Economic reforms announced in the run-up to the parliamentary elections in October 2016 raised concerns about whether Georgia was departing from its path of prudent fiscal policy. A reform of the corporate profit tax and increased infrastructure investment were driving expectations of a 6% of GDP budget deficit in 2017, endangering Georgia’s macroeconomic stability and its reputation with investors.
After winning the elections, the “Georgian Dream” coalition has undertaken significant efforts towards keeping the budget deficit at bay. The deficit in 2017 is now expected to remain at around 4% of GDP and to decrease in the coming years. This was achieved by increasing excises on goods such as fuel, cars, tobacco, and gas and by further savings in administration expenditures. Immediate worries about Georgia’s economic stability are hence allayed. At the same time, it is important to monitor the economic and fiscal effects of the new fiscal measures in the coming years.
An economic reform plan for the elections In the parliamentary elections in Georgia at the end of last year, the governing “Georgian Dream” coalition won a clear victory. Before the elections, Prime Minister Giorgi Kvirikashvili had announced a “four points” plan for economic reforms:
• fundamental reform of the corporate profit tax, only taxing dividends instead of profits
• Almost USD 3.5 bn investment in infrastructure for regional development until 2020
• A one-stop-shop “business house” to serve all public administration needs of companies
• Reform of the (vocational) education system according to the German model
Some elements of this plan were already implemented before the election. The reform of the corporate profit tax according to the “Estonian model”, which aims at simplification of procedures and increasing investments by taxing disbursed profits (dividends) instead of retained profits, was already signed into law in May 2016, but the application has commenced in January 2017.