Perspectives of interbudget relations development based on foreign experience

Dr. Tamar Gamsakhurdia

Social justice, political and economic stability represents the important principle of the organization of tax-budget system in developed countries that, in our opinion, must be based on the following:

1. Distribution of rights and obligations among all levels of state authorities
2. Conferment of necessary rights and obligations for state authorities with a view of optimal realization of public funds
3. Overcoming vertical and horizontal misbalance by means of transfers, subsidies and subventions.
The tendency in the increase of the local administration role under the influence of scientific-and technological progress is observed in the developed countries. Besides, the scale and ratio of regional economy is increasing, regional links and functions of local administration become quite complicate. All this serves to increase the role, the authority and financial resources ratio of local budgets that make up 40-50% in federal states and 30% in unitary ones.
From the viewpoint of the utilization of decentralized and cooperative models of interbudget relations, developed countries are divided into the following groups: three federative states (USA, Australia, Canada) and two unitary ones (Great Britain, Japan) are applied to the first group which is characterized by the independence of regional and local authorities. Regional and local authorities in the countries of the second group (Sweden, Denmark, Finland, Norway) are characterized by a high ratio of social financing. The countries of the third group (Germany, Austria, Switzerland) are noted for a high level of the development of autonomy and interrelation between the budgets. The countries of the fourth group (Belgium, Portugal, Spain) are characterized by the dependence of regions on the central budget.
Georgia faces the process of integration into European structures in its transition to market economy. Thus, it is necessary to take into account the provisions recognized in Europe. We mean “European Charter on self-rule” which says that it is necessary to develop methods for the protection of financially weak local self-governing bodies or for the financial equalization in higher organs of power. Yet, this procedure and measures must not limit the rights of local organs in their spheres of influence.
Nowadays, we should proceed from the three approaches of financial equalization.
1. Issuance of transfers from the state budget to the budgets of lower level;
2. Implementation of subventions with a view to financing expenditures;
3. Issuance of budget loans in case of temporary gaps in local budget provided they are extinguished during the current budget year. There must be used such terms of crediting when the Central Government would become a warrantor of loans assigned by the Commercial Banks for the territorial budget. Apart from this, the Central Government would perform overall or partial financing of some investment programs. The mechanism of financial transfer is important for the solution of the problem of financial control because in reality the transfer of financial assets implies financial links between the budgets that “serve” as a means of budget functioning and financing of population’s social expenses. Therefore, the local administration and local autonomous bodies must have a regular income source in order to perform their functions. Priority is attached to transfers and their distribution mechanisms. They will help to overcome disproportion resulting form the erroneous economic and social development in different territorial entities.
In this sense, we should consider the experience of developed countries and study the mechanisms that enable the authorities to balance the levels of economic and social development in territorial entities. F.e., in the developed federal states (USA, Germany, Austria, Australia, Canada and Sweden) the ratio of local expenditures in the total volume of state expenses ranges from 7% (Australia) to 26% (Switzerland); the ratio of expenditures in the USA and provinces in the total volume of federal expenditures ranges from 16% (Australia) to 48% (Canada). The ratio of subsidies received by the USA and provinces from federations ranges from 16% (Germany) to 50% (Australia).
As we see, there is a large-scale egalitarian distribution in Germany and Australia. As for Canada, egalitarian distribution is especially important in provinces; the American Government does not interfere with the local affairs. From this point of view, the experience of the USA, Federative Republic of Germany, Switzerland and other European states is especially important. The study of their experience will promote the process of budget balancing by the state and will quicken the development of financial mechanisms with a view to regulating the processes that arise from the merger of “vertical” financial equalization with a horizontal one.
Thus, the peculiarity of American taxation system consists in the parallel use of primary taxes. F.e. natural persons pay three types of income taxes (federal, state and local), three types of corporations’ profits taxes (federal, state and local), two types of income taxes (state and local), etc. Therefore, the sphere of social and economic regulation in the USA is characterized by a high decentralization level of state functions; state and local administrations have their own forms of independent budget, they have the right to establish their own taxes and to regulate economic and social activity within their territory. Apart from the local taxes, the local budget receives subsidies from the federal Government. We should also point out that the quick growth of federal subsidy affect the functioning of the whole federal system. Due to these circumstances, economic links have expanded, on the one hand, and on the other one, the federal Government interfered with the spheres of regulation that used to be a prerogative of the States and local administration. All this resulted in the growth of political tension between the Federal Government and local authorities.
We should also point out to the fact that, nowadays, the role of federal subsidies and credits for the local administration has lately decreased in the USA. It is connected with the policy of “new federalism” that is aimed at non-interference of the federal Government into the local affairs. Namely, the ratio of paid service grows, new kinds of local taxes are established, etc. Let us consider the law of local budget in Washington (one of the American States). Its budget revenues consist of taxes as well as assignations. Because of it, heads of County Commissioners’ Establishments have a limited right to meet the expenditures and to undertake new responsibilities, so that they become confined to the existing assignation ratio.
The experience of Federative Republic of Germany is of special interest, as far as distributions of responsibilities and authority are concerned. Under the Constitution of Germany, the federation budget consists of Customs duties, excise taxes, insurance fees, turnover tax, bill stamps, etc. The budget revenues of Federal Lands include income tax, death duties and vehicle owners’ taxes. Income tax, corporation profits tax and value added tariffs are a common source of income for both the Federation and Lands.
The tax system in Germany consists of 38 taxes that make up 60-80% of total revenues.
Indirect taxes (VAT and excise) make up 54% and direct taxes make up 48%. In Germany, there is a vertical equalization as well as a horizontal distribution of revenues among financially strong and weak Federal Lands. As contrasted with the USA, the federal Government of Germany takes part in the budget preparation with the purpose of ensuring single economic policy in the whole territory of the state. By using this approach, the Federal Government involved rural communities in the implementation of state taxes. The state undertook the function of distributing tax levies between communities.
The following system of financial support functions in Germany; horizontal – between the Lands; vertical – between the budget and Lands; communal – between the Lands and local administration.
The main objective of financial support of German Government is equalization of economic conditions between them, which serves to improve population’s economic conditions.
The system functioning in Switzerland is a different one. The functions of the Central Government are minimized here. As for Canada and Australia, here priority is attached to the equal conditions for population.
If we review the equalization of regional revenues from the viewpoint of cost outlay, we will see that economic unequality between the regions is compensated by the distribution of supplementary resources, which, in its turn, serves to determine the level of centralized distribution of public funds. By applying a similar approach to all regions, the Central Government provides each region with the possibility of paying taxes at a flat rate, which makes for the equalization of revenues between regions in the whole territory of the state.
Proceeding from the experience of developed countries, we can conclude that the main advantage of de-centralization consists in favourable conditions for the effective work of local administration. All this makes for the maximal independence of regional policy and preservation of single budget policy in the whole territory of the state.
As we see, there are different methods of solving interbudget relations in developed countries. We should take into consideration these methods and our national state interests in determining the perspectives of interbudget relations in our country
Therefore, we can draw the following conclusions:
1. Improvement of interbudget relations in Georgia must be based on the experience of developed countries;
2. It must take into consideration the real conditions of transitional period and ensure establishment of tax budget system;
3. Strict differentiation of budgetary responsibilities must be performed.
4. The mentioned problems must be solved by taking into account the national state interests on the basis of mobilization of supplementary financial resources and examination of the system of tax relations.