THE IMPACT OF FISCAL DECENTRALIZATION ON MUNICIPAL FINANCIAL SUSTAINABILITY IN GEORGIA

Abstract

This paper is dedicated to a complex analysis of the fiscal decentralization process in Georgia and its causal relationship with the level of municipal financial sustainability. The relevance of the research is driven by the legislative changes implemented over the last decade, including the transition to a new Value Added Tax (VAT) distribution model since 2019, which fundamentally altered the budgetary architecture of local self-governments. The aim of the paper is to determine the extent to which the existing fiscal model ensures real financial autonomy for municipalities and whether it reduces vertical fiscal imbalance. The study employs quantitative methodology, specifically a panel data analysis of the budgetary figures of Georgia's 64 municipalities for the period 2018-2024. To evaluate financial sustainability, a system of indicators is utilized, encompassing the self-sufficiency ratio, the transfer dependency index, and the capacity for capital expenditure financing. The research findings reveal that despite the declared progress in decentralization, the majority of Georgian municipalities still experience fiscal illusion and a high level of dependency on central transfers. The analysis shows that while the VAT distribution formula has increased the predictability of municipal revenues, it has failed to ensure the complete leveling of regional inequalities. The paper argues that to achieve financial sustainability, it is essential to optimize the local property tax base and diversify municipal borrowing authorities. The study concludes with practical recommendations focused on refining fiscal policy in accordance with the standards of the European Charter of Local Self-Government.