Opinion

The Role of Fiscal Policy in Economic Growth

by | Jul 18, 2013
nino evgenidze

Nino Evgenidze is Executive Director of the Economic Policy Research Center.

During the planning process of the state budget, a 6% real economic growth was predicted; however the civil society and political circles are questioning the feasibility of achieving 6% growth rate and performance of the planned budgetary revenues.

According to the newest data published by the National Statistics Office of Georgia, in May 2013 real GDP growth equaled 0%, as to the VAT turnover a 6.2% decrease was observed in comparison to the previous year. The given information strengthens even further the doubt regarding the feasibility of achieving the planned economic growth.

In this regard, the interdependence dynamics of VAT turnover and the economic growth are worth a mention. Even though both indicators tend to repeat the same trend, and a difference between them is usually in the 3% range, according to the data from May 2013, this difference has gone beyond 6%. Therefore, it is important to define the VAT exempted sector of the economy that has enjoyed significant growth. In other words, such an indicator of VAT turnover makes even a 0% growth rate highly improbable.

The statistics makes it clear that in order to achieve annual 6% economic growth, monthly average economic growth in the remaining months should be at least 8.7%. If compared to the 2.2% growth of the past 5 months, achieving the above-mentioned rate is not feasible. Therefore, 3-4% annual growth is more optimistic, however, even this indicator will be hard to achieve unless some positive changes are made in the country’s economic policy.

Economic growth slowdown and worsened economic indicators will necessarily impact the state’s budgetary revenues, especially income tax. As of June 2013, 2 981.5 million GEL has been mobilized in the state budget in terms of income tax, which represents 43% of the annual plan. This indicator is a decrease compared to last year, i.e. during the 6 months period in 2012 the state budget mobilized 2 963.1 million GEL in taxes, representing 47% of the annual indicator. In 2013, revenues from taxes in the state budget was defined as 6 920 million GEL, i.e. 9.6% above the 2012 reality. Therefore, we should project that according to the 2013 six months data, the state budget has lost more than 265 million GEL in taxes and in case this tendency continues, this sum will increase even further.

During an economic slowdown, the state can play an important role, through fiscal and monetary instruments. In a period of economic stagnation, when the private sector is reluctant or cannot manage to create economic stimuli without the state’s intervention, the state has the possibility to stimulate the economy through targeted fiscal policy. If we take into account that infrastructure projects are a part of the expenditures that stimulates and fosters economic activity, it would have been justified and most important for the state to finance such projects, in order to stimulate activity in the private sector. However, during the 5 months period 267.2 million GEL was spent on infrastructural projects. That is 151.2 million GEL less than in 2012. According to the statement made by the government of Georgia, implementation of such a policy is unjustified, since infrastructure projects should be financed by the private sector. It should be further noted that reducing such projects before the private sector takes over is also unjustified, the consequences of such actions are proved by the economic and budgetary indicators.

Our recommendation is to develop an economic development plan for the country, presenting information about the short and long-term economic policies to be implemented by the state and offering concrete actions for fulfilling this plan, in order to foster economic growth. The mentioned document should be discussed and reviewed in detail among business circles, to increase their confidence and sense of stability for undertaking long-term economic decisions. Such an action plan still does not exist, economic tendencies over the past 5 months once again highlight the importance of having such a plan.

Moreover, economic slowdown was paired with budgetary problems, associated with the performance of the planned tax revenues. Therefore, in order to bring clarity in the economic circles, it will be a positive signal if the society is presented with a plan clarifying how the given deficit will be covered, whether this will be a reduction in the expenditures portion, or attraction of other sources of financing.

At the same time, we have also mentioned the importance of the state implementing policies that stimulate the economy, until the private sector is active enough to stimulate economic activities on its own. Examples of such stimuli is financing infrastructure projects, and allocating sums in this direction. However, as we have noted, a drastic decrease in infrastructure expenditures. Such a policy has already been proved wrong by the economic indicators and hence, our recommendations for economic recovery are still essential.



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