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Losaberidze, Davit. 2008. Policy Analysis. Page 3. Annual Report on Development of Local Democracy in Georgia, 2008. Edited by Open Society Georgia Foundation. Tbilisi. Georgia. 2 Ministry of Finance of Georgia; http://www.mof.ge/ 3 National Statistics office of Georgia; http://www.geostat.ge/ 4 Ministry of Economic Development of Georgia; http://www.economy.ge/ 5 National Statistics office of Georgia; http://www.geostat.ge/
Like many other countries Georgian Government designed anti-crisis plans, conducted the budget police of Tighten of the belts, lightened administration, disbursed more finance for the rehabilitation of infrastructure and by the tax indulgences made Georgia more attractive for international investors. The priorities of the countrys budget changed and most finances were addressed to social spheres. Like that increased giving out transfers to municipality. The policy conducted by the central authority towards the self-governing includes disadvantages. During the crisis the local budget had to take obligation which was not included in their competence.
governing unit. In the year 2010 this law was annulled and was designed Budget Codex, which regulated the state and local budget. Adequacy and conformity is the main principle if financial independence of self-governance and we may say main lack of Georgian legislation. The European Chart about Local Governing Finance It is an axiom that without having private property and financial sources, self-governance would be a sham and will exist only fictitiously. When we talk about the establishment of self-governance, the basic principles should be found in the financial independence. Even if self-governance units are elected with democratic way, have a good institutional structure and highly skilled staff, it is evident that without finances it would not be able to solve even local importance issues. That is way that European charter of Local Self-governance dedicates special article to the local finances. We may say that article of charter, including eight points in it, is the basis of financial independence. Without accomplishing the main principles of the mentioned article, the real self-governance would not exist6. The Georgian Parliament made the ratification of the European Chart of Local Self-Government in the year 2004 October 26. The 9-th article of the Chart deals with the finance of the local governing. Local authorities shall be entitled, within national economic policy, to adequate financial resources of their own, of which they may dispose freely within the framework of their powers(9.1)7. The requirement of the mentioned item is mainly carried out and the local governing organs have their own finance which they can spend in the frame of their authority. The revenues of the budget of self-governing unit consist of own and attracted revenues. The own revenues include the local taxes, local fees, equalizing transfer and other revenues belonging to the local governing units. The attracted revenues include special transfers and earmarked transfers and other revenues established by the Georgian legislation. The local self-governing units can spend their own revenues independently according to their opinion.
Chkheidze, Paata. 2005. Aspects of Administrative and Legislative Decentralization. Proceedings of Fiscal Decentralization Forum Georgia, 2004. Tbilisi. 7 The European Chart of Local Self-Government, Strasbourg, 15 October 1985. 8 Ministry of Finance of Georgia; http://www.mof.ge/
At the result of it, the structure of local budget has changed totally. If in the year 2007 the own taxies revenues came to 50.2% of the local budget, it decreased by 15.1% in 2008. In the year 2008 the biggest portion 35.6% of attracted revenues among the revenues of self-governing budget comes on the revenues gotten from transfers. 35.1% from total revenues comes on attracted revenues, 15.1% - on tax revenues and 9.8% on the capital revenues. In the revenues of local budgets unimportant portion has the revenues received from grants and loan, which only amounts to 0.03% and 4.5% of the total revenues9. Although if comparing the year 2008 with 2007 the amount of various revenues had completely changed. In the year 2008 relatively with 2007 tax revenues reduced by 100%; In the year 2008 relatively with 2007 attracted revenues reduced by 114%; Capital revenues reduced by 133%; Totally tax, attracted and capital revenues reduced by 158% in the year 2008; Grants increased by 80000%; The loan quota increased by 100%. Although the budget of local government did not reduce, their portion towards united budget and GDP has been reduced10. Year 2004 2005 2006 2007 2008 2009 Local Budget in GDP % 6.8 7 6.8 8 7 6.7 Local Budget in United Budget % 26 24 18 20 18 17
It is worth to mention, that for state budget as well as local ones, 2009 was the problematic year comparing with the year 2008. The results of the crisis reflected on the budget only from 2009. The situation has been improved from the beginning of 2010, as incomes were comparably higher for state budget, as well as local ones. Property Taxes in Georgia In the European Chart of local government has been underlined that the organs of local government should be a right of adopting local taxes and fees. They should get the part of local revenues just out of it. Today, according to the acting law, one of the major sources of owns revenue of the local budget is the tax of the property and seven kinds of local fees. In connection with the tax of property due to the existing indulgences this tax is not able to fill the budget of municipalities. Economic crisis did not affect the revenues got from property taxes. On the contrary, it even increased. In the year 2007 the tax of property came to 67.3 MLN US dollars. Out of it the portion of Tbilisi was 49%. In 2008 the common revenues of the units of local governing amounted to 88.4 MLN US dollars. Out of it 51% came to Tbilisi. In 2009 the tax of property was 96 MLN US dollars and 41% came to Tbilisi. Although this sum is very little and it is only 9% in total quota of budget 11. Local Fees in Georgia One of the sources of filling the local budgets is local fees, though the enumerated figure of local fees established only by the law means nothing if self-governing unit does not pass the right administration of these
9
Ministry of Finance of Georgia; http://www.mof.ge/ National Statistics office of Georgia; http://www.geostat.ge/ 11 Ministry of Finance of Georgia; http://www.mof.ge/
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local fees. Today only seven kinds of local fees work. Since January of the year 2007 lots of local fees have been annulled. Although there added others instead of them. Although there added other instead of them, but the new local fees dont act and the budget do not get revenues from them. In the Year 2007 from the local fees 27268.2 thousand US dollar went into the local budgets. Out of it 21230.5 thousand US dollar get comes to Tbilisi. In 2008 41773.3 thousand US dollar get and the portion of Tbilisi is 32319.4 thousand US dollar12. Although the size of the local budget has not reduced despite the crisis, but it occurred at the expense of transfers. More than 2/3 it of revenues of some municipalities is transfer. According to economic experts, that in its part increases the danger of pressure from the central authority.
12
Regional Differences
In Georgia some municipalities are riches and some are poorer due to its poor resources. In order not to by a big social-economic difference among municipalities it is important that the centre should take upon itself to solve this problem and the European Chart considers it in its part. According to the requirement of the chart: The protection of financially weaker local authorities calls for the institution of financial equalisation procedures or equivalent measures which are designed to correct the effects of the unequal distribution of potential sources of finance and of the financial burden they must support. Such procedures or measures shall not diminish the discretion local authorities may exercise within their own sphere of responsibility13. In Georgia the demand of the noted paragraph since the year 2007 is being fulfilled, as there is a formula of equalizing transfer proved on the base of the law. The equalizing transfer is given to the budget of self-governing unit as a financial aid for the purpose of implementation of the exclusive authorities. In Georgia, as well as in all other countries, all municipalities have not got the same economic bases and their budgets are also different. Equalizing Transfer according to the Regions The purpose of equalizing transfer is to finance various self-governing units is order to reduce the financial difference and equal the level of their development. The equalizing transfer is given to self-governments in order to finance the difference that exists between revenues and expenses. However according to the decision of the Georgian government only 70% of necessary transfer has been financed, because of which local governments are unable to implement financing of all kinds of necessities. The requirement of the Europe chart 9.6 - Local authorities shall be consulted, in an appropriate manner, on the way in which redistributed resources are to be allocated to them14. Georgia is not joined with this article of the chart and accordingly local governments do not participate in distribution of their finance. According to the chart, transfer should be allocated to equal week local government with others. However it happens so that a big quota of transfers comes to the capital and to big municipalities, as they have much expenses and week municipalities have got little budget and their expenses are reduced. Tbilisi - the capital, comparatively with other municipalities, has got the most budget revenues at one person. It has the best regulated infrastructure and the most part of the state budget is spent in the capital. There is a situation, when the capitals budget is twice as more as all the other budget of self-governing (with minus of Autonomous Republics). Actually, it can be noted that all economic activity and finance are concentrated in one city. The Graphic of the equalizing transfer about the difference According to the regions15
2008
2009
2010
13
14
The European Chart of Local Self-Government, Strasbourg, 15 October 1985. The same. 15 Ministry of Finance of Georgia; http://www.mof.ge/
In Georgia the dynamics of allocating the transfer during the years 2007-2010 was like that. In the year 2007 from central budget as transfer 43 MLN dollar was allocated for local governments. Out of it equalizing transfer was 30%, 67.5% was giving to special transfer and 2.5% for earmarked transfer; In the year 2008 the quota of transfer increased by 700% comparatively with the year 2007 and amounted to 335 MLN Dollar. Out of it 66% was giving to equalizing transfer and 3% to earmarked transfer and 31% - to special transfer; In the year 2009 the size of equalizing transfer reduced by 14%, though the size of special transfer increased by 77%, but the size earmarked transfer increased by 35%; In the year 2010 in the state budget there has been considered 490 million dollar for local selfgovernment and comparing with the year 2009 it is the growth by 34%; In the year 2010 equalizing transfer will be given more than 89% and the quota of the special transfer will increase by 8.2% and the quota of earmarked transfer will reduce by 29% comparatively with 2009. The considerable growth of the equalizing transfer is caused by the changes of accounting method. It should by mentioned, that the most part of equalizing transfer 71% comes to self-governing cities. It is worth to mention, in 2008, budget revenues and equalizing transfer per inhabitant for local selfgovernments were characterized by fluctuations. The average of budget revenues of local self governments calculated per inhabitant amounted to 214.3 GEL, but equalizing transfer per inhabitant amounted to 50.2 GEL16.
900.0 768.8 800.0 700.0 600.0 500.0 358.4 400.0 348.5 232.3 300.0 137.4 128.4 155.9 200.0 118.4 114.7 98.8 97.0 83.7 49.9 34.2 25.6 21.5 21.3 100.0 20.2 17.4 15.6 13.2 11.8 0.0
US $
Mtskheta municipality has the maximum amount of budget incomes per inhabitant. It is caused by the fact that in August, 2008, after Russian-Georgian war, there were allocated funds from the state budget to build living facilities for refugees. These funds were register within the budget of Mtskheta municipality. Delegated Authority - The Earmarked Transfer The least portion in transfer comes to earmarked transfer. According to the law earmarked transfer is transferred to finance delegated authority of the local self-governing. Delegation of authorities to the self-governing unit by the state governance bodies shall be allowed on the basis of legal acts of Georgia, and the agreement accompanied by the transfer of commensurate material and financial resources. According to the law in 2009 for the local self-government had been determined the following delegation of authorities:
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Public Health care; Compulsory military service; Military reserve; Minimal social help. However, some of the municipalities did not get the necessary sum of financed the delegation authorities from central budget and allocated the finance from their own revenues. For example: the municipality of Kharagauli allocated approximately 5000 Us dollar from its revenues to finance which should be used to settle the important problems considered as priority by the population. Problems about Special Transfer It should be noted one more fact, the chart considers, that 9.7 article As far as possible, grants to local authorities shall not be earmarked for the financing of specific projects. The provision of grants shall not remove the basic freedom of local authorities to exercise policy discretion within their own jurisdiction17. It can be said, that this requirement of the chart is not fulfilled up to end and in most cases selfgovernment have to finance such expenses that are not in their competence. According to the law, special transfer should be used for financing unforeseen expenses such as natural disasters. In the year 2008 in organic law was written that special transfer should be used to finance other important expenses. Thats why the purpose of this transfer factually became comprehensive. In the year 2010 special transfer is considered two local governments: On Tbilisi and Batumi (capital of the Autonomous Republic of Adjara). The Graphic of the special transfer about the difference According to the regions18
2008
2009
The European Chart of Local Self-Government, Strasbourg, 15 October 1985. Ministry of Finance of Georgia; http://www.mof.ge/
thousand
Helping Villige Cheap Credit Programs To overcome the problems caused by the war and crisis two Georgian government started to implement two important programs: The program of helping villige and a cheap credit program. In the frame of a program of helping village all the municipalitys villages were given certain finance and this finance was used by the local inhabitants themselves. In the frame of helping a villige, all municipalities villages have been given finances and they have been used by the local population. In same villages there has been made water supply, were built nursery schools, libraries. In this work the local population have been employed. We think that such stimulus was important for avoiding the crisis, though it is better that local governments should be given more finance resources in order to be able to finance all kinds of needs. The governmental program Cheap credit contains two sub -programs - Export Promotion and Regional tourism, agricultural and handicraft development. Within the framework of this program, in 2008 and in 2009 were financed 134 projects and total value of projects amounted more than 40 million US Dollars. The budget of this program was distributed by all regions of Georgia. The amount of direct and indirect beneficiaries of cheap credit program exceeds 32 thousands persons 19. The program of the local business has considered allocating cheap credit for local business. The local businessmen were given credits with a low interest rate. They created enterprises and employed the local population in it. Primarily, credits were given to businessmen who have their business in those municipalities that were damaged because of the Russian aggression. Russian military forces did a serious harm to Georgian strong municipalities. In order not to be lagged behind these municipalities, many activities have been financed from the central budget. Budget Priority of Social Sphere Crisis has affected the social situation: the number of unemployed has increased, there started migration inside and outside the country. That is why to avoid these problems are largely dependent on the right policy of self-governance. During the crisis the priority of the local budget should be changed and mainly directed towards the social sphere. As it has been mentioned, Georgian municipalities have not got strong financial resources that are why crisis has not affected it largely. However social situation has changed. Just because of it, Georgian local authorities looked at the budget policy and directed the finances towards the social projects. That is confirmed by the statistics of the years 2007-2009. According to the law funding of social field is not an own competence of self-government. It is a competence of central government. It is reflected in the law on self-government, that its competence is mobilizing the municipal resources in the spheres of health and social care on the territory of self-governing unit, working out, implementing and informing the population about the appropriate events, such as the creation of safety environment for peoples health, the establishment of the wholesome manner of life and the identification of risk factors concerning the health. Although, since the economic crisis appeared, self-governments announced social programs as a priority. In general, it is very important to carry out an analysis of self-government expenditure policy. This shows how effective is the self-government, and if it spends the income correctly in accordance with the law and set targets. In the year 2007, the self-governments expenditures amounted to 756724.1 US Dollars20. The expenditures were as follows:
19 20
Finance representative Self-defence and executive 0.2% authorities 11.0% Social care 3.5% Education 6.4% Rest, culture 6.6% Health care 1.3%
In the year 2008 the total quota of the budget taxes of self-governing units came to more than 906 MLN dollars. Quite a considerable sum was spent on financing non-own competence (Police departments, the office of Parliament major deputy, Health care, general education and etc.). Number of rights and authorities are not distinguished between the central and local governments 21. In 2008, the small exclusive competences of self-governments were decreased even more and the fields like water supply achieve management, central heating, rests utilization were taken away. When worldwide, exactly the local self-governments are authorized to regulate the above-mentioned fields.
Finance representativ e and executive authorities Social care 12.7% 4.4% Education 9.9% Rest, culture 7.5% Health care 2.2% Accomodatio n economy 35.9%
Self-defence 0.3%
In the year 2008 the quota of non-own expenses is not so little. In 2007 the portion of non-reasonable expenses came to 6.4% of total expenses. In 2008 9.1% and in 2009 it takes 8.6% in the planned taxes 22. Non-finance of exclusive authorities by the local government makes social conditions more difficult in the regions. Because of decreasing income, the budget of local self-government is limited. Thats why it is not acceptable, to use the most part of finances on funding of apparatus of self-government and other nationwide programs (like healthcare, education). Local self-governments do not fund the projects oriented on real development. In most local self-government areas, the infrastructure is not arranged and limited amounts are spent on social events. That causes the increase in migration from village type settlements to urban ones and
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Narnamia, Davit , and Losaberidze, Davit. 2009. Expenditure Policy of Local Self-Governments in Georgia. Caucasian Institute for Economic and Social Reserch. Tbilisi. Georgia. Also available online at http://www.ciesr.org/uploads/publications/gtz_research_ciesr_geo.pdf 22 Ministry of Finance of Georgia; http://www.mof.ge/
from urban type settlements to the capital city. As a result, the 1/3 of the country population is concentrated in the capital city23. In the year 2009, the self-governments expenditures amounted to 594757.8 thousand US Dollars24.
Finance representative and executive authorities 13.9% Social care 6.7% Education 9.3% Rest, culture 7.7% Health care 3.2% Accomodation economy 29.7%
Self-defence 0.4%
Society participation level in the activities of local self-government and decision-making process in pretty low. The problem is the factor, that the society do not have imagined clearly and is not quite aware about the role and functions of the self-government and the point that the people is the source of authority and power, and they must be involved actively in resolution of issues of local importance. In Georgia, this right is used while voting. Nowadays, society involvement and participation in resolution of locally important issues is minimal. In 2007-2008, while planning local budget expenditures, there were ignored the priorities of the population. It was low participation of the society in the budget planning process, although since 2009 the municipalities have been trying to involve local population in budget planning process and make them set their priorities themselves. It is conducted based on sociological survey, though it happens frequently, when the population requests to fund the project beyond the exclusive competencies of local self-governments.
Reforms
After economic crisis Georgian Government more activity started to develop regions and to give them more authorities. From the year 2009 the government started to pass the reforms in this course and all kinds of changes have gone into the organic law and the competences of the local self-governance have increased. These changes will be enacted in the year 2010 after the local elections. In addition in 2009 created the Ministry of Regional Development and Infrastructure, competences of which represent: Works out proposals on municipal development, administrative-territorial arrangement and regional governance system reforms; Leads activities to stimulate innovations activities; Supports establishment of research and development institutions in the field of innovations; Draws up recommendations for decrease of existing disproportion in the levels of the socio-economic development among the regions; Prepares proposals on support to entrepreneurship activities, stimulation of investments, regulation of employment issues, creation of new job places and improvement of the social infrastructure; Prepares recommendations on the calculation methodology for the equalization transfer.
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Losaberidze, Davit. 2008. Policy Analysis. Page 4. Annual Report on Development of Local Democracy in Georgia, 2008. Edited by Open Society Georgia Foundation. Tbilisi. Georgia. 24 Ministry of Finance of Georgia; http://www.mof.ge/
It was reduced extra free capital within Georgia, the big privatization process was ended and as a result previously received funds expired. Thus, it became doubtful to finish old programs, not speaking about launching new ones. Even if the central government expresses the desire, the implementation of the reforms, such as enforcement of local democracy, appears to be hard, because of the need of serious funding. At the same time, inefficiency of present local self-government system becomes more apparent. The demands for changes come more frequently not only from the representatives of civil society and international organizations, but the officials of serf-government too. It is needed to start real decentralization and to be the reform fully implemented 25.
Recommendation
To proceed the real expenditure policy, it is necessary to solve the following issues: To provide the real fiscal decentralization, giving the chance to local self-governments to spend more funds independently; The central government should transfer particular sources of income to local selfgovernments; The income tax should be placed to local self-government budgets instead of the state budget; The local self-governments should be granted a real independence while planning expenditures part. The central government interference should be excluded from all those processes; The local budget should be transform on the program principles of financing, that means that on the activities financed from budget the target program should be previously elaborated and approved with budget. This will ensure the purposive and transparent expenditure of concrete local budget; Establish principles of state transfer policy; It is vital to increase the population involvement level in budget expenditure planning process, to let the local self-government to fund those issues, which are the most important for the local population; Establish local budgetary public control system; Delegate authorities should be fully ensured financially with earmarked transfers by Central Government; Once the nice property basis is set up, it will support the financial development and improvement of investment environment; Upon the distinguishing the central and local government property, it is necessary to grant wider authorities and real independence to local self-governing units. It will give to selfgoverning units to use and control the mentioned property more efficiently in their best interests. They would be able to use the income from this property within their competence, influencing self-government economic growth.
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Losaberidze, Davit. 2008. Policy Analysis. Page 3. Annual Report on Development of Local Democracy in Georgia, 2008. Edited by Open Society Georgia Foundation. Tbilisi. Georgia.
References
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Chkheidze, Paata. 2005. Aspects of Administrative and Legislative Decentralization. Proceedings of Fiscal Decentralization Forum Georgia, 2004. Tbilisi. Losaberidze, Davit. 2008. Policy Analysis. Annual Report on Development of Local Democracy in Georgia, 2008. Edited by Open Society Georgia Foundation (OSGF). Tbilisi. 2008. Narnamia, Davit , and Losaberidze, Davit. 2009. The Spending Policy of Local Self-Governments in Georgia. Caucasian Institute for Economic and Social Reserch. Tbilisi. Also available online at http://www.ciesr.org/uploads/publications/gtz_research_ciesr_geo.pdf Toklikashvili, G., Gvelesiani, G., and Murghulia, S. The reform of Fiscal decentralization in Georgia. The Center for Strategic Research and Development of Georgia. Bulletin 109, June 2008. Tbilisi. Shergelashvili, Tengiz., Narmania Davit., Fiscal Equalization in Georgia. 2006. Tbilisi. The European Chart of Local Self-Government, Strasbourg, 15 October 1985. Organic Law of Georgia on Local Self-Government. Tbilisi. December 16, 2005. Law of Georgia on Property of Local Self-Government Units. Tbilisi. March 25, 2005. Georgia Budget Codex. Tbilisi. 18 December, 2009. http://www.mof.ge/ http://www.geostat.ge/ http://www.economy.ge/