By Albert Khachatryan

Armenia’s state budget is on the point of collapsing so that attempts are being made to fill the huge budget gaps by means of external financing.

According to the preliminary data reported by the RA Ministry of Finance, the total state budget revenues approximated to 359 billion AMD, and total on-budget expenditures 426.5 billion AMD (or, inclusive of the credits extended to offices in charge of target programs, about 469 billion AMD). The state budget deficit exceeded 67.5 billion AMD or, with the aforementioned offices’ funds, 109.9 billion AMD!

A much better situation was observed last January: the budget deficit (with the offices’ expenditures considered) was “just a little more” than 12.4 billion AMD. Then, without the offices’ funds considered, Armenia registered a budget surplus of 12.2 billion AMD. Therefore, Armenia’s state budget has not only registered regress. Rather, it is faced with quite serious problems.

Suffice it to say that 69.8 times (!) as much funds were borrowed this January-July to fill the budget gaps as in the corresponding period last year.

The main and immediate cause of the sad budget revenue picture is tax collection: this January-July tax revenues registered a decrease of about 60 billion AMD — all the taxes except for fixed and incomes taxes were actively collected. It should be noted that the Armenian national tax policy has always been based on the value-added tax (VAT), its share in the total tax revenues being the largest. Various tax rules are applied worldwide, with some of them based on the VAT. However, unlike the profit tax, this tax is, as a matter of fact, paid by consumers. So the tax burden can be said to fall mainly on ordinary citizens in Armenia. In a number of developed countries, the income tax constitutes a large share of taxes, 40% and up. It makes sense: the high income tax for individuals reduces consumption expenses and promotes business investments. Also, high income taxes enable the Government to implement income leveling plans and active social policies. This is standard practice in Sweden, a country with high living standards and a low social polarization level. Quite the opposite can be observed in Armenia.

We have two main problems. First, although progressive taxation is in effect in Armenia, the tax rates for excessive incomes are far lower than in a number of developed countries. The second problem is mass tax evasion by the rich.

The data on the incomes of “decile groups” (10% of the total population) regularly published by the RA Statistical Service are far from being real. According to the official statistical data, the Armenian population’s income totaled 1,049.8 billion AMD last year, whereas the expenses on goods and services totaled 1,791.2 billion AMD (1.7 times as much) Even with the state purchases of goods and services considered, the great difference suggests that the surveys of households conducted by the Statistical Service do not involve “the rich class.” The official data on the incomes of the richest people of Armenia are rather a shock: less than 76,400 AMD (about U.S. $210) per capita! How can such “large incomes” be sufficient for large-scale construction of mansions, purchase of elite housing and expensive cars? It is a question that remains unanswered.

But even this scant information on the population’s incomes does not confirm the amount of income taxes paid to the budget. To substantiate, let us compare the official data for last year. The total income tax revenues exceeded 53.7 billion AMD or less than 9%. However, if the last five “decile groups” had paid only 10% of their incomes as taxes (though the figure must be much higher for them, which would more than compensate for the taxable minimum), the income tax paid by them would have totaled 80 billion AMD. Moreover, with concealed incomes considered, their incomes taxes would have been many times as large as the actually paid amount.

The institution of income statements would help resolve the problem. However, in Armenia the problem has been “formally” dealt with for years. The groups liable to state their incomes are quite small, and the incomes stated by them arouse reasonable doubts.

The critical budget revenue situation requires urgent measures. The crackdown on tax evasion may ensure short-term success, which, however, may lead to business stagnation later, especially the SME sector. So it is much more advisable to introduce proper order in the income taxation field.