journal N1 2025

Expanded Summary

Fiscal policy is one of the main parts for the implementation of the economic policy, which does not have the immediate impact on the macroeconomic indicators. Therefore, during assessing the impact of fiscal policy on macroeconomic variables, not only the short-run but also the medium and long-run effects should be analyzed. Moreover, the size of the impact differs depending on the policy instruments used.

The research topic of fiscal consolidation in Georgia and its possible macroeconomic impact is still new considering the available data of budget revenues and expenditures are from only 1995. Hence, the last two decades are the most important period for the discussions about the quantitative and qualitative results. It should be noted that according to the organic law of Georgia on economic freedom, budget deficit should not exceed to 3 percent of GDP and public debt should not exceed to 60 percent of GDP. Therefore, fiscal consolidation becomes crucial due to the crisis and economic shocks, and there are the discussions about the different alternatives during the implementation of fiscal consolidation.

In this paper, changes in Georgian fiscal policy in terms of consolidation is analyzed, including the pre-pandemic and current period. In addition, it is also defined how important is the spending decomposition for the economy and the concentration on the current or capital spending.

The macroeconomic effects of fiscal consolidation differ through the changes in revenues and expenditures as well as the decomposition of expenditures. Fiscal consolidation implies that Cyclically Adjusted Primary Balance should improve by minimum of 2 percent of GDP or should improve by minimum 1.5 percent of GDP during 2 consecutive years. “Tight episode” is defined as successful and expansionary tight fiscal policy. The paper finds out the “tight episodes” for Georgia and explores, in which years was the fiscal consolidation in Georgia and whether it was through the reduction in current, capital or both spending.

The paper includes the effects of changes in spending decomposition on Macroeconomic indicators. The results show that when consolidation is implemented through the reduction in capital spending (as a share of total spending), Cyclically Adjusted Primary Balance deteriorates, compared to the results through the reduction in current spending. The difference is higher when observing the impact on Primary Balance. Moreover, revenues increase less and economic growth is lower during the next 4 years when the capital spending is declining. After a year from consolidation, results are different whether current or capital spending is using. Primary Balance is more improved when both spending components are using. In addition, economic growth is higher during the fourth year, when using the current spending, while the higher cumulative growth is observed when declining both spending components.