Volume 1: Public expenditure review - Strategic issues and reform agenda 

Volume 2: Public expenditure review - Background notes

Report Outline

To keep government finances on a sustainable path along with sustainable growth and job creation, this public expenditure review offers reform options in the areas of macro-fiscal policy, social protection and health, education, the state owned enterprise sector and inter-governmental fiscal relations.

Macro-fiscal Challenges

• Generating growth and creating jobs within a sustainable fiscal framework is Georgia’s biggest macroeconomic challenge.
• The change in government in 2012 marked a shift in fiscal policy with prioritization of recurrent social expenditures over capital spending.
• Spending on pensions has been the largest component of social expenditures putting pressure on the government’s fiscal position.
• As a result of introducing the universal health care (UHC) in February 2014, health spending is projected to double in nominal terms.
• Public finances in Georgia are likely to come under pressure over the short- to medium-term in the context of large increase in recurrent expenditures and the limited scope to raise revenues.
• The prospect of reduced capital expenditures going forward has increased the urgency of instituting a sound public investment management system.

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Education Expenditures

• Government spending on education in Georgia is low – compared to countries with similar per-capita incomes and relative to both the shortage of human capital and the country’s ambitions. 
• The per-capita financing system in the education sector is transparent and leads to an efficient allocation of resources.
• An efficient distribution of resources cannot offset substantial sector inefficiencies, such as poor teacher quality, and excess number of teachers from the pre-school through the secondary level.
• The vocational education and training program has been completely overhauled but only a fourth of the VET graduates are able to find jobs in their mainstream education disciplines.

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State Owned Enterprises

• According to business survey statistics, the state owned enterprise sector in Georgia is relatively small and its contribution to GDP amounted to 7 percent in 2012 and accounted for about 10 percent of total formal employment.
• The five largest SOEs in Georgia comprise 80-90 percent of the total assets of SOEs and are grouped under the extra budgetary Partnership Fund. Establishing an inventory of SOEs to get a consolidated picture of fiscal position is essential. 
• The government undertakes significant quasi-fiscal operations through these large SOEs, and mainstreaming them into the budget will increase the transparency and accountability

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Intergovernmental Fiscal Relations

• The current administrative structure in Georgia, with just one layer of sub-national government, is in line with international practices.
• 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.
• The low level of revenue autonomy at the local level acts as a disincentive for effective fiscal management.

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Last Updated: Aug 11, 2014