The Albanian budget for 11 months 2023 is like a double-edged sword

The state budget for the 11th month of 2023 results in a surplus[1] and this reality shows at first glance that the government’s finances are being managed effectively. This budget surplus comes from the realized income at the level of 99.4% of the 11-month plan and spending at the level of 95.8% of the 11-month plan.

So it can be seen that the income has increased by 3.6 percentage points more, which is also considered a surplus or surplus in the 11th month of 2023.

In budgetary practice, unrealized expenditures in the planned measure indicate the economic climate or the way governments spend taxpayers’ money.

Meanwhile, the increase in the share of payroll tax and profit tax has also affected this budget surplus.

If we were dealing with surpluses for a family (income greater than expenses) this would be called savings.

How are the government budget revenues in absolute terms?

VAT revenues (176.6 billion ALL from imported goods and services and from production and sales within the country) are respectively 133.5 billion ALL from imports and 43.1 billion ALL from economic activity within the country. The ratio of VAT from economic activity within the country compared to VAT from imports is 1 to 3, or in other words over 68% of VAT for the government budget is collected at customs points and only 32% is collected from economic activities within country. This situation of VAT in these reports is the indicator that our economy continues to remain dependent on imports and production activity and services are still contributors with a small share.

However, it seems that imports have a decrease in VAT of 70 million euros less than last year and the impact mainly comes from[2]:

– the drop in food inputs[3] by 32 million euros less,
– the decrease of fuel imports by 495 million euros less,
– the decrease of imports of textiles, shoes, leather and wood by 125 million euros less,
– the decrease of imports of construction materials by 150 million euros less
– the increase in imports of machinery and spare parts by 270 million euros more.

The difference in the total import invoice from the above goods is only 540 million euros less than the 11th month of 2022.

Meanwhile, exports also have a decrease in their value, even though a part of them are VAT contributors to imports. According to the order as above, it can be seen that there are:

– increase in exports of food products by 45 million euros more,
– decrease in exports of fuels and minerals, energy with 90 million euros less,
– the decrease of exports of textiles, shoes, leather and wood by 100 million euros less,
– the decrease of exports of construction materials by 255 million euros less

The difference in the total export invoice from the above goods is only 425 million euros less than the 11th month of 2022.

In this comparison between imports and exports according to product groups, it can be seen that there is a positive performance of the trade balance for food and beverages with 13 million euros more, factored by supplies to neighboring countries, Italy and Greece.

A trade surplus of 13 million Euros for 11 months is an indicator of low productivity, if we consider the resources used for these exports, which are at levels still far from the sustainable competitiveness index.

Construction materials also show a positive trade balance, where mainly the production of raw materials showed higher export levels with 105 million euros of iron, steel and cement, etc.

There is also a negative trade balance for exports of textile and footwear products, etc. with a difference of 25 million euros more imports than exports. This comparison shows that businesses had a positive expectation during the beginning of the year by increasing the supplies of raw materials, but the decrease in sales abroad in other months has a decrease, having a negative trade balance.

Meanwhile, the trade balance is also negative for machinery and equipment, with 270 million Euros more imports than exports. These imports are part of the investments made mainly in road and air and sea transport infrastructure, as well as in the extractive industry and electricity sectors.

The entire economic situation of the entry and exit of goods and services in Albania shows that the productive economy within the country is not growing intensively and with the approach to create a sustainability for the future market, but in a situation of slow development that can only guarantee short-term resistance and little value for medium periods.

The 11-month revenues from the tax on profit (57 billion ALL) and on personal income (53 billion ALL) indicate an increase in the profits of medium-sized companies, which reflect the frozen profit rates after the pandemic, as well as an increase in contributions of infrastructure companies, which directly affect tax payments.

On the other hand, the increase in the minimum wage from 36 thousand ALL/month to 40 thousand ALL per month has influenced an increase in middle-level salaries, and the taxation of double employment, the increase in the salary of the public administration has also influenced this increase. and other income from the sale and purchase of real estate. Fiscal policies have a very low impact on the limits of the fiscal inequality of the tax on capital (dividend) which, even though it is at the reduced rate of 8%, is with a very low collection level in relation to expectations.

A logic of increased salaries has directly influenced the increase in social and health insurance contributions (to the extent of 127.6 billion ALL, 19.3 billion ALL or 17.8% more than the 11th month of 2022).

While these revenues are declared as a success of the administration, it seems that there is still a lack of transparency and accountability regarding fiscalization (e-tax) and its beneficial effects, there is no analysis of how much the budget has benefited by narrowing evasion, as well as how much corruption has been fought as an element that hits directly the objective of the fiscal revenue strategy to increase voluntary compliance in the payment of taxes and duties through the creation of conditions for tax justice.

Having funds in the government budget coffers can be a sign of prudent spending. But this does not mean that having a surplus is always useful. As such, it can sometimes come with its own problems.

When the budget underestimates our real fiscal position, the end-of-year “windfall” surplus must be used not only to pay down the debt, but to make decisions about additional investment in areas such as social housing, childcare, education and poverty reduction, such as and aid for sectors such as export producers, etc. that were damaged not by mismanagement and a failed business model, but were damaged by unfinished tasks, lack of accountability to the detriment of distorting the reality of the exchange rate.

The main risk of running a budget surplus is lower investment and tax revenues and higher non-tax revenues and fees. The highest tax revenues are visible precisely in the excise and institution fees, which for 2023 are increasing by 5% compared to 2022.

In 2023, as in 2022, when the government runs a surplus, it appears not to spend or invest at the same level in those sectors of the economy beyond transport infrastructure and other infrastructure. This is seen in the case of the 11-month 2023 budget, where capital investments, although increased in relation to 2022, are actually 30% less than the 2023 program. However, when the investment falls, its returns are not generated. Keynesian economic theory suggests that economic entities should run a surplus during periods of prosperity and a deficit during a down cycle or depression. This allows the government to save money when it is doing well and spend money on economic stimulus when the economy is not doing well. In fact, the government this 11 months has spent the money for salary increases at a staggering level for the country’s budget (18% more than in 2022). Meanwhile, an increase without golden and transparent criteria has also been made for local budgets, which it seems that even the government’s budgetary “syringe” (22% more than in 2022) cannot save their financial languor.

In closing, achieving a budget surplus (surplus) is not always a positive achievement. Although it may seem wise for a government to save money, even if we had this situation these savings mean that the wider economy will not benefit from the multiplier effect of government spending. In addition, these savings can mean less spending on public services.

A budget surplus like the one that the budget is passing in 2023 is also affecting the economic condition of the productive sectors and inflation levels, but also directly on the gross domestic product (GDP). In the current case of the lack of spending and an insufficient redistribution of unused funds, as what was done with the normative act of mid-December 2023 (not consulted with anyone)[4], they show that the budget is not on the right track of positive signals for economic actors and citizens in need. Expenditure is one of the four components of GDP, which means that a government that struggles to reduce its spending will eventually reduce its GDP. Since lower spending reduces the amount of money circulating in an economy, it may happen that we have more shortages of Albanian Lek in circulation and a further increase in its value against foreign currencies.)

After all, having a surplus can be beneficial because those funds can be used to pay down public debt or finance new investments. But there are risks to having a surplus, which include price increases as this can often be a double-edged sword.

To be clear, deficits are not the only or necessarily the best way to increase public investment in important areas. Indeed, the government with all its lobbying factors should plan to increase public investment by taxing the rich and corporations, and there is room to do so. Even the international credit rating agencies, as well as the IMF and other creditors agree that there is room to raise additional revenue, but this unfinished task to date still weighs heavily on the burdened category, those who work and have still hope for the system.

[1] The term budget surplus refers to a situation that occurs when revenues exceed expenditures.

[2] https://www.instat.gov.al/media/12880/tj-nentor2023.pdf

[3] The value of the supply on which VAT is calculated on import, where there are also products exempt from VAT

[4] https://financa.gov.al/miratohet-akti-normativ-per-ndryshime-ne-buxhetin-2023-deklarata-e-ministrit-te-financave-dhe-ekonomise-ervin-mete/