the akims, which take place at the beginning of the year, and which deal with the execution of the budget for the previous year, are attended by quite a small amount of people. Therefore, the budget process, unfortunately, is not the “hottest” massive and fascinating topic.
However, a few years ago, the situation changed. This is because the stability, predictability and other attributes characteristic of budget planning in the pre-crisis period has gradually come to naught. During the entire 2015, all issues related to the execution of the budget, i.e. how to spend money, and to planning – what and how to spend in the future, were often on the front pages of newspapers. State officials responsible for the budget, MPs, independent analysts, analytical agencies – all these players were in some confusion about the current situation with the budget. The weakening of the national currency, the unpredictable exchange rate of the dollar, low oil prices are only the main factors that disrupted the process that had been shaped for years. Indeed, during only four months – from August to December 2015, the exchange rate of dollar significantly and rapidly changed several times. For this very reason, the Government and Parliament had long reflected on what rate to use in calculating the next year’s budget, which had been repeatedly published and commented in the media. They decided to be based on 300 tenge for a dollar. But, as of December 15, 2015, the dollar was worth more than 330 tenge. A barrel of oil cost less than $ 40, although the budget was based on a price of 50 dollars per barrel. Given the high cost of our oil, 50 dollars per barrel is already not the best forecast. The information about significant difficulties with the execution of the budget in 2015 also causes anxiety. Simply put, the budget has about 270 bln. tenge missing.
Of course, all these are serious objective reasons that play perhaps a key role in the fact that planning of the budget has become much more difficult. At the same time, we are aware of the possibility of such a scenario, all of us – heads of the state bodies of high rank, analysts, international organizations and agencies, NGOs and citizens – have warned each other about the harmfulness and inadmissibility of dependence of our economy on the sale of raw materials. Of course, the government has made efforts for the development of other sectors of the economy, but obviously we did not enough have time to do this.
However, even in the current situation, the World Bank considers one of the possibilities to exit from the current crisis is the diversification of the economy. Cyril Muller, Vice-President of the World Bank for Europe and Central Asia, told about this in the report “Low commodity prices and weak currencies”: “Today, diversification of the economy may be much more successful than in the years of boom oil prices. It involves the creation of new jobs in the tradable sectors, which produce non-oil products and also export to new markets. In forming the new economic approaches, it is important to take into account the new realities and take advantage of these opportunities, which requires flexible exchange rates to compensate for the negative effects. Equally important is the simplification of the process of investing in new industries”.
However, this publication is not intended to predict future developments in world markets, the price of oil and exchange rates. It is rather an attempt to analyze how the budget process in Kazakhstan is taking place, and what the participation of the citizens is in this process, what they are interested in, and what impact they have on it.
Kazakhstan’s budget is formed based on the so-called “cascade” principle, when first the central government is approved, then local budgets – of the regions and cities of national significance, and then of the cities and districts. In practice, this means that the regions are waiting for the approval of the national budget, and only then they can adopt their budgets for the coming period, i.e. no earlier than December of the current year.
However, at the mundane level in our society, one can often hear people compare the standard of living abroad, for example, in European countries, and in our country. People often cite the example of Germany and France, which have a very high level of wages and serious social protection measures for citizens. At the same time, few people consciously ask themselves, what the price of such a well-being is. After all, to ensure a high level of social protection, it is necessary to seek the funds somewhere. American physician, poet and writer Oliver Wendell Holmes Senior said that taxes is the price we pay for the opportunity to live in a civilized society. Taxes are the basis for any budget. If we want to live in the advanced economies and with high levels of social protection, are we prepared to pay this price? With their high (by our standards) income, residents of European countries pay about sixty percent in the form of various taxes and fees.
Here we are talking about citizens, workers, not about companies and individual entrepreneurs. If we ask a resident of Germany, who is an employee in a company, about how many taxes he pays, we are likely to receive a comprehensive answer. Will we get the same answer from an employee of a Kazakh enterprise? We can assume that not all of our citizens think about it – what taxes and how much they pay. Partly, it is because we ourselves, employees, are physically not involved in the activities relating to the payment of taxes, because our employers make calculations, retention and transfers. We do not submit tax declarations (I am not speaking about civil servants and other persons who are required to do so in accordance with law), and we do not directly contact with the fiscal authorities. Therefore, we do not know the prices of taxes. Perhaps, there is some sense in those discussions that arise periodically in the Parliament and the Government on the need for the introduction of a universal tax declaration.
But there is, perhaps, one exception, when citizens are aware of what kind of tax, when, how much it is necessary to pay – a tax on transport. Every car owner knows exactly, how much he needs to pay as the annual tax for his own transport, otherwise he (or she) will not pass the technical inspection procedure, respectively, he (or she) will not be able to use their transport. In this case, the system works in a different way: we know that we must pay, we pay, and, what is remarkable, we want to see the results produced by this money. Often in the media and in everyday conversations, we hear statements like: “We pay transport taxes, so where are good roads?!”. This opinion on the one hand, is fair. But, on the other hand, it is unfortunately erroneous. For the majority of citizens comes as a surprise that, getting into the national budget pot, our money gets depersonalized, and it is no longer the money for the vehicle tax or the payment of fines for violations in the sphere of environmental protection – it is simply budget revenues. In other words, there is not a direct relation between the fact that we have paid the tax on vehicles and the subsequent use of these funds for the repair or construction of roads. As there is no connection, for example, between payments and fines, which a company pays for the activities harmful to the environment and subsequent environmental measures.
The money received in the budget from tax on vehicles can be directed to any other sphere, such as education or health care. This is probably correct, but still somehow unfair.
We also pay ourselves the property tax, but in this case, we get a receipt, i.e. again we are acting reactively, because the payment and delivery of receipts are made by someone else, we just need to make a payment.
Speaking about the road tax, we can, on the one hand, note that in this case, the government seems to have leverage on car owners who do not pay taxes – you will not pass inspection and you cannot use your car. However, there is a certain paradox here. Periodically, tax and traffic police employees organize joint raids to detect road tax evaders. It turns out that we have a significant number of car owners who do not pay this tax, therefore, they do not pass the car inspection. At the same time, they manage to use their cars. As a rule, such people are owners of cars with large engine capacity – more than 3.5 liters, which means that the revenues from their payments should be significant.
Based on the foregoing, we come to the conclusion about the so-called “low tax culture”. Although in our case, there is no need to make measurements, whether this culture is high or low, it is enough to say that it is important to have such tax culture. However, despite the fact that we pay relatively low taxes, or actually we do not pay them ourselves, because our employers do it for us, we still believe we have the right to sometimes express the idea that “we pay taxes, respectively, we require high standard of living” or “officials live on our taxes”, etc. There is some truth in these statements, of course. But there are things that we also need to understand. Our taxes, that is, those that we pay as individuals, do not occupy the most significant part in the total tax revenues. The main income of the budget are payments of companies – legal entities. Unfortunately, our citizens have little interest in the budget – both national and local (district, city, county). Often we do not want to understand and see the dependence of the quality of our lives on how well the budget is planned and executed. It is much easier to play the role of a “sofa analyst”, criticizing officials, MPs and the Government.
However, to date, there are very significant opportunities for ordinary citizens to get the latest information on the budget.
Suffice it to say that in 2011, Kazakhstan has created the legal framework and established practice of publishing the so-called civil budgets. Civil Budget is a non-technical accessible version of the budget aimed at increasing public understanding of government plans on taxation and spending, in addition, a means of involving citizens in the budget process – according to the principle of “understand/ know – can participate /influence”. Section “Civil Budget” is on the official Internet site of the Ministry of National Economy of Kazakhstan (http://economy.gov.kz/ministerstvo/grazhdanskiy-byudzhet/index.php?SECTION_ID=9038), as well as on the official websites of regional departments of the economy and budget planning.
In fairness, it should be noted that the first civil budgets placed on the websites of central and local government agencies in 2011-2013 were more informative, written in non-technical language, using info-graphics. The introduction of the civil budget allowed Kazakhstan to occupy the 38th position (out of a hundred) in 2010 in the international Open Budget Index, which is calculated every two years by the International Budget Partnership. For comparison, in 2008, the country’s rating was at the level of 35 points (http://www.internationalbudget.org/opening-budgets/open-budget-initiative/open-budget-survey/publications-2/rankings-key-findings/rankings/). It is also worth noting that in recent years, the rating of the openness of the budget of Kazakhstan has been steadily rising, and according to a recent study, it amounted to 51 points in 2015. Thus, the country has made some progress in this direction.
Returning to civil budgets, we can say that, unfortunately, during the last two or three years, the quality of the civil budgets has deteriorated. Apparently, as soon as the attention to this subject waned, the attitude to its implementation became purely formal.
It is known that a significant portion of revenues is provided by mining companies hat produce hydrocarbon crude and solid minerals. At the moment, thanks to the successful promotion and development of the Extractive Industries Transparency Initiative in Kazakhstan, we have an opportunity to get detailed information about payments of any mining company operating in the territory of our country. Thus, the site of the Committee for Geology and Subsoil Use of the Ministry of Investment and Development of Kazakhstan, in the “EITI” section, provides the information about payments of extracting companies in the National Report on the implementation of the EITI (http://www.geology.gov.kz/ru/ipdo-1/otchety).
This information is interesting, at least, because the proceeds from the sale of stocks of raw materials and oil, in particular, constitute a very substantial part of the budget revenues, I mean the central budget, local budgets, as well as o the National Fund. For example, the information from the national reports on the implementation of EITI in 2014 tells us that in the Mangistau region, mining companies transferred 40.6 billion tenge to the local budget, and 198.9 billion tenge to the central budget, 716.7 billion tenge – to the National Fund. For comparison, in the Pavlodar region, which produces only solid minerals, the amount of transfers was much more modest: to the local budget – 8.3 bln. tenge, to the central budget – 15.7 billion tenge, and to the National Fund – 80,900 tenge.
Speaking about the crisis and the problem of budget execution, one immediately thinks about how to implement the budget. As already known, in 2015, the central budget did not receive a significant amount – 13 to 20 percent on certain types of taxes. What can be done in such circumstances? The experience has shown that our local authorities act in a proven way in such situations. For example, car owners should be more careful about their compliance with the road rules, because penalties are most likely to be used everywhere. Entrepreneurs also freeze in anticipation – on the one hand, small and medium businesses should be developed, and it is not worth disturbing them in the times of crisis, but, on the other hand, the budget must be somehow replenished. Therefore, many people expect inspections.
Unfortunately, we did not manage to learn how to use all the features of the tax regulation, promotion of small and medium business, etc. After all, the taxes paid by small and medium enterprises, as a rule, are local taxes, which go to the budget of the district or city. As you know, local budget revenues consist of tax and non-tax revenues. The structure of tax revenues, for example, in a particular city might look like the following: Individual income tax – 30%, excise tax – 29% (if there are producers of related goods), social tax – 23%, Property Tax – 8.5%, tax for transport – 3%, use of natural resources, land tax, fees for permission from the owners, state duty – 6.5%. Accordingly, it is necessary to create conditions that would enable to ensure the implementation of key taxes, which make up 90% of all tax revenues in budget.
Often, however, the activities of the fiscal authorities and local bodies of executive power do not look very coordinated – they move in parallel, completing their work.
In general, the potential of local budgets is not used in full scale. In 2012, the National Budget Network of Kazakhstan (www.budget.kz) attempted to make an analysis of how the local budget, in particular, the budget of the regional center, i.e of a city, could solve basic problems, disturbing the citizens, i.e. the inhabitants of this particular territory. Preliminary, studies had been carried out, aimed at the identification of the most priority issues for urban residents. The results were then compared with the local budget. For example, in Pavlodar, the top “five” most urgent problems and concerns of citizens included the following:
1. The poor environmental situation and its negative impact on health.
2. The low level of wages and pensions.
3. Poor housing conditions.
4. The rise in prices of essential commodities.
Next, the second “five” in descending order:
6. High-quality health services are not accessible for material reasons.
7. The increase in utility prices.
8. No enough money to solve important problems (treatment, tuition).
9. Quality education is not accessible for material reasons.
10. Children and young people are vulnerable to drug abuse.
The main conclusion was obvious: the solution of the most problematic issues identified by citizens is not supported by public expenditure of Pavlodar city budget, as they are referred to the competence of the bodies of regional or national level.
The comparison revealed that only 3 of the 10 most pressing issues in the ranking of the problems disturbing the population of Pavlodar are included in some way in the events of budget programs and, accordingly, backed up financially. In particular, the problems are as follows: 1. The increase in utility prices; 2. Lack of money to solve important problems (health treatment, tuition); 3. Children and young people are vulnerable to drug abuse. As for the other problem areas, all of them are somehow solved by the central government, including with financial support. However, these issues are in the competence of the regional and national levels of decision-making.
Let us now consider the level of civil participation in the development, review and approval of the budget. Since 2010, the National Budget Network of Kazakhstan holds a biennial study on the definition of the Index of openness of local budgets. In 2015, another study was conducted analyzing the results of 2014. The results showed that, in principle, the legal framework for citizen participation is there. But, by and large, people do not really use them, that is, initiatives coming from citizens or NGOs are few. With regard to the initiatives coming from the executive and representative authorities to involve citizens in this process, the situation is different depending on regions. For example, the informative value of websites of the departments of economy and budget planning and of financial management varies greatly. In East Kazakhstan, we can see the monthly reports on budget execution, but in many other regions, the reports can be for six months or for a year. Deputies could do much, but the activities of maslikhats in this direction are not always quite noticeable either. Virtually none of maslikhats uses such a mechanism, as public hearing when discussing the draft budget or specific issues related to the budget. There is almost no information in the public domain about how the authorities work with citizens – which of their suggestions were taken into account, implemented, etc.
Overall rating of transparency of local budgets by the end of 2014 is as follows:
In many ways, the openness of the budget process is enhanced by the activities of NGOs. Unfortunately, not all regions have organizations that specialize in this subject.
The low level of civil participation can be also explained by ignorance and lack of awareness and a low level of tax and financial culture, and by many other objective factors. At the same time, analyzing the results of many studies, we can conclude that such indifference is often caused by a lack of faith in the fact that the opinion of citizens can change something in the budget process. In any case, the “owner” of this process are the local executive authorities, which have full information on the plans (economy) and on the budget (finance). Authorities that approve the budget – maslikhats – often focus on secondary issues, such as the allocation of funds within the already defined “corridor” for a single administrator, not paying attention to the wider picture – policies to ensure a profitable part, and distribution of costs.
Most likely, if we treated the issues of budget planning with more understanding and attention on the ground, understood our responsibility for budget revenues from local sources available, diversified our local economy, it would not be so painful today, when we have to face the problems of global proportions. For the majority of citizens, the appeals to live within means, and a shift to austerity are basically clear. The more that living beyond one’s means is impossible, and without savings – is difficult.
We should be ready for difficult, but possibly interesting times. The tax system is reviewed – many entrepreneurs will have to become VAT payers, they should also be aware of the new sales tax. We say that a crisis is the time to review the established order of things and probably refrain from something unnecessary and wasteful. Let us hope that the crisis will help us to look at the potential of our natural and human resources in a different way, in order to use them more effectively.
Sergei Gulyaev, CEO of PF “Decenta”
The opinion of the author does not necessarily represent the views of CABAR