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Reference ID Created Released Classification Origin
08TBILISI2252 2008-12-05 14:15 2011-08-30 01:44 CONFIDENTIAL Embassy Tbilisi

DE RUEHSI #2252/01 3401415
O 051415Z DEC 08

C O N F I D E N T I A L SECTION 01 OF 02 TBILISI 002252 
E.O. 12958: DECL: 12/05/2018 
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 t
he 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 
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. 


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