Budget law of Azerbaijan Republic

1. Definition and types of budgets

2. Budget law and budget law relations
3. Budget structure
4. Budget incomes and expenditures

In general, budget-is a statement of the spending and income part of an

individual, firm or government.
We know that government has too many responsibilities and duties. And one
of them is the financial obligation. So, for ex, in UK, government has been
responsible for between 40 or 50 percent of national expenditure over the past 20
years. The main areas of public spending are the National Health Services, defense,
education and roads. In addition, the government is responsible for transferring a
large amount of money round the economy through its spending on social security
and National Insurance Benefits. All of this is financed through taxes, duties such
as income tax and VAT.
The government has to make decisions about how much to spend, tax or
borrow. It also has to decide on the composition of its spending and taxation.
Should it spend more on education or less on defense? Should it cut income tax by
raising excise duties? These decisions about spending, taxes and borrowing are
called the fiscal policy of the government. In addition, the main indicators of
annual fiscal policy of the government have found their reflection in the budget.

Fiscal policy can be distinguished from monetary policy, in that fiscal policy deals
with taxation and government spending and is often administered by a government
department; while monetary policy deals with the money supply, interest rates and
is often administered by a country's central bank. 

As the central part of the financial system of the government budget is an

important indicator of the sovereignty of every state, for realization of its aims and
functions a country should centralize significantly large financial resources in its
hand. The most important money fund of every country is the budget as we
mentioned earlier.

Feudalism vs. bourgeoisie

Magna charta No scutage nor aid shall be imposed on our kingdom,
unless by common counsel of our kingdom
 Let us speak about the origin of the term “budget”. Budget is the French
word-“bougette”, having then transformed to the English word “budget” that
means purse, or bag. In the Middle Ages people used this word for the bag, which
a Prime Minister carried, put financial reports into and regularly spoke with these
reports to the House of Lords. Later this word began to be used as a “report of
Minister of Treasury to the Parliament”.
We use the term “budget” in three aspects: as a material term-budget is
centralized money fund which helps the government and municipals to realize their
obligations and functions.
As an economical category budget is an economical relation about
accumulation, distribution and utilization of centralized money fund.
As a juridical category budget means financial planned act worked out in a
special way defined by law and adopted by the governmental bodies or municipals.
In this position budget is the main act on the accumulation, distribution and
utilization of the state money fund.
State and municipal budget plays a very important role in the political,
economical, social life of the country.
What are the features of the budget? They are:

Budget is a universal financial act. It means that unlike other balances and
estimates, its indicators cover all the sectors of economic and social development.
Budget is a coordinating financial act. It means budget coordinates all
indicators of state, municipal and private budgets.
Budget is the main financial act. It means all other financial documents are
drawn on the base of the indicators of the state budget.

According to the Law on Budget System dated July 2 nd, 2002, Budget —is the
Essential financial document at collection and use of the funds necessary for
fulfillment of duties and functions belonging to the government and municipalities
through relevant state authorities and self – governance bodies of the Republic of
Azerbaijan.
As a financial plan, the budget should possess certain essential features. They
are:

 Comprehensiveness. This feature is called “the rule of unity”. It insists that there
must be a single fund and all money collected must be accumulated into
“Consolidated fund”
 Equilibrium or balance. It means that the budgets should be balanced.
 Annularity.
 Flexibility
 Objectively.

A balanced budget amendment is a constitutional rule requiring that

a state cannot spend more than its income. It requires a balance between the
projected receipts and expenditures of the government.

In its simplest form, a balanced budget amendment would add a budget

rule to the Constitution that would require federal spending not to exceed
receipts.

We told that normally budgets are regarded to be balanced. But sometimes it

may happened that the revenue receipts are not exactly equal to cost payments.
Then this budgets are called unbalanced. Unbalanced budgets may be in different
forms as well:
 If revenues or incomes exceed the expenditure costs it is called budget surplus
 If revenue receipts for budget period are less than cost payments the difference is
budget deficit.
Budget deficit-a deficit which arises because government spending is greater than
its receipts. According to the law, Budget deficit is the amount of budget
expenditures not provided with budget incomes. Budget deficit in normal limit is
acceptable in every country. But if it exceeds the normal limit it can make very
serious problems for every country.
What is the normal limit of the budget deficit? According to the economists 5-10
per cent of GDP is the normal limit for the budget deficit.
Why does the budget deficit occur? It is caused by several factors. Firstly, we
meet budget deficit when the fiscal discipline is very low in the country-as a result
budget incomes begin to decrease and we meet budget deficits.
The second reason is the increasing crime situation, mainly corruption in the
country. It leads to the illegal money circulation, known as “shadow economy” and
to the budget deficit at the end.
The third reason for budget deficit is political instability in the country.
And the last reason is the weakening of the international economical relations
of the country. For example*, the fall of oil prices or fluctuations in the price of the
dollar influence the budget incomes in our country.
There are several classifications of budget deficit. They are: random or real
deficit; chronic or temporary; planned or unplanned deficit.
 For determining the fact and amount of the real budget deficit the government
must answer three question^
what should be included in expenditures?
What should be included in revenue?
What length of time should be chosen as the accounting period?

Governments in many countries run persistent annual fiscal deficits. A budget

deficit occurs when tax revenues are insufficient to fund government spending,
meaning that the state must borrow money, usually in the form of government
bonds.
Why do some many countries run large and often semi-permanent fiscal
deficits? A number of reasons can be put forward, some of them are short-term and
others linked to structural, deeper fiscal issues facing one or more countries in
particular
Cyclic reasons

A cyclical (temporary) deficit is a deficit that is related to the business or economic

cycle. The business cycle is the period of time it takes for an economy to move
from expansion to contraction, until it begins to expand again. This cycle can last
anywhere from several months to many years, and does not follow a predictable
pattern.[8]

For many countries a rising budget deficit is the inevitable result of

experiencing a recession or a sustained period of slow growth.
In a downturn, revenue flows fall from direct and indirect taxes whilst at the
same time, the government is required to pay more out in welfare benefits such as
the means-tested income support, unemployment benefits and other welfare
handouts.
So part of a fiscal deficit may be the consequence of the automatic
stabilizersat work. These are the tax and government spending changes that
happen automatically at different stages of the business cycle. The governments of
most developed countries are prepared to allow the automatic stabilizers to work
through because, when their economy recovers, the cyclical component of a fiscal
deficit will diminish, indeed in an economic boom, the government may run a
budget surplus.
Automatic stabilizers are mechanisms built into government budgets, without any
vote from legislators, that increase spending or decrease taxes when the economy
slows

Structural reasons

A structural (permanent) deficit differs from a cyclical deficit in that it exists

regardless of the point in the business cycle due to an underlying imbalance in
government revenues and expenditures. Thus, even at the high point of the
business cycle when revenues are high the country's economy may still be in
deficit

For some countries, fiscal deficits seem an almost permanent feature, rarely is
the government able to find enough tax revenue to cover the annual spending
budgets. What structural problems / issues might lead to persistent fiscal deficits?
1. High levels of tax avoidance and tax evasion - the former is legal
(e.g. people and businesses taking advantage of tax loop-holes, tax relief, choosing
to pay declared taxes in low-tax countries etc) but the subject of fierce media and
popular criticism. The deliberate evasion of tax is illegal - in some countries
governments are less effective than they might be in countering shadow markets
where no tax is paid or in tracking down agents who are not paying the tax that is
due.
2. High levels of income and wealth inequality - some economists
argue that highly unequal societies also end up with a worsening fiscal position for
the government. The uber-rich are liable for higher taxes in a progressive system
(and top rate taxpayers in the UK clearly pay a high % of total revenues) but they
also have an incentive to use all of the legal tax avoidance schemes open to them.
At the bottom end of the labor market, if millions of people are in low-paid,
insecure work, many will not earn enough to pay much in tax and even more may
remain dependent on top-up welfare benefits, adding to the pressure on
government spending.
3. Demographic pressures - these can affect the fiscal position too, for
example an ageing population will cause an increase in government spending on
the state pension; a fast-growing population (perhaps boosted by net inward
migration) will also put more pressure on the government to fund essential public
and merit goods.
 4. Government inefficiency - if the state sector is relatively less
efficient in supplying public services, then value for money will be lower and more
will have to be spent in total to provide the cover that people need. Free market
economists favor a smaller government sector with many activities out-sourced or
privatized to the private sector to supply.
]

5. High levels of government subsidy / financial support - over time,

total government spending can rise because of the many competing demand placed
upon politicians and the effects of lobbying by (often influential / powerful)
pressure groups. In some countries, public spending is bloated by very generous
systems of farm / food / energy subsidies that are politically hugely difficult to
remove. The state might also get locked into providing financial support for loss-
making businesses and industries such as airlines.
These reasons help to explain why many countries run a structural budget
deficit. This means that the budget deficit will not disappear when the economy is
on the upswing of their economic cycle.

Generally - countries whose governments depend heavily on the tax revenues

from just a handful of key industries are at risk of seeing their budget position
worsen very quickly when the revenues and profits from these sectors suffer.
Consider the budget effects on the world's major oil producers from the recent
collapse in the global price of crude oil.
In many lower-income developing countries, import tariffs are an important
source of revenue. So a sudden and large contraction in world / regional trade can
have a powerful effect causing a government to run into major fiscal problems. In
many of these countries, total tax revenues are a small percentage share of GDP.
The Saudi Arabian government usually runs a large budget surplus - but this
disappeared in 2010 the last time that oil prices plummeted.
Norway is an example of a country that nearly always runs a budget surplus -
sometimes as much as 10% of GDP!

source: tradingeconomics.com
You will sometimes read about a government's "primary budget deficit" - this
means the budget deficit before interest payments on the national debt are added to
the figure. For example, Greece is now running a primary surplus, but the size of
her national debt (and associated interest payments) means that the overall fiscal
balance remains in deficit
 Budget deficit, even in the short run, must not be excessive. The practical
question is, not only how long, but how much a budget is unbalanced. If deficits
are either so frequent or so large as to give the sense of a financial situation out of
control, the results may be very damaging.
To stop budget deficit, or at least to keep them within reasonable bounds,
there are, indeed, two possible types of policy which may be adopted. The first is
deflationary, the second inflationary or if a term be preferred which emphasizes the
fact of past deflation, reflationary. The first accept the fall of the prices, together
with the possibility of further falls, and on this basis seeks to reduce expenditures
and increase revenue. It aims at balancing the budget by direct means. The second
seeks to reverse the fall of the prices and relies less on economies than on
stimulating trade and thus increasing the revenue. It aims at balancing the budget
by indirect means and is generally willing to leave it out of balance for a while.
So, the first policy seeks to reduce costs, the second to raise prices.
Source:Hugh Dalton. Principles of Public Finance.(2003)

There are several methods for overcoming the budget deficit. In theory we
divide them into 3 groups:
 Emission method;
 Tax method;
 Curtailment method

Article 24th of the Law on Budget system of AR determines several actions

for overcoming the budget deficit. They are:
 Determination of the amount of deficit;
 Using resources from selling short-term bonds;
 Using credit resources;
 Applying the method of “sequestration”(curtailment)
 Assigning the control over the execution of budget expenses to certain
governmental bodies.
What is the sequestration (curtailment)? According to the Law, Curtailment
— is a specified reduction of expenditures of the rest of the budget year, except for
the justified provisions for expenditures, in case incomes of the state budget, the
budget of Nakhchivan Autonomous Republic and local budgets, and revenues of
sources of finance of the state budget deficit are not performed. Justified provisions
for expenditures —are the budget expenditures specified by law without
curtailments applied during the budget year.
 1. Expenditures in the following items of economic classification are
considered justified provisions for expenditures, and curtailments are not applied
to them, regardless of the status of revenues to the budget:
7.1.1. Salary;
7.1.2. Salary supplements;
7.1.3. Pension, other social allowances and payments;
7.1.4. Expenditures of internal and foreign government liabilities;
7.1.5. Expenditures of other provisions to be justified in accordance with the
law on the state budgetof every year.

There are several types of the state budgets. They are:

 Normal budgets-they are budgets of stabile economics and normal type of
development;
 Emergency budgets-we approve them during the state of emergency and
direct all expenses to solve it;
 Minimal budgets- specific for federal states. For example, every city or
federal subject creates its own budget document where it shows minimal expenses;
 Consolidated budgets-. These documents are used for statistic and
comparison reasons.
Budget law and budget law relations.
Budget law is one of the most important subsectors of the financial law. The
subject of the budget law is social relations about accumulation, distribution and
utilization of centralized money funds of the government. According to the
authors, budget law is a totality of financial law norms which regulate relations
about budget structure of the government, budget proceeding and relations about
establishing the structure of incomes and expenditures and their distribution among
the budgets.
Unlike other financial law norms, norms of budget law are distinctly divided
into material and procedural norms. Thus, material norms are attached in the first
10 articles of the Law-they declare notions of budgets, income and expenditures,
main principles etc. after the 11th article the law incorporates procedural norms that
regulate proceeds of adoption, execution and control over the budget execution.

What is the subject of budget law? Budget law regulates the following
relations:

 Relations about defining budget structure and creating budget system;

 Mutual relations between the budgets that are included into the budget
system;
  Relations about forming of budget documents;
 Relations about the control over the organization of budget execution

There are several differences between budget law relations and other financial
law relations. Firstly, it is created during the forming of state and municipals’
budgets. Secondly, they are temporary and last only a year. And thirdly, the
participants of these relations are special.
Individuals and entities cannot participate in the budget law relations. It can
be:
 State and its administrative territorial units;
 State and municipal bodies.
Features for being participants of budget law relations:
 Participating in distribution of incomes and expenditures among the
budgets;
 Participating in any stage of budget proceeding;
 Participating in budget law relation about budget financing.

Sources of budget law. They are very varied. We can see them even in the
Constitution. The main document is law on the Budget system.
The Budget structure of our Republic consists of two stages: state budget
and municipals’ budget.
In Federal Republics it consists of three parts. They are: state budget, budget
of federal units and municipals’ budget.
There are several principles of budget structure of the government. They
are:Unitarianism; completeness; realism; independence; publicity; transparency;
efficiency etc.
Unity of the budget system means that the budget policy in the whole country
is united. For ex, the 19th article of the Constitution declares that money is unit in
the whole country.
Completeness of the budget firstly means that the budget should be complete.
It means the incomes and expenditures of the budget should cover each other.
Realism means that all sources of incomes and expenditures should be real.
Independency means that all the stages of the budget structure should be
independent. But this independency is limited. If low-level budgets get financing
from the state budget, they become depending on it only in utilization of these
financial resources.
Publicity means that all budget stages of the budget proceeding should be
open. Experts say that if we compare today law on Budgets and laws of USSR we
can see that the principle of publicity does not feature itself only in publishing. For
 example, there were only 6-11 articles and it covered all 17 republics’ budgets. In
addition, apps to this law were not published then.

There are several principles for forming and using municipals’ budgets. They
are:Independency; self-government; publicity; combination of local interests with
state interests. (Law on the basis of finance of municipals)

Incomes and expenditures of budgets.

Every budget consists of two parts: incomes and expenditures. It is the same
about state and municipal budgets, too.
The income of public authority may be defined in a broad or a narrow sense.
In the broad sense it includes all incomings or receipts, in narrow sense only those
receipts which are included in the ordinary conception of revenue.
The first and most important practical distinction of the incomes is between
taxation and other sources of income. So, we divide all incomes of public
authorities or state budget if it is possible to say, into two big groups: tax and non
tax incomes. What are the other incomes? They can be:
 Tributes and indemnities;
 Forced loans;
 Pecuniary penalties for offences;
 Receipts from public property passively held, for e. public lands leased to tenants;
 Receipts from enterprises carried on by a public authority;
 Fees or payments made by services performed by a public official;
 Receipts from voluntary public loans.
Source: Principles of Public finance.
Incomes and expenditures. According to the Law, Budget classification consists
of classification of budget incomes and classification of budget expenditures on
functional, economic, administrative and other principles. Incomes of budget
classification and its content on functional, economic, administrative and other
principles are defined by relevant executive power body.
Incomes. According to economic classification, we divide incomes into: taxes
and non-taxes. 9th article of law also divides incomes into State taxes; Grants;Other
incomes.
According to the rules and conditions of entry to the budget system, budget
incomes are divided into 2 groups: a) attached incomes b) regulative incomes.
Attached incomes are permanent normal incomes that are provided by Law.
Regulative incomes are incomes that are provided for balancing lower
budgets through the means of higher budgets. They are:
  Dotation. It is the financial aids given by the state budget to municipals
aiming to cover their deficit.
 Subsidy. It is the financial resources given to lower budgets, or even
individuals and entities. The aim is financing these and other projects and the main
feature is that this financing is based on shared participating.
 Subvention. The financial aim given by the State budget also. It is given
with the aim to finance the important and strategic projects.
 Transfers- it is the resettlement of money resources from one fund to
another. And there is not any aim or control.
 Budget loans- it is the loans given by the budget resources and with low
rates or without any rates. Main features-it may be given by state budget to
municipal and NAR budget, to entities, by local budgets to municipal entities. İt is
refundable. İt must be given back within a year.
 Grant is a quantity of money, i.e., financial assistance, given by a
government, organization, or person for a specific purpose. Unlike a loan,
you do not have to pay back the money. In some cases, the receivers of
study grants who abandoned their courses have to pay back the money.

Grant -is the aid for financing humanitarian (more ecological, educational,
health, culture, legal advices etc.)projects. Grant relations are regulated on the
law of Grants dated April 17th, 1998. Grant is given disinterested and for
specific purposes. Grant relations bead on the Contract of grant, which is
concluded by the donor and recipients, if donor or recipient is the
government, and then instead of contract we use the decision about grant.
Donor and recipients can not be all individuals and entities. There are
requirements in the legislature about it.
Who may be donor?


If grant is given by the sources of the State budget, it should be indicated in

the budget document and it is prohibited to apply additional taxes or to raise
tax rates for these purposes. Grant is free from all taxes and other state
payments.

Grants on behalf of the state of Azerbaijan are issued at the expense of the state
budget of the Republic of Azerbaijan. For the issuance of such grants, special
requirements shall be provided as a separate paragraph in the state budget
 expenditures. However, in this case, no additional taxes may be applied or the
existing tax rates may not be increased for the formation of those funds.

Expenditures are classified as functional, organizational and economic

classification too.
Organizational classification is when expenditures are classified on the basis
of organizational or administrative units such as department or minister responsible
for implementation of budget programs.
Functional classification implies an attempt to present the allocation of total
government expenditure. According to functional classification expenditures are
divided into the following categories:
 National defense;
 International affairs
 Education and manpower
 Health
 Agriculture and rural development
 National resource
 Commerce and transportation
 Community development
 Veteran benefits and others
It can be grouped as:
1. General service
2. Community service
3. Social service
4. Economic service
5. Others
Economic classification divides expenditures as: current and capital
Source: www.accountongnotes.net
According to the Law, expenditures are divided as below:
10.1.1current expenditures, including salary, salary supplements, pension and
other social allowances and payments; expenditures of procurement of goods and
other services, interest rates payments, grants, subsidiaries and current transfers;
10.1.2. Capital expenditures, including receipt of basic funds, capital
investments and purchase ofshares;
10.1.3. Expenditures of service to debt on loans and interest rates, and share
contributions of projects.
 We should talk about two budget funds when we talk about the budget. They
are Fund of “Automobile ways” and Guarantee fund of State guaranteed debts.
They are called as targeted budget funds.

targeted budget funds are formed and used for the implementation of
specific measures within the state budget, the budget of the Nakhchivan
Autonomous Republic and local budgets;

Fund of automobile ways

The main purpose of the Fund is to ensure their maintenance and repair for the
efficient operation of the network of national and local roads in public use in the
Republic of Azerbaijan.

According to the law dated October 12th, 2006, sources of this fund are:
road taxes;
simplified tax paid by individuals involved in passenger and cargo
transportation;
excise tax for automobiles paid in import;
custom duties for automobiles paid in import;
state duties for permission on international transportation;
state duty for annual technic inspection;
resources allocated from the state budget.
Expenditures

3/1/1/Maintenance and repair of roads of national importance connecting the

capital of the Republic of Azerbaijan Baku with the cities of the republic, regional
centers, urban-type settlements, air, sea and river ports, railway stations, reserves
and recreation zones, as well as special facilities and enterprises;
3.1.2. maintenance and repair of inter-district and local roads connecting villages
and settlements directly with cities and district centers;
3.1.3. to finance the maintenance and repair of public roads of national and local
importance.

Guarantee fund of State guaranteed debts.

To ensure the fulfillment of the part of the state debt
service expenditures of the Republic of Azerbaijan in
excess of the state budget for the relevant budget year
and the obligations under the state guarantee, a special-
purpose budget fund - the Guarantee Fund - shall be
established within the state budget of the Republic of
Azerbaijan
Incomes.

funds allocated from the state budget;

13.2.1-1. The part of the free balance of the single treasury account transferred to
the Guarantee Fund in accordance with Articles 19.2 and 19.5 of the Law of the
Republic of Azerbaijan “On Budget System”; [22] 13.2.2. one-time gratuitous fee
received from the main borrower for the issuance of a state guarantee. The amount
of the fee is determined by the relevant executive authority, taking into account the
degree of risk on the required state guarantee and the financial condition of the
main borrower;
13.2.3. Receipts to the state budget on repeated contracts concluded between the
relevant executive authority and the main and re-borrowing legal entities and
agreements concluded with intermediary (agent) banks in connection with the use
of loans;
13.2.3-1. Funds transferred to the Guarantee Fund in accordance with Article 12.2
of the Law of the Republic of Azerbaijan “On the Central Bank of the Republic of
Azerbaijan”; [23]
13.2.4. the part of expenses saved during the year envisaged in the state budget in
connection with public debt service;
13.2.5. Income from the management of funds collected in the Guarantee Fund;
13.2.6. other sources not prohibited by law.
The draft budget prepared in accordance with the
current legislation of the Fund shall be submitted to the
Ministry of Finance of the Republic of Azerbaijan by
July 1 of this year. And then shall be included into the
expenditures of state budget

Expenditures not specified in the state budget, the budget of Nakhchivan

Autonomous Republic and local budgets, as well as reserve funds of the state
budget, the President of the Republic of Azerbaijan, the budget of Nakhchivan
Autonomous Republic and local budgets can be created aiming at fulfillment of
public and local events.

Decree of Cabinet of Ministers Rules of Using of the

State Budget Reserve Fund

The volume of the Reserve Fund of the state budget is defined not more than
5 percent of theincomes of the state budget, taking into account the actual
execution of this Fund in the previousyear.

6.3. The volume of the Reserve Fund of the President of Azerbaijan Republic is
defined by notmore than 2 percent of the incomes of the state budget. The
Fund's assets are allocated to events ofgreat importance in the socio-economic
life of the country.

The assets of the Reserve Fund of the President of Azerbaijan Republic cannot
be used forholding elections and referendums in the country and promoting the
activities of the President of theRepublic of Azerbaijan.

The assets of the Reserve Fund of the President of the Republic of Azerbaijan
are spent tofinancing expenditures specified with decreesof President. Terms of
use of the assets of the Reserve Fund of the President of the Republic of
Azerbaijan aredefined by relevant executive power body, terms of use of the
Reserve Fund of the budget ofNakhchivan Autonomous Republic are defined by
the relevant executive power body of NakhchivanAutonomous Republic and
terms of use of the reserve funds of local budgets are defined
bymunicipalities.Deadline for the use of assets of reserve funds end at the end of
relevant budget year.