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.
According to the legislation, local government revenue includes own receipts and transferred funds. Own receipts include local taxes and duties, an equalisation grant and other revenues provided to the local self-governing unit. The transferred funds include capital transfers, special transfers and targeted transfers, loans and the grants obtained according to the Law of Georgia on Grants. The legislation provides the right of self-governing units within their powers, to use their own receipts at their discretion.
There has been an increase in municipalities’ budgetary revenues since 2013, which is a positive development.
However, a large part of these revenues continues to come from the central authorities by means of transfers. Between 2013 and 2017, the share of grants received from the central budget made up 49.7-47.7% of total revenues. Today, the main legal debate concerns the Budget Code of Georgia. Since 2016, the Government of Georgia has begun the decentralisation of property income tax (PIT). At the initial stage of the reform, the PIT paid by individual entrepreneurs was assigned to local budgets. Moreover, according to a new reform strategy announced in March 2018 by the prime minister and the speaker of the parliament, local budgets should amount to at least 7% of gross domestic product (GDP) (considered to be a minimum threshold based on practice in other European countries) before the end of the upcoming reform period 2018-25. According to local interlocutors, this strategy requires changes to the Budget Code of Georgia and to sectoral legislation.
In 2017, municipalities received total tax revenues amounting to GEL 559.5 million, which is GEL 269 million more than in 2015. The increase was caused by amendments made to the Georgian Budgetary Code. In particular, since 1 January 2016, the following taxes provide revenue for the budgets of local authorities: income tax paid by private individual entrepreneurs; income tax paid by non-residents (income from property sales); income tax paid by natural persons on the surplus from the sale of material assets; income tax payable by natural persons on gifted property; income tax paid by natural persons on inherited property; and income tax paid by natural persons on rented property. Municipalities’ revenues from the various types of income tax described above amounted to GEL 245.4 million in 2016 and decreased to GEL 162.3 million in 2017. Because revenue from these taxes was passed on to municipalities, local authorities have received smaller equalisation transfers from the State central budget as a result. In 2015, equalisation transfers from the central State budget amounted to GEL 834.6 million, while this figure decreased by GEL 234.9 million in 2016 and by GEL 179.5 million in 2017.
Among the existing tax revenues of municipalities, property tax has played an important role as it has brought increased revenue for local budgets. The amount of property tax revenues amounted to GEL 397.2 million in 2017, which is GEL 33.8 million more than in 2016 and GEL 107.6 million more than in 2015. Besides this growing trend, there is room for increasing tax revenues even further. There are, however, significant obstacles that would first have to be removed, such as existing tax privileges for certain categories (for example, owners of agricultural land who owned their land prior to 2015 and natural persons whose income is less than GEL 40 000 per year are exempt from paying property tax) and other problematic regulations (for example, the value of real estate on which property tax is paid is determined by the taxpayers themselves, while local authorities are given no information on property and income taxes paid by legal entities and natural persons).
As for non-tax revenues (consisting primarily of property-related income and fees), their share in the revenues of local authorities’ budgets is considerable: 17% in 2015, 15% in 2016 and 19% in 2017. It has to be pointed out, however, that in the case of community municipalities, both tax revenues and non-tax revenues are meagre; only large towns achieve a meaningful level of revenues.
Fiscal decentralisation remains one of the most important concerns in relation to the local self-governance system in Georgia. The ratio between the revenues of municipalities and those of the State decreased between 2015 and 2017: from 23.4% in 2015, to 22% in 2016 and 20.1% in 2017. The share of municipal budget revenues (except for Tbilisi) in relation to Georgia’s GDP is still low, amounting to 3.16% in 2015, 3.21% in 2016 and 3.06% in 2017.
Municipal property (Article 104 of the Code) also constitutes an important asset for the financial autonomy of municipalities. According to the National Agency of State Property, 1 335 real estate objects were transferred into the ownership of municipalities in 2016 and 1 038 in 2017. In general, proper evaluation of property transferred to local self-governments presents a significant difficulty because its market value is not being established. The ministry of economy and sustainable development does not have this information, even though it is directly responsible for the process of transferring property to local authorities. Moreover, central authorities have not yet fully implemented the decentralisation of land, water, forest and natural resources, although according to Article 107 of the Code, such property existing in the territory of a municipality shall be assigned to the municipality. Until now, the central authorities have not managed to fulfil their obligation under Article 165 of the Code of Local Self-Government to develop, by 1 January 2016, a bill defining local natural resources, including water and land.
Municipal expenditure amounted to a total of GEL 1 813 million in 2017, which is GEL 24 million less than in 2016 and GEL 66 million less than in 2015. In recent years (including in 2017), municipal expenditure mostly related to the areas of economic activity (23%), housing and utilities (19%), education (14%) and other general services.
“State services of general purpose” includes administrative costs and costs for the maintenance and operation of self-governing bodies; the total cost amounted to GEL 245.9 million in 2017, which is GEL 23 million less than in the previous year and only GEL 4.3 million less than in 2015. It should be pointed out that this figure is relatively high in small municipalities.
The budgetary system in Georgia is based on the principle of independence. Municipalities enjoy independence in formulating their budgets and in redistributing and allocating resources. According to Georgia’s Budgetary Code, local authorities should have been drawing up their budgets using the “programme budgeting” format since 2012. Budget performance is managed through electronic public finance management systems. All accounts relating to the municipalities’ budgets appear in the State treasury system of accounts, and central government has real-time information on the status of local authorities’ budgets. Procurements are also managed through a centralised e-procurement system.
However, information on objectives, tasks and expected outcome indicators are still not clearly defined or are simply missing from municipal budgets, although these data should serve as a basis for local self-governments to make decisions on how to distribute their financial resources. According to critical comments made during the monitoring visit, this situation also creates problems for financial reporting and transparency and discourages citizen involvement in the budgeting process.
Concerning compliance with Article 9, paragraph 1, there is no doubt that impressive progress has been made in recent years. A system of local revenue has been developed and municipalities can freely dispose of the biggest part of this revenue. Georgia therefore complies with Article 9, paragraph 1, of the Charter; however, the rapporteurs encourage the Georgian authorities to move forward with further financial decentralisation.