Georgia will need to Manage Public Expenditure Pressures to Support Growth and Stability
December 10, 2012
Tbilisi, December 10, 2012 – Georgia will need to skillfully manage significant public expenditure pressures in several sectors to meet its fiscal consolidation targets over the next three years, according to the Georgia Public Expenditure Review (PER) report titled Managing Expenditure Pressures for Sustainability and Growth presented by the World Bank today. The report points out that implementing and potentially deepening fiscal consolidation will be important for Georgia to generate strong growth with macroeconomic stability in an uncertain global environment.
“This Public Expenditure Review is intended to contribute to a forward-looking policy dialogue on the key challenges associated with medium term expenditure consolidation and the options to address them,” said Henry Kerali, World Bank Regional Director for the South Caucasus. “In preparing the report, the Bank team benefited from consultations with government representatives, independent experts, and the donor community. We believe that this report comes at a critical juncture as Georgia seeks to balance its expenditure priorities across several sectors.”
The report takes a detailed look at the challenges and policy options associated with public expenditure policy in several areas, including pensions, social assistance, health, capital budgeting, and the roads sector.
“Social expenditure pressures arise from the need to provide adequate old-age income to an aging population that relies primarily on the publicly funded pension benefit, as well as from needs to improve social assistance coverage of the poor, and improve health outcomes,” said Faruk Khan, World Bank Senior Economist and lead author of the report. “Capital expenditure pressures arise from the need to rehabilitate a large backlog of the secondary and local road network in poor condition, continued improvement the East-West Highway, and from new investment needs in energy, water, agriculture, and regional development.”
The report presents an array of policy options that could collectively curtail expenditure pressures estimated at about 2.8 percent of GDP in 2015, thus allowing Georgia to meet its fiscal consolidation targets while efficiently addressing its expenditure priorities in different sectors.
The pension options include linking growth of the basic benefit to inflation while selectively targeting larger increases to those in greatest need, thus protecting purchasing power and setting expectations at sustainable levels. Developing voluntary savings for retirement would also help to ease pressure for unsustainable increases in the basic benefit. Increasing targeted social assistance (TSA) coverage of the poor and prioritizing increases in TSA over universal pension and voucher programs would enhance equity of overall social benefits, while linking TSA recipients to employment and human capital opportunities would reduce pressure on TSA in the medium term.
In the area of health, the options include expanding health insurance coverage with a focus on the poor population, addressing weaknesses in the quality of care with a focus on primary care, and reducing high out of pocket pharmaceutical spending by promoting use of generic brands of medicines.
Options to induce greater selectivity in capital expenditures include further improving the content and presentation of the capital budget, introducing a systematic project screening and identification process, and developing systematic capital budgeting guidelines. These options would help to most effectively manage the growing pipeline of infrastructure project needs within the fiscal envelope.
Options to enhance long run sustainability of efficiency of roads sector investments include adequate provisions for routine and periodic maintenance, rebalancing outlays for rehabilitation and new construction as investment in the East-West Highway winds down, and initiating rehabilitation of a target subset of the local road network.
As Georgia’s economy rebounded by more than 6 percent per year during 2010-11, the fiscal deficit declined from 9.2 percent of GDP in 2009 to 3.6 percent in 2011, primarily from a consolidation of current expenditures from 30.1 percent of GDP in 2009 to 23.3 percent in 2011. The policy options presented in the PER report should enable further fiscal adjustment during 2013-15 to come from a balanced consolidation of both current and capital expenditures. The report also indicates that in the event of higher than projected growth during 2013-15, deepening fiscal consolidation can help prevent a buildup of macroeconomic imbalances and encourage a shift toward sustainable growth driven by the tradable sectors.