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

Transcription

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

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. 2

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

4 SELF- GOVERNNACE SELF- GOVERNNACE SELF- GOVERNNACE SELF- GOVERNNACE GOVERNANCE SELF- GOVERNNACE Self-Governance Unit SELF- GOVERNNACE SELF- GOVERNNACE SELF- GOVERNNACE 4

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

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 6

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

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 8

9 Expenditure Calculation E= Cn*Pn or C 1 *P 1 + C 2 *P 2 + C 3 *P 3 + C 4 *P 4 + C 5 *P 5 + C 6 *P 6 E (expenditure) = the sum total derived from the multiplication of the statistical data (Cn) and equalization coeficient (Pn) where: C n i.e (C 1 C 2 C 3 C 4 C 5 C 6 ) 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) ; P n i.e Pn (P 1,P 2,P 3,P 4,P 5,P 6.) 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) 9

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 Administration Education Economic activity Culture Health protection Social Provision Health and Social Insurance 10

11 Calculation of Equalization Coefficient Administration Education Culture Economic activity Population Area Status of the capital Number of preschool age children Population Number of youth under 7-18 Status of the capital Length of the roads Status of the capital 11

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 12

13 State Service of Common Purpose Equalization Coefficient Equalization Schedule for Expenditures 8, , , , , , , , Number of Population 13

14 Calculation of Equalization Coefficient Coefficient Name Administration Economic activity and housing communal services Recreation, culture and religion Education In total P 1 Population P 2 Area P 3 Length of the road P 4 P 5 P 6 Number of youth under 7-18 Number of pre-school age children Status of the capital , , ,

15 Calculating Budget Expenditures of Municipalities Name of the Statistical indicator Equalization Coefficient Calculated Cost Population C P C1*P1 3,821.1 Area C P C2*P2 1.3 Length of Road C P C3*P3 4,137.4 Number of youth under 7-18 C P C4*P Number of pre-school age children C5 8.2 P C5*P Status of the capital C6 1.0 P6 23, C6*P6 23,973.1 Total Sum 32,

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 Revenues Batumi 1, , , , ,

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. 17

18 Calculating equalization transfer for Batumi Statistical indicators Amount Equalization coefficients Amount of expenses Population (thousand men) C P Area per capita (m 2 ) C P Length of the roads (kl) C * P Number of youth under 7-18 (thousand men) C P Pre-school age children (thousand men) C P Status of the capital C P 6-23, , Total - E 32,975.2 Note* - length of road = (127*0.9)*0.9 + (127*0.1)*0.1 Calculating revenues Revenues Batumi 1, , , , ,995.2 R=TREND(2004w, 2005w,2006w,2007w)= 15,995.2, If K=0.6 Then T=(E-R)*K=( )*0.6=

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. 19

20 Having been discussed with Parliament and Government the Formula was approved by the law on selfgovernance unit and Instructions for transfer calculation was approved by the Order of the Minister 20

21 Thank You for Your Attention! 21