Fiscal centralization encumbers regions
10 February, 2011
Fiscal centralization encumbers regions

Georgian fiscal policy suffers from the centralization, which causes underdeveloped regional economic activity and vast migration tide, devastating villages.
Georgia is on the track of centralization rather than decentralization irrespective its decentralization obligations assumed against the EU. Its fiscal policy bespeaks of this fact.
Budgets of self-governance bodies by almost 90% depend on the central state budget that deprives local governments to dispose  with their financial resources at their own discretion and hampers to  regional development of the country –

this is the key finding of the Center for Economic Problems Research (CEPR), a nongovernmental organization, based on the analsis of  budgetary policy of 2010-2011 of Georgian big cities including the black Sea outlets Batumi and Poti, as well as industrial towns of  Kutaisi [in the west part of the country] and Rustavi – adjacent to Tbilisi. 
Georgia assumed an obligation against the European Charter on Local Self-Governance bodies in 2005 to implement decentralization in the country and implemented somewhat decentralization-oriented reforms then by implementing political cosmetic changes but the fiscal policy bespeaks of the reverse trends.
Thanks to the budgetary policy based on alleged fiscal decentralization principle the central budget takes all tax-based incomes except the property tax and gambling business tolls from the local budgets. Share of property tax that charges by the least rate of 1% makes about 3-4% of the local budget revenues that is a drop in the sea and cannot finance all the due expenses of self-governances. As to gambling tolls this kind of business is developed just in two-three big towns like Tbilisi and Batumi while there are more than 60 self-governing bodies throughout Georgia and bigger part of them cannot count on gambling tolls.
“You know some people say that centralized policy is better for our country, I do not argue may be this is the right way but the bad thing is we say one thing and do another. I mean that government says it is for decentralization while implements a fully centralized fiscal policy,” Shota Murghulia, the CEPR analyst, told Georgian Journal.
Tax-based incomes are the major part of any budget, 80% of Georgian central budget is made by taxes however it takes almost 100% of taxes from local budgets and compensates the misbalance through transfers.  The scheme works as following:  the center calculates total incomes of all local budgets based on equalization formula and finances local governments through equalization, special and target transfers. Out of these transfers the equalization transfer is the most important by its volume and concept as local self-governance bodies are supposed to dispose with it at their own discretion.
However the fact is that central government defines all budgetary priorities actually and self-governance bodies just nod, Davit Narmania, Board Chairman of the CEPR, said. Special and target transfers are officially defined by the central authority as targeted priorities and they cannot be diverted on other purposes.
According to Murghulia, this kind of fiscal decentralization policy was backed by reason to treat all regions fairly. Actually local governments are developed differently  according to their size and economic activity [like some have big incomes some very small]and to insure smooth and fair development of the entire country government decided to gather all budgetary incomes and redistribute it through the equalization formula on all local governments according to their size and need.
“But nobody knows how fairly the equalization transfers are redistributed in fact, this equalization formula is quite sophisticated and none of the self-governance bodies can calculate it, only Ministry of Finances knows how to calculate it,” Murghulia said.
“24% of the total public financial resources of the country are spent on self-governances but 12% out of this figure goes to Tbilisi alone and the remainder 12% is redistributed among all the other local budgets,” Narmania elaborates. “And the central government is the decision-maker in fact. Very often programs implemented by the regional development fund [of the state budget] duplicate the targets of self-governance bodies and the latter plays the role of an “outsider”. And situation aggravates each year by more and more fiscal weakening self-governments. This year government plans to take GEL 40 million from the self-governance bodies and put it in the fund of regional development to finance regional projects that are beyond the competence of this fund actually. I mean rehabilitation of sewerage systems [in regions], regional roads and bridges etc.”
The result of high dependence on the central budget is that the central authority dictates to regions its policy laying ground to formal decentralization that creates setbacks to the country’s economic development as it boosts voluminous streams of economic migrants from rural area to urban that devastates Georgian villages.
To mitigate the situation Narmania recommends  to clearly separate the competences and rights of central and local governments, also to make self-governments to be fiscally self-dependent. To this end even part of income taxes should be remained to local budgets that will provide self-governments with sufficient finances to finance their expenses. But if self-governing body is very poor and economic activity is too low there the central budget should support it through equalization transfer.
“That will be fair and the unlike  way when you take all incomes from local governments and send transfers instead,” Narmania said.

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