Managing Expenditure Pressures for Sustainability and Growth
Executive Summary Economic growth has rebounded strongly in Georgia during 2010–12 and commendable fiscal consolidation has been implemented, although considerable medium-term macro-fiscal challenges remain. Growth rebounded strongly to 6.7 percent a year during 2010–11, but the external current account deficit remains large at 11.8 percent of GDP in 2011. External repayment obligations during 2012–14 are significant, although the authorities have built fiscal buffers to help manage the payments due. Georgia also remains vulnerable to the possibility of a sharper global downturn related to the evolving euro-zone crisis. In addition, national savings are insufficient to finance the necessary investment and exports and tradables have not yet begun to serve as the engine of rapid economic growth. In this context, the authorities have implemented a commendable fiscal consolidation program, with the overall fiscal deficit down from 9.2 percent of GDP in 2009 to 3.6 percent in 2011, to serve as a cornerstone of sustainability. To meet the challenge of generating rapid and sustainable growth in an uncertain global environment, Georgia will need to continue to implement and potentially deepen its fiscal consolidation program. Addressing the growth and sustainability challenges noted above will require further reducing the overall fiscal deficit from 3.6 percent of GDP in 2011. This will create additional space for a fiscal response in the event of a sharp global economic shock and also further bolster debt sustainability. Furthermore, in the event of an upside growth scenario with higher foreign direct investment and capital inflows, deepening fiscal consolidation is an option that may help prevent erosion of national savings, avoid a widening of the current account deficit, and resist real exchange rate appreciation pressures.
This public expenditure review (PER) considers possible sources of expenditure pressure that may affect the fiscal consolidation program and suggests options to manage them. There is broad consensus, underpinned by the government’s medium term macro-fiscal framework, that fiscal consolidation will require reducing overall expenditures by about 3 percentage points of GDP through 2015. At the same time, considerable social and infrastructure needs remain in an environment where the opportunities to extract fiscal space from other areas has diminished. Social expenditure pressures arise from the need to provide adequate old-age income to an aging population that relies primarily on the basic publicly funded pension benefit. Additional pressures arise from the need to improve social assistance coverage of the poor and from the need to improve health outcomes and financial protection against impoverishing out of pocket health payments. Capital expenditure pressures arise from the need to rehabilitate and reconstruct a large backlog of the secondary and local road network in poor condition, as well as from continued improvement of the main international East-West Highway. Additional pressures arise from new investment needs in the energy, water, agriculture, and regional development areas. Continued implementation of the fiscal consolidation program will require managing these underlying pressures in a systematic fashion, so that expenditures do not exceed currently envisaged levels. This PER presents a number of options for consideration to manage fiscal consolidation, which can contribute toward greater selectivity in capital expenditures, enhanced sustainability of the road investment program, and containing medium-term social expenditure pressures. The specific options for consideration are outlined in Table 1. In the event of an upside growth scenario, deepening the planned
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Executive Summary