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Equalization Formula Ministry of Finance of Georgia Budget Department Tbilisi October 18, 2007

Equalization Formula Ministry of Finance of Georgia Budget Department Tbilisi October 18, 2007. Introduction. Current Position Previous Position Reason

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Equalization Formula Ministry of Finance of Georgia Budget Department Tbilisi October 18, 2007

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  1. Equalization FormulaMinistry of Finance of GeorgiaBudget DepartmentTbilisiOctober 18, 2007

  2. Introduction • Current Position • Previous Position • Reason • During Formula development process I used to be the Budget Director at the Ministry of Finance of Georgia; the formula was prepared under my direct leadership • A local consultant was hired to develop the formula.

  3. Introduction • Purpose of Presentation • Review of the reforms implemented for decentralizing local self-governance in Georgia • Organic Law on Self-Governance (1997) • Elections for the self-governance units (1998) • Establishment of the 1072 self-governance units • Amendments into the Organic Law on Self-Governance • Creating 69 Self-Governance units from 1072

  4. Self-Governance Unit

  5. Introduction • Outcome • Increase in Revenue • Revenue Simplifying hiring of the more skilled staff • Increasing the degree of independence for self-governance units • Law on the Budgets of the Self-Governance Units • Budget authorities • Types of the transfer • Equalization transfer formula

  6. Need for New Equalization Formula • Existing formula did not meet the requirements • Amendments in legislation • Average income decline • Did not cover all of the municipalities

  7. Goal of the New Equalization Formula • Equal financial capacity • Simplicity • Inability to manipulate data • Comprehensiveness

  8. Equalization Formula Ti=(E-R)*K where: Ti – shows equalization transfer for local municipality E – shows budget expenditures of local municipality R_ shows revenues of local municipality K– is coefficient of support

  9. Expenditure Calculation E=∑ Cn*Pn or C1*P1+ C2*P2+ C3*P3+ C4*P4 + C5*P5 + C6*P6 E (expenditure) = the sum total derived from the multiplication of the statistical data (Cn) and equalization coeficient (Pn) where: Cni.e (C1 C2 C3 C4 C5 C6 ) – is a statistical indicator of local self-governing unit (population, pre-school age children, area, number of youth under 7-18, status of the capital, roads of local importance); Pni.ePn (P1,P2,P3,P4,P5,P6.) – Equalization coefficients, which represent interconnection between each category of expense (function) and statistical indicator. Amount of equalization coefficient is calculated through regression analysis, which is then approved by the order of the Minister of Finance for the long-term period (3-4 years); this coefficient is the same for all self-governing units and increases annually consistent with the Consumer Price Index (CPI) identified in the Basic Data and Direction paper (BDD)

  10. Calculation of Equalization Coefficient • State service of common purpose • Defense • Public order and security • Other expenses • Education • Economy • Environment protection • Housing communal services • Recreation, culture and religion • Health protection • Social Provision Administration Education Economic activity Culture Health and Social Insurance

  11. Calculation of Equalization Coefficient

  12. Calculation of Equalization Coefficient • Calculating average cost • Calculating average expense indicator based on the forecast expenses of the basic (present) year and actual expenses of the previous two years. • Finding the correlation by individual function between average expenses and statistical indicators through regression

  13. Equalization Coefficient

  14. Calculation of Equalization Coefficient

  15. Calculating BudgetExpenditures of Municipalities

  16. Revenues of Local Municipalities • R - revenues of local municipality (property tax, non-tax revenues, capital revenues). Revenues for each district are calculated according to the tendency (“TREND”) of current year forecast and previous three year actual indicators. Excel function “TREND” had been used for calculation of revenues. R=TREND(2004w, 2005w,2006w,2007w)=15,995.2 Calculating revenues

  17. Support Coefficient • At the following stage, amount of equalization transfer of the budget of each local municipality is calculated. This transfer is received via multiplying the difference between the expenses and the revenues of the same municipality by the coefficient of support (K), which is approved by the government of Georgia for 4 years.

  18. Calculating equalization transfer for Batumi Calculating revenues Note* - length of road = (127*0.9)*0.9 + (127*0.1)*0.1 R=TREND(2004w, 2005w,2006w,2007w)=15,995.2, If K=0.6 Then T=(E-R)*K=(32975.2-15995.2)*0.6=10188.0

  19. Issues Encountered in Transition • Calculated transfers were not sufficient to offset loss of income tax • Status of the Capital should be revised • Use indicators that have stronger coefficient (with higher correlation coefficient) • One Time Revenue fluctuation (including capital revenues) • Tie transfer pool to GDP, VAT an etc.

  20. Having been discussed with Parliament and Government the Formula was approved by the “law on self-governance unit” and Instructions for transfer calculation was approved by the Order of the Minister

  21. Thank You for Your Attention!

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