- The main challenge for the country is a bold rethinking of approaches to economic growth and, in general, economic policy. The 2023 draft budget can respond much better to the country's main infrastructural and education challenges, which, according to international experience, is the driver of double-digit economic growth in the medium term.
- At a time when the pandemic and the Russia-Ukraine war pushed other countries to reconsider their budget spending and economic policy much more boldly than Georgia, without such large-scale rethinking, Georgia will inevitably fall behind. Rethinking budget spending in these countries is dictated by the disruption of logistics and production chains, inflation, unprecedented labor shortages, sharp increases in interest rates, and the rise of the digital economy. Current expectations of a recession are likely to lead to further adjustments to this budget spending.
- The deficit of the unified 2023 budget returns to the 3.0% limit established by law (planned at 2.9% of GDP). By the end of 2023, the government's debt is planned to be at 38.8% of GDP, which is significantly lower than the maximum limit of 60% prescribed by law.
- GEL 594 million of the budget balance is directed to the deposit certificates of commercial banks to stimulate the economy with long-term resources.
- The draft amendments to the Budget Code that accompanies the budget envisages the inclusion of the financial operations of state enterprises belonging to the government sector in the unified budget of the state.
- Increased quality of analysis of fiscal risks arising from state enterprises.
- Attaching information about tax expenditures to the budget, which the Ministry of Finance did out of its own goodwill in 2021, is becoming mandatory.
1. The GoG Administrative Size and Social Expenses
1.1.Reduce bureaucracy, which will reduce the total labor remuneration in the public sector: it is not the increase in the salaries of civil servants, which is a normal phenomenon, especially considering inflation, but the increase in their numbers that is a cause for alarm.
1.2.Accelerate the targeted social assistance (TSA) reform, in particular
- Changes to the Proxy Means Test (PMT) and Needs Index that will allow us to more reliably identify the truly socially vulnerable based on their income fluctuations, verifiable expenses, and other criteria.
- Anticipating overlap with the IDP database.
- In parallel with the targeted social assistance (TSA) reform, initiate the regulatory reform for better accounting of incomes, including, first of all, the registration of beneficiaries and applicants of targeted social assistance to personal accounts. Best international experience shows that the reform of targeted social assistance not coupled with income accounting will not be effective.
- It is important that the growth of social expenses be dictated by such a reform of targeted social assistance (TSA).
- The resources made available by the redistribution of expenses should be directed to those sectors and programs that have a higher contribution to economic growth, such as, for instance, infrastructure, education, etc.
1.3 Until the targeted social assistance (TSA) reform, the growth of the pension without indexation and the growth of other social benefits should be temporarily suspended.
As best international practices have it, one of the main motivations and fiscal justification for introducing a cumulative pension system is to reduce dependence on the state pension. Establishing an awareness that you cannot depend on the state pension is essential to legitimizing putting a stop to growth in the state pension. When all recipients of the state pension are also beneficiaries of the cumulative pension system, the state pension should either not increase at all or not increase at the same rate as it would have without the reform. When the time comes indexation should no longer be an issue.
2. Budget Financing of Productive Sectors: Infrastructure and Education
2.1.Identify the challenges that prevent economic growth, including attracting foreign direct and domestic investments, and gradually increase in infrastructure financing accordingly.
2.2.The government should ensure to the greatest extent possible the publicity of information about the current status and plans of the major infrastructure project, the Anaklia Port Project.
2.3.In order to search for suitable contractors, actively use the opportunity to participate in public procurement of various countries through membership in the World Trade Organization.
2.4.Good international practice should be taken into account, which shows that when the planning of investment projects is the responsibility of a private contractor rather than any state agency, these projects are implemented much more efficiently, and there is no problem underspending public funds.
2.5.Identify needs in preschool and secondary education, part of which is reflected in the World Bank's 2022 human capital report, and increase funding accordingly.
2.6.Initiate fundamental research-based reform to improve PISA results, including improving graduation criteria in a way that positively impacts student motivation, vocational and higher education choices, and thus the quality of learning. As of today, only 6% of high school graduates apply to vocational schools, and 81% go to higher education, despite the high probability that a person with higher education will not be able to find a job.
2.7.Professional education should be reorganized with the assumption that there will be a strong wave of direct foreign investment in the near future. International experience shows that countries that do so are better prepared to receive investment flows.
3. Results-Oriented Budgeting
3.1.Set a deadline for the program appendix to the budget to be voted into the law with the rest of the budget. At the moment the program appendix is the only part of the budget that is not voted into law by parliament, which diminishes budget spenders’ responsibility for budgeting for meaningful output and outcome indicators
4. State Enterprises
4.1.The Ministry of Finance should be given freedom to solve problems of state-owned enterprises described in the fiscal risk document. First, to put a stop to and then ban quasi-fiscal activities, e.g., to have the freedom to discontinue subsidizing household tariffs for natural gas in the, which has put effective functioning of Oil and Gas Corporation, the most successful state-owned enterprise, at risk.
4.2.Fiscal risks from the energy sector are decreasing gradually, but fora long-term economic efficiency, it is necessary to encourage competition and make the process as transparent as possible.
4.3.The state should divest itself of the assets of state-owned enterprises.
5. Economic Growth
5.1.Reducing taxes. It is important to respond to the disruption of international supply and production chains caused by the pandemic and war with the right stimulus to the economy. In 2023, the budget balance of GEL 1.2 billion allows us to compensate for the shortfall in revenues caused by tax cuts. Despite the balance of GEL 1.2 billion, GEL 594 million will go to long-term financing of the economy through commercial banks, which is a positive development, but for the post-pandemic economy and against the background of the war, a reduction in taxes will be a much greater stimulus.
5.2.In the following years, revenues reduced by lowering taxes can be compensated by reducing expenditures, which we look at above.
5.3.Tax Benefits
- Conduct an ex-post regulatory impact assessment (Post-RIA) to assess the correspondence of the actual results with the intended goals for each benefit and scrap them accordingly.
- The stated goals of tax benefits can be more efficiently achieved through budget programs as these are submitted to the Parliament for approval every year, as the Ministry of Finance notes.
- Amendments related to tax benefits in line with an ex-post regulatory impact assessment attached to the 2024 budget bill.
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This material has been financed by the Swedish International Development Cooperation Agency, Sida. Responsibility for the content rests entirely with the creator. Sida does not necessarily share the expressed views and interpretations.
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