The Government of Georgia (GoG) is currently preparing a new Local Self Government Code that will introduce significant modifications to the structure of local-self-governments (LSGs) in Georgia. Currently, Georgia has 63 LSGs (excluding Tbilisi and those areas not under Georgian control). If the proposed law is approved in Parliament, it would increase the number of LSG units dramatically: according to the GoG, by 2015 there would be close to 120 LSGs, and by 2018, approximately 240 LSGs overall. At time of writing, the draft Code was still under discussion by the GoG, prior to its introduction to Parliament.

This policy proposal has generated considerable debate, particularly with respect to its eventual costs. Thus, as a contribution to the policy reform process prior to its finalization and introduction to the Parliament, in August 2013 the G3 program contracted the International School of Economics at Tbilisi State University (ISET) to carry out a study of the fiscal implications of the GoG’s proposal to increase the number of municipalities.1 In designing the study, G3 consulted with the Ministry of Finance (MoF), which agreed to provide ISET with all of the necessary fiscal data on LSG revenues and expenditures. The ISET researchers, too, conferred with the MoF on the data sources and also with representatives of the Ministry of Regional Development and Infrastructure (MRDI) on the scope and timing of the proposed territorial reform.

The proposed reform is motivated by the so-called Subsidiarity Principle, calling for a maximal decentralization of governmental administration, as local governments are arguably better informed about local circumstances and can therefore make decisions that better fit local preferences and needs. The advantages of subsidiarity are not necessarily monetary, but may, for example, come in the form of higher legitimacy of government decisions. At the same time, according to the theory of fiscal federalism, an LSG should only execute those government functions that are primarily of local relevance, as the decentralized management of tasks that span larger regions typically gives rise to inefficiencies. For instance, so-called spillover effects lead to an undersupply of governmental services, as some local governments can have a free-ride on the public services that are provided by their neighboring municipalities.