Georgian decentralization lacks its fiscal part
28 November, 2013
Georgian decentralization lacks its fiscal part
Decentralization reforms in Georgia suggest only political and administrative decentralization in their first phase; fiscal decentralization will not come until the second phase. Sector analysts think that Georgia, with its meager state budget, cannot afford such a luxury as fiscal decentralization at the moment. The draft code on Self-Governance of Georgia will begin to affect parliamentary procedures this week. The self-governance related legislation is supposed to be effected by early spring, and self-governance elections will be held in May 2014.
Thus
newly elected self-governance bodies must rule municipalities based on new and reformed legislation. However, the changes mainly imply political and administrative reforms, say researchers of the non-governmental Coalition for the Development of Local/Regional Government and Civil Society Actors. They anticipate that the fiscal decentralization will be possible only after authority solves the problem of political and administrative management of municipalities.
According to Temur Tordinava, Executive Director of the Caucasian Institute for Economic and Social Research (CIESR), a Coalition member organization, the governmental strategy on self-governance reforms will embark upon fiscal decentralization with the second phase of reforms, which in likelihood will only come in two or three years.. According to Tordinava, it is planned that income tax will be shared between the central and municipal budgets, while the currently active transfers, together with property taxes, will also remain in municipalities.
Meantime, municipalities will be dependent on the central budget by almost 80%, as they have up to present day. In Estonia, for example, fiscal dependence between the central government and municipalities is 50/50, whereas according to the current law of Georgia, all taxes except property tax are sent to the central budget – thus insuring fair funding of municipalities and their economic development through equation transfers that are calculated based on a special formula. Special and targeted transfers are also disbursed from the center, to meet special needs of the regions.
This sort of high dependence on the center creates a risk that the central government may use municipalities for enhancing its political influence in the regions, and for influencing voting during elections. It was a general practice during the previous government, and this kind of tactic is quite tempting to any authority, analysts say. Besides, fiscal dependence upon the center was distracting to investors.
“Some investors said that when they have been negotiating possible investment projects in certain regions some governors [heads of municipalities] did not care for them in fact; they would say that all investments would have been accumulated in the central budget, at any rate, and therefore they were indifferent as to whether or not the investment project might come about,” Giorgi Tsimintia, Head of the Board of the Association of Young Economists of Georgia (AYEG), a member organization of the Coalition, explained to Georgian Journal.
However, Coalition members believe that the new government apparently has the political will to give fiscal independence to regions, but not immediately, only when the new Code comes into effect in the coming spring. The authorities cannot afford fiscal decentralization at the moment, against the backdrop of an economic slowdown and reduced budgetary incomes, they say.
It is certainly true that a developing country like Georgia needs at least 10% of GDP growth annually to push its economy ahead. But Georgian economic growth is expected to drop to 2.5% this year, though it may experience a 5% increase next year, International Monetary Fund forecast recently.
“There are three sorts of decentralization: political, administrative, and financial. This draft code suggests political-administrative reforms at the moment, and fiscal reform is a prospect,” said Mikheil Dzagania, an economic researcher at the CIESR.

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