Identifier
Created
Classification
Origin
08TBILISI2252
2008-12-05 14:15:00
CONFIDENTIAL
Embassy Tbilisi
Cable title:  

GEORGIA: 2009 BUDGET REVENUE OUTLOOK IMPROVES BUT

Tags:  ECON PGOV PREL GG EFIN 
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DE RUEHSI #2252/01 3401415
ZNY CCCCC ZZH
O 051415Z DEC 08
FM AMEMBASSY TBILISI
TO RUEHC/SECSTATE WASHDC IMMEDIATE 0513
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
C O N F I D E N T I A L SECTION 01 OF 02 TBILISI 002252 

SIPDIS

E.O. 12958: DECL: 12/05/2018
TAGS: ECON PGOV PREL GG EFIN
SUBJECT: GEORGIA: 2009 BUDGET REVENUE OUTLOOK IMPROVES BUT
STILL GRIM

Classified By: AMBASSADOR JOHN F. TEFFT. REASONS: 1.4 (B) AND (D).

C O N F I D E N T I A L SECTION 01 OF 02 TBILISI 002252

SIPDIS

E.O. 12958: DECL: 12/05/2018
TAGS: ECON PGOV PREL GG EFIN
SUBJECT: GEORGIA: 2009 BUDGET REVENUE OUTLOOK IMPROVES BUT
STILL GRIM

Classified By: AMBASSADOR JOHN F. TEFFT. REASONS: 1.4 (B) AND (D).


1. (C) Summary: The Ministry of Finance projects that
budget revenues will increase by about GEL 160 million in
2009 even factoring in the PM's recent proposal for an
accelerated tax cut. Revenue projections for 2009 reflect
only the GEL 700 million in international aid for which an
official agreement has been signed. The Ministry of Finance
expects that number to grow substantially over the course of
2009 as aid pledged at the October 22 Brussels Donors
Conference become available. The GOG remains hopeful that
revenues and aid will be sufficient to finance expenditures
through the first quarter of 2009 - a scenario that is still
very much in doubt. Although revenues are down roughly $270
million because of the August conflict, the budget gap was
filled by the use of the GOG's sovereign wealth fund and
aided by the recent tranche of $250 million of direct budget
support from the USG. Better than expected tax receipts for
September and October, coupled with a recent agreement with
the Asian Development Bank for $70 million of direct budget
support means the overall budget revenue situation moving
forward looks better than a month ago. See Septel for a
breakdown of the 2009 budget proposal. End Summary.


2. (C) Comment: All told, the GOG still faces a difficult
first two quarters as revenues generally lag, a condition
that will be exacerbated by the war and global economic
crisis which has halted previously robust GDP growth. GOG
budget calculations are based on a prediction of 4% GDP
growth which may be overly optimistic. Most GOG contacts
estimate GDP growth for 2009 will be between 2 and 5%. The
GOG has wisely not incorporated any promised aid for which
agreements have not been completed into budget calculations.
If revenue receipts drop precipitiously, which so far has not
been the case, foreign aid inflows could potentially fill the
gap or at least mitigate against any budgetary crisis. The
GOG will be monitoring revenue inflows very carefully as it
desperately wants to avoid any scenario which would force

budgetary spending cuts in a slowing economy. While GoG
initial numbers show an overall increase in revenues, this is
likely due to the cashing in of the government's soverign
wealth funds that were created earlier in 2008.
Unfortunately, while these funds add to the budget for 2009,
they are not unencumbered revenue. The government will have
to eventually pay out on the floated Eurobonds. End Comment.

Accelerated Tax Cuts To Provide Stimulus
--------------


3. (C) PM Mgaloblishvili has proposed an accelerated tax
cut in the hopes of stimulating consumer spending especially
during the first two quarters of 2009 which traditionally
show slower growth and revenue streams (septel). The move is
hardly surprising given the long-term GOG strategy to lower
taxes coupled with a desire to provide a fiscal stimulus in a
slowing economy. Pending Parliamentary approval, the income
tax rate will fall from 25% to 20% and the dividend tax from
10% to 5%. The tax rate was previously scheduled to decrease
annually (1% in 2009) eventually settling at a 15% flat tax
on income in 2013. Taxes on dividends were schedule to
follow the same arch with the ultimate elimination of taxes
on dividends in 2013. PM Mgaloblishvili has publicly argued
the cuts "mean that the income of all employed people will
increase, as well as their savings. In addition, a tax cut
is a good precondition for creating new jobs." Economic
Qis a good precondition for creating new jobs." Economic
analyst Gia Khukhashvili suggested that the tax cut alone
will not be enough to drive the short-term economic
development of the country, but he welcomed it all the same
as a positive overall policy step for long term development.

Budget Projections Harbor Many Unknowns
--------------


4. (C) Deputy Finance Minister Papuna Petriashvili told us
that decreased revenues because of the tax cut have been
reflected in the 2009 budget. He stated that the accelerated
tax cut had been decided on in October, and planning had
proceeded accordingly. The Ministry of Finance calculates
the tax cut will cause a shortfall of roughly GEL 250 million
compared with leaving tax rates at 2008 levels. Even with
the proposed tax cut, the Ministry of Finance believes
overall revenue inflows will increase by about GEL 160
million. Petriashvili noted the reoccurring trend that
despite past tax cuts, GOG overall income tax revenues have
incresed. He expects to see a similar result as more people
regularize their tax status and incomes grow in general.
This potential revenue increase also has not been accounted
for in any of the current budget planning and could provide
additional budgetary wiggle room if realized. Inflation is
projected at a manageable 7% so the cuts are not expected to
cause any overarching inflationary problems. Petriashvili
said the cuts were in line with the GOG's general policy goal

TBILISI 00002252 002 OF 002


of gradually lowering taxes over time and not did not
represent any departure from their overall long-term economic
plan.


5. (C) Petriashvili expects budget inflows to be
significantly plused up by foreign assistance. If agreements
are reached expeditiously, foreign aid could provide critical
budgetary support during the 1st and 2nd quarters of 2009
which are more likely to face a budgetary crunch. He
cautioned that for planning purposes, the Ministry of Finance
has created a 2009 draft budget which does not contemplate
any foreign assistance for which an agreement has not been
signed. Petriashvili said budget projections will have to be
continually updated depending on the nature of the
assistance. The budget implications of the foreign
assistance inflows will become clearer in time, but
Petriashvili expects the large majority of foreign aid to be
spent on infrastructure development and social aid, all of
which can be expected to provide a further economic stimulus.
TEFFT