As a result of the global crisis a number of new economic terms have been circulated and used by economists. If we classify such terms, the first one will be “financial and economic crisis” and the second one is “floating rate”. The third term is “sequestration”. It is a new term for the people of Armenia.
Sequestration means cutting down the expenditure of separate clauses of budgets or the overall budget. Usually sequestration is done due to two reasons: if there were mistakes in the budget formation (calculations) or in force-majeure conditions. People say that sequestration is possible in this phase but the government refuses such rumors and assures that the expenses are adjourned. In consideration of the fact that the crisis had already started before the period when this budget was drafted it is logical that there are other reasons why sequestration should be made. The prime minister approved this point of view too in his interview given to representatives of four newspapers on March 12: “The development rates are worse than we could foresee last summer when we drafted the budget for 2009, including with the efforts of international organizations. Bad predictions are becoming reality and it is impossible to forecast anything in this phase.” One day before the mentioned interview the PM met with MPs of PA, ARF and LS factions. After the meeting the PM met with journalists and said, “Yes, there is a prediction that there will be 4,5% growth or there may be negative development by 1-2 or 4,5%. We have taken all the mentioned scenarios into consideration.”
In fact the prime minister affirmed that there are four possible scenarios, and in case of each of such scenarios the GDP development level will be lower than considered in the budget. In other words, in any case the budget cannot be fulfilled and there is a need for sequestration. Otherwise in order to fulfill the budget the state would collect as much as it could to have enough money. The authorities understand that it is dangerous. “It is impermissible to collect taxes through radical methods and we will not do that. The mechanism of tax collection we have adopted is the following: target the level of tax collection and collect the taxes at least to make it equal to 17,4% of the gross domestic product. In other words, we should collect as much tax as our economy is producing. Tax collection is based on the principle I said but not the expectations in 2009.”
This policy may be called “floating taxation policy” as well. It is a good idea because you can’t kill the economy in order to provide budget collection. On the other hand, there are expenses that cannot be cut down, for example the state can’t cut down the stipends.
The prime minister said that there could be several scenarios of economy development but did not specify which of them was the most possible one. There are some facts that may help us to get the answer to this question. The PM says that the government will collect as much tax as the economy produces. It means that there are no specific targeted limits because the tax to be collected will vary depending on the GDP capacity.
In our previous publications we wrote that the government was going to adjourn budget expenses amounting at 131 billion dram (in fact it will cut down the budget). This information has not been officially refuted. Even more, some coalition MPs analyzed that amount and there were other MPs who said that it would not be enough. It is sequestration whatever the government says and however defines it.
The budget income part, including the customs, for 2009 was planned at 727.4 billion dram. Let’s deduct 131 billion from this amount. 596.4 billion remains. It means that the government hopes to collect maximum 596.4 billion as tax incomes instead of the planned 727.4 billion. As the PM says, the tax capacity should equal to 17.4% of the GDP. It means that the GDP in 2009 is going to be 3427 billion dram (3427 x 17.4% = 569.4). In fact, based on what the government officials and MP say, as well as the official statistics, we may say that the government expects to provide maximum 3,427 billion dram of GDP in 2009. The planned GDP for 2008 was 3,520 billion. The GDP planned for 2009 is less by 2.6% than the GDP planned for 2008. It means that the most realistic scenario for the government is the scenario, according to which the economy will fall by 2-3%.
It is quite understandable why the government escapes from using the word sequestration because if they use this word, they indirectly agree that the GDP capacity will be cut down, which means that the commitments and assurances of certain RPA representatives and MPs were baseless. Even the official statistics reports fall in the economy. According to the official statistics, the GDP in January-February months of 2009 was less by 3.7% than the GDP in the same period of the previous year.