Abstract. The analysis of the structure of the budget expenditures of Armenia suggests that Armenia allocates funds from the budget expenditures mainly to the maintenance of the state structure, military expenditures and provision of social protection of the population. Both the volume and the share of budget expenses of these directions have increased in the last ten years. The increase in the share of these directions in the budget expenses suggests that the governments of Armenia felt the need to direct a larger part of the budget expenses to these directions every year in order to solve the existing problems in these directions. Armenia's increase in military spending once again proves that it is pursuing an occupation policy. In the last ten years, the military expenditures made up to one-sixth of the budget expenditures. Armenia's budget spending has made it one of the most militarized countries in the world. Thus, in the report prepared in 2022 by the "Bonn International Center for Conversion" showing the level of militarization of the countries of the world, it was noted that in 2021, Armenia is the third most militarized country in the world. This index is prepared based on the comparison of the military budget with GDP and health benefits.

The fact that Armenia spends most of its budget expenditures on social protection is related to the socio-economic situation in the country. Because Armenia is facing serious problems of emigration and poverty. Every year, a large number of Armenian citizens leave the country and acquire citizenship in other countries, especially in Russia. The main reason why the population leaves the country at a massive rate is the bad socio-economic situation. Statistical figures show that in 1991-2019, practically 31% of the population of Armenia emigrated and left the country. Besides, Armenia is one of the poorest countries in the world. According to the data of the World Bank, the poverty level in Armenia is 53.5%. Considering the problems we have mentioned and to solve these problems, the governments in power in Armenia are always forced to spend more on social protection. However, even in this direction, the substantial increase in budget expenditures did not provide an opportunity to fundamentally solve socio-economic problems.

One of the facts showing that Armenia continues its aggressor and separatist traditions is the allocation of sums that are considered significant for the state budget of a country like Armenia to the so-called "Nagorno-Karabakh Republic" in the state budget every year. Thus, in the state budget of 2019, this number is 250 million dollars, 280 million dollars in 2020, 430 million dollars in 2021, and 360 million dollars in 2022. From the state budget of 2023, 360 million dollars have been allocated to the so-called "Nagorno-Karabakh Republic", which is 5.6% of the total state budget of Armenia. Although it is not the topic of this article, we can note that according to the analysis, these allocations are aimed at supporting corruption and separatism rather than the implementation of real economic projects. This means taking away the welfare of the Armenian people. This situation means that a country in poverty "steals the available limited resources" from its people.

The article first reviews the structure and structure of the budget system of the Republic of Armenia and draws attention to the law on which the budget policy is implemented. In this part, the structure and sources of formation of the state budget and municipal budgets of Armenia are also brought to attention. Then, in order to understand the nature of Armenia's budget policy, the dynamics of budget revenues and expenses, as well as the budget deficit in the last ten years, are reviewed. After that, the structure and dynamics of the budget expenses are analyzed in different directions and the directions where the most expenses are incurred are determined. Based on this, the economic, political and social reasons for allocating more expenses to these directions are determined.

Keywords: Armenia's budget system, Armenia's state budget, Armenia's budget expenditures, Armenia's budget. 

Introduction

One of the main indicators reflecting the bad progress and negativity of the Armenian economy is the indicators related to the state budget. Thus, the central state budget had a continuous deficit for 1997-2014, and this deficit increased 6.5 times during the 18-year period. The main reasons for this are the fact that the country's economy is constantly in the conditions of a war economy due to the occupation of mountainous Karabakh, the situation of blockade, corruption and structural problems in the country. According to the indicators of the State Statistics Committee, Armenia uses an average of one-fifth of its budget for defense expenses. Defense costs make up 5.3% of GDP. Overall, the budget for military spending is greater than the budget for education and health.

As a result of its own occupation policy, its self-isolation led to an unjustified increase in a number of expenses, on the one hand, and on the other hand, it caused the inability of these expenses to strategically provide indicators such as product release, employment, and efficiency in the long-term perspective.

1.  Budget system and legal basis

The budget system of the Republic of Armenia consists of two levels: the state budget and the budget of municipalities. The government is responsible for preparing the state budget, and community leaders are responsible for preparing community budgets. Budget projects are drawn up in accordance with the activities of the Government of the Republic of Armenia, the medium-term expenditures of the state, as well as community development programs. Conducting budget policy at the state and municipal level is carried out in accordance with the unified financial, monetary and tax policy of the state. Currently, the budget policy of Armenia is regulated by the law "On the Budget System" adopted on June 24, 1997. According to this law, the budget system of the Republic of Armenia is based on the following:

- preparation of budget projects;

- budget classification of budget revenues and expenses;

- accounting;

- report;

- general principles of budget execution.

There are four main directions of revenue generation of the Armenian budget. These directions include tax revenues and fees, non-tax revenues, revenues related to capital transactions, and revenues from official transfers. Income from transfers includes funds allocated by foreign countries and international organizations. The directions of budget expenses include general public services, expenses related to defense, public order and security, health care, social protection, housing and communal services, and others. The budget of Armenia also includes other expenses that do not belong to the main expenses of the state budget. These costs include:

- state reserve fund;

- subsidies allocated to municipal budgets according to the equalization principle;

- allocations to municipal budgets for delegated powers;

- targeted allocations (subsidies) allocated from the state budget to municipal budgets for the purpose of financing capital expenditures of municipalities;

As we mentioned, in the budget of Armenia, the maintenance of the government's reserve fund is also related to other expenses that are not related to the main expenses of the state budget. Funds collected in this fund are used to cover unexpected expenses and expenses related to state guarantees provided at the expense of the state budget. The size of the reserve fund cannot exceed 5% of the expenditures provided for in the budget draft for any year, and spending from the reserve fund is carried out based on the decisions of the government.

In order to ensure the development of municipalities, the state budget of the Republic of Armenia includes subsidies allocated to municipal budgets on the principle of equalization. The total amount of subsidies given to municipalities from the state budget is determined at the level of at least 25% of the total amount of actual revenues from income tax, land tax and property tax in the previous budget year. When calculating these grants, tax benefits granted by local self-government bodies in the manner established by law are also taken into account.

As for the budget of municipalities, these budgets are divided into two parts according to the law "On the Budget System": the administrative part of the municipal budget (administrative budget) and the fund part of the municipal budget (fund budget). The revenue part of the administrative budget of municipalities consists of tax revenues and fees, non-tax revenues and official transfers. Official transfers include subsidies from the state budget for municipalities and funds from other sources. The fund budget itself consists of income and expenditure. Inflows include targeted subsidies allocated from the state budget, targeted allocations allocated from other sources, allocations implemented by decisions of the municipal council, allocations from the administrative budget (reserve fund) and funds received from other sources. The expenditure part of the fund budget includes capital construction costs, capital repair costs, the costs of repaying loans and other debt funds, and the costs of forming reserves of inventory items. In Armenia, it is envisaged to create reserve funds at the level of municipal budgets, and the volume of this fund cannot exceed 30% of the calculated revenues of the administrative part of the municipal budget. 

2. Budget revenues and expenses and budget deficit

The above mentioned allows us to see the structure and form of the structure of the system of the Republic of Armenia. In order to understand the nature of Armenia's budget policy, it is necessary to review the dynamics of budget income, expenses and budget deficit in the last ten years, as well as the structure and dynamics of budget expenditures in different directions. This will also give us an idea about the dynamics of economic development in Armenia.

Statistical figures presented by Armenia show that Armenia's total budget revenues increased more than 1.4 times in 2011-2021 and reached the level of 3.34 billion US dollars (hereafter dollars) in 2021 (Chart 1). During these years, the level of budget revenues has generally increased, but has not changed along the same lines. In 2012, 2015, 2016 and 2020, the volume of budget revenues decreased compared to the previous year. The lowest level of budget revenues in these years was recorded in 2012 ($2.35 billion), and the highest level was recorded in 2021. During the period under review, the average growth rate of budget revenues was at the level of 3.8%. As for the general budget expenses of Armenia, the volume of budget expenses in 2011-2021 also tended to increase in general. During these years, the volume of budget expenditures increased 1.5 times and reached 3.98 billion dollars in 2021. During this period, a decrease in the volume of budget expenditures was observed only in 2012, 2015 and 2018. In the remaining years, the volume of budget expenditures increased. The lowest level of budget expenditures, as in budget revenues, was recorded in 2012 ($2.5 billion), and the highest level was recorded in 2021. During the period under review, the average growth rate of budget expenditures was at the level of 4.35%.

The difference between the average growth rates of budget revenues and expenditures and the statistics in Chart 1 show that budget expenditures have always exceeded budget revenues in 2011-2021, and as a result, a large budget deficit has been formed every year. In the period under review, the decrease in the volume of the budget deficit was observed only in 2012, 2018 and 2019. In the remaining years, the volume of the budget deficit increased. The lowest level of the budget deficit was recorded in 2012 ($149 million), and the highest level was recorded in 2020 ($679.8 million). 

Chart 1. Income and expenses of the Armenian budget (million dollars)

Source: Statistical Committee of the Republic of Armenia 

In 2020, the budget deficit increased sharply and reached the highest level in the last ten years. Thus, in 2020, the volume of the budget deficit increased more than 5 times compared to the previous year (Graph 1). The Second Karabakh War and the COVID-19 pandemic, which resulted in Azerbaijan liberating its territories from the Armenian occupation, played a major role in the sharp increase in Armenia's budget deficit in 2020. Due to war-related additional costs and social economic support measures implemented due to the pandemic, the budget has been changed twice. During this period, due to the economic decline, budget revenues decreased, but budget expenditures increased, and as a result, the budget deficit increased sharply. In 2021, although the volume of the budget deficit has decreased somewhat (7%), it is still at a high level.

A sharp increase in the budget deficit in 2020 led to an increase in its share in the Gross Domestic Product (GDP) to 5.4%, which is quite high (Chart 2). However, in 2019, this indicator decreased to the level of 1%. In 2021, it decreased somewhat to 4.6%. The highest limit of the share of the budget deficit in GDP was registered in 2016, which reached the level of 5.5% that year. In order to close the high budget deficit, the Armenian government mainly used foreign debts, which led to a sharp increase in the level of foreign debt.

Chart 2. Share of Armenia's budget deficit in GDP

Source: Statistical Committee of the Republic of Armenia and the World Bank 

3. Analysis of the structure of budget expenditures

In order to understand the essence of Armenia's budget policy, it is important to review the structure of budget expenditures. With this, we will see which directions Armenia spends more on, as well as understand the socio-economic aspects of the budget policy. Statistical figures announced by Armenia regarding the structure of budget expenditures show that budget expenditures are mainly directed to 10 directions. These directions include administrative, defense, national security and judicial, economic relations, environmental protection, communal services, health, culture, sports and religion, education and social insurance directions. In 2011-2021, the amount of budget expenditures allocated in most of the mentioned directions tended to increase. 

Chart 1. Structure of Armenian budget expenditures by main directions (million dollars)

Source: Statistical Committee of the Republic of Armenia 

During this period, a decrease in the amount of budget expenditures allocated only for environmental protection and communal services was observed. If we compare the years 2011 and 2021, then we will see that the amount of budget expenses allocated for environmental protection has decreased by 33%, and the amount of expenses allocated to communal services has decreased by 6.2 times (Chart 1). There has been no big change in the amount of expenses allocated for education. If we make a similar comparison in other directions, we will see that the amount of funds allocated to administrative expenses from the budget increased by 1.82 times to 756.18 million dollars in 2021, the expenses allocated for military purposes increased by 1.7 times to 666.9 million dollars in 2021, social protection expenses increased by 1.8 times to 2021 to 1.23 billion dollars in 2018, healthcare costs increased by 87% to 318.6 million dollars in 2021, and the amount of expenditures allocated to national security and justice increased by 63% to 317.6 million dollars in 2021 (Chart 1).

In order to determine in which directions the budget expenses are mostly spent, it is necessary to look at the structure of budget expenses by percentage distribution. Statistical figures show that, as in 2011, in 2021, the directions where the budget funds were spent the most were administrative expenses, defense expenses, and social protection expenses. 

Chart 2. Structure of Armenian budget expenditures by main directions (percentage)

Source: Statistical Committee of the Republic of Armenia 

In 2011, the amount of funds allocated for administrative expenses was 15.6% of the total budget expenses, the funds allocated for defense expenses were 14.7% of the budget expenses, and the funds allocated for social protection were 26% (Chart 2). As it can be seen, not only the amount of funds allocated for these directions in 2021, but also their share in the budget expenses has increased in comparison to 2011. Thus, in 2021, administrative expenses accounted for 19% of budget expenses, defense expenses for 16.8% of budget expenses, and social protection expenses for 30.9%. Among these directions, the largest increase in the share of budget expenditures was in the direction of social protection expenditures. As can be seen from Chart 2, the share of social protection expenses in the total budget expenses increased by 4.9% in 2011-2021. Summing up, the share of the three mentioned directions in the total budget expenses increased to 66.7% in 2021, while it was 56.3% in 2011.

In addition to the three directions we have mentioned, the share of expenses allocated to national security and court in the budget expenses increased by 0.6% and reached 8% in 2011-2021. In the same period, the share of expenses allocated for economic relations in the total budget expenses tended to decrease and decreased by 0.9% to 7.6% (Chart 2). Another area whose share in the budget expenses decreased in the period under review is education, whose share in the budget expenses decreased from 10.8% to 7.4%. The share of health care expenses in budget expenses increased by 1.6% in 2011-2021 and reached the level of 8%. The share of budget expenses allocated for communal services in the total budget expenses decreased by almost 9 times in 2011-2021 and fell to the level of 0.5% in 2021. However, in 2021, it was at the level of 4.4%. The share of funds spent on environmental protection and culture, sports and religion in budget expenditures did not change much during the period under review and was at a low level. 

References

1. The Jamestown, Eurasia Daily journal, Armenia’s Demographic Situation: Short-and Longer-Term Trends. https://jamestown.org/ program/armenias-demographic-situation- short-and-longer-term-trends/

2. Economic Implications of Second Karabakh War For Armania https://aircenter.az/en/single/ economic-implications-of-second-karabakh-war-for-armenia--oped-687

3. The World Bank in Armenia https://www.worldbank.org/en/country/armenia/overview

4. Bonn İnternational Center for Conversion https://www.bicc.de/de/press/press- releases/press/news/global-milita risation-index- 2019-gmi-focuses-on-eastern-europe- european-nato-and-eu-countries-655/?utm_referrer= https% 25253 A%25252F%25252Fyandex.by%25252Fnews

5. Ermənistan Statsitika Komitəsi, illik məcmuələr 2022, https://www.armstat.am/file/doc/99533328.pdf

6. Parliament of Armenia, Law "On the Budget System of the Republic of Armenia",  http://www.parliament.am/legislation.php?sel=show&ID=1503&lang=rus