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GEORGIA | PUBLIC EXPENDITURE REVIEW

CHAPTER 4. INTERGOVERNMENTAL FISCAL RELATIONS A. INTRODUCTION The current administrative structure in Georgia, with just one layer of sub-national government, is in line with international practices. With a territory of 69,700 square kilometers and a population of around 4.4 million, Georgia’s size warrants one subnational tier of government or at most two, if the autonomous district of Adjara is included. The current structure avoids duplication of functions and is in line with the division of responsibilities between the center and the sub-national governments (SNGs), with several public services being provided directly by the center. The population covered by the local governments in Georgia varies widely and the median population of 35,000 is much higher than the median population of 19,000 for the bottom tier jurisdictions in most European countries. This helps Georgia achieve economies of scale in the provision of local services. Despite limited expenditure responsibilities, SNG spending in Georgia is reaching levels similar to those in countries where subnational governments are responsible for more resource intensive services. SNGs in Georgia are primarily responsible for the provision of housing, utilities and communal services while the more resource intensive services like education and health are with the central government. SNG expenditures are at 7 percent of GDP, and have accounted for about a fifth of consolidated government expenditures. They have been increasing steadily since 2008, both in real terms and relative to GDP. There is also significant inter-regional disparity in spending in Georgia, primarily attributable to lumpy capital expenditures. Another crucial factor affecting expenditures across regions is the size of the population.

The low level of revenue autonomy at the local level acts as a disincentive for effective fiscal management. Intergovernmental fiscal transfers have accounted for nearly 70 percent of total revenues of SNGs. Since 2008, the only own sources of subnational revenues have been property taxes and non-tax revenues, such as rents, fines and penalties, sale of goods and services and other local government collections. While local governments can determine property tax rates, local accountability is limited by the fact that local governments are passive recipients of revenues collected by the national tax authorities. Therefore, there is limited room to hold SNGs accountable for revenue performance. Fiscal transfers from the center help close the gap between expenditure needs and revenues of local governments. While there is a complicated formula for the calculation of equalization grants to SNGs, it lacks transparency and has proved difficult to replicate. In addition, the center also doles out unclassified special purpose transfers, which are largely residual in nature and are mostly used for capital expenditures. Therefore, there is no incentive for local governments to reduce expenditures as it would result in lower transfers from the center. This chapter reviews the fiscal implications of SNGs in Georgia. The analysis in this chapter leads to the following measures for the government to consider:

• • • •

Short term: Improve data collection on all aspects of subnational finances to increase transparency and fiscal management of SNGs. Medium-term: Change the formula for the calculation of the equalization grant to make it simple and to better reflect the overall pool of resources and expenditure needs of SNGs. Medium-term: Remove the suspension of taxes on movable property and lower the income threshold for exemptions on immovable property. Medium-term: Allow SNGs to share the tax base for certain taxes (such as the personal income tax) and be able to set their own tax rates on top of the national tax rate applied to the same tax base. Both taxes (the central and local components) could be administered by the central tax administration.

The rest of the chapter is organized as follows. Section B provides an overview of the institutional and administrative framework for local governments in Georgia. The next section focuses on the level and composition of their expenditures while Section D discusses the main sources of revenues for SNGs. Section E gives the way forward.

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Profile for World Bank in Europe & Central Asia

Public Expenditures in Georgia: Strategic Issues and Reform Agenda  

Volume 1: Main Report. To keep Georgia’s government finances on a sustainable path along with sustainable growth and job creation, this publ...

Public Expenditures in Georgia: Strategic Issues and Reform Agenda  

Volume 1: Main Report. To keep Georgia’s government finances on a sustainable path along with sustainable growth and job creation, this publ...