GEORGIA | PUBLIC EXPENDITURE REVIEW
CHAPTER 1. MARCO-FISCAL CHALLENGES A. INTRODUCTION Generating growth and creating jobs within a sustained fiscal framework is Georgia’s biggest macroeconomic challenge. Although Georgia’s economy registered a rapid growth of 5.7 percent per annum during 2010-13, unemployment remained high at 15 percent. Translating the high growth to strong net employment remains a challenge, as older industries continue to decline, shedding jobs, while new industries have yet to create enough jobs to absorb the unemployed. The new growth sectors such as tourism and other services have not been able to generate formal employment as effectively as a robust tradable sector would have. On the supply side, businesses complain that job seekers do not have adequate skills, in large part because the existing education curriculum is not well aligned with the demand of the private sector.
Addressing the jobs and growth challenge will require policy actions to address the education and infrastructure gap while continuing fiscal consolidation. Improved roads, better water supply and a reliable power sector are crucial for facilitating growth in the tradable sector, and there is a substantial role that the government can play in this regard. The skills mismatch in the labor market and the country’s relatively low education budget also call for more spending on education at all levels starting from pre-school4 Social spending will protect those who do not benefit from growth However, all these expenditures need to be made in accordance with the fiscal consolidation agenda of the government, designed to help restore the macroeconomic buffers needed to secure stability and growth in the future. High fiscal and current account deficits will pose a threat to Georgia’s fiscal sustainability. The fiscal deficit rose after the 2008 global financial crisis and conflict with Russia, reflecting a prompt and adequate fiscal stimulus to the economy. The current account deficit remained over 10 percent of GDP after the crisis, in line with the rise in the fiscal deficit and fast import growth fueled by lending expansions. With fiscal consolidation a top priority, Georgia’s fiscal and current account deficit were reduced to 2.5 percent and 5.9 percent respectively by the end of 2013. Due to the government’s continued commitment to fiscal consolidation, public finances need to be efficiently managed to maximize its impact on growth and job creation. The recent increase in recurrent expenditures poses the challenge of a more rigid budget and less fiscal space in the future and this makes the need for policy actions particularly pressing. The new government which came to power in late 2012 prioritized social objectives and enacted a set of new policies to improve social benefits. During 2012-13, the government raised the benefit levels under the TSA and pensions, and introduced universal health care (Spotlight 1). The immediate effect of these actions will be reflected in a deterioration of the fiscal deficit to 3.7 percent of GDP in 2014. Over the medium term, an aging population and the need to improve health outcomes and coverage of the poor in social assistance programs will keep social expenditures high. Meanwhile, capital expenditures need to be maintained at current levels to ensure growth and address the infrastructure gaps. These increased benefits posed considerable risks to Georgia’s fiscal sustainability. On the revenue side, tax collections remain buoyant thanks to improved tax administration but there is a constitutional provision which bars the government from raising tax rates. Therefore, Georgia faces a situation of increasing recurrent expenditures which are difficult to curtail and limited upsides to revenue collections. In such a scenario, further fiscal consolidation to create fiscal buffers and efficient management of public finances will be the key for the country to sustain medium- to long-term economic growth and job creation. In order to address the macro-fiscal challenges facing the country and achieve fiscal consolidation targets, this chapter proposes the following options for consideration:
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Establish rule-based compensation policies and regulations for public employees and civil servants to contain increases in salaries and bonuses. Strengthen public investment management and external oversight. Sustain capital expenditures at 6 percent of GDP.
4. Evidence shows that estimated benefit-to-cost ratio of increasing enrolment in preschool from 25 percent to 50 percent in low- and middleincome countries range from 6.4 to 17.6.
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