Issue 5, 2011. October-November

   

LIBERTY ACT: PUTTING THE "BURDEN OF PROOF" ON THE GOVERNMENT

The Georgian parliament passed the government's controversial Liberty Act in July. Among other things, the new law changes the constitution to make it more difficult for future governments to spend more. In an interview with Investor.ge, the prime minister's chief advisor Vato Lejava, outlines what the act means for business and investors.

The Liberty Act will create a better fiscal environment for investors, according to Vato Lejava.

The act, set to come into force in 2013, is the Georgian government's ambitious law aimed at capping governmental discretionary spending. It sets "parameters" for a strict fiscal policy including a three percent cap on the budget deficit and a limit on government spending to ensure it does not exceed 30 percent of GDP.

The ability of the government to increase taxes is also strictly curtailed: parliament made changes to the constitution obliging future governments to hold a referendum in order to raise taxes.

Those restrictions provide a "stable" environment for investors, Lejava said.

"I think it is a message, internally and externally as well. It is about predictability. What investors need, whether domestic or foreign, is that the situation is stable and predictable," he commented.

But the final version of the law is quite a departure from the initiative President Mikheil Saakashvili laid out in 2009. Gone are the provisions banning new tariff regulatory bodies and new licenses and permits.

However the government can bypass the referendum if the tax increase is temporary. Spending caps are also subject to a two year grace period if needed.

Controversy over the initial proposal was premature, noted Lejava. In particular the International Monetary Fund (IMF) was concerned because it limited the government's ability to regulate shocks to the economy. The European Union (EU) was displeased with plans to limit regulatory bodies, permits and licenses - a move that might have conflicted with the deep and comprehensive trade agreement and negotiations.

But Lejava stressed that two years on, the goals laid out in the Liberty Act are far from radical. Many politicians in the EU and the United States are now considering "how to cut" spending to combat the global economic recession, instead of spending more - the ruling philosophy in 2009.

"Now during the last two years ... we can see a difference in the international arena; to tackle the crisis, is focusing exactly on how to limit the discretion of the government," he said. "[S]omething that was considered a novelty has become something debated. Now it is important to appreciate that the initiative of the president was quite visionary."

The restrictions on government spending fundamentally alter the "burden of proof" for changing fiscal policy, Lejava said, adding, "... any government who will say I need to increase my discretion will need to convince the public and then bring the changes through the democratic process."

"The burden of proof will be on the government."

GEORGIA'S LIBERTY ACT: AHEAD OF THE CURVE

European governments are passing similar measures inside the Eurozone to combat the financial crisis.

In 2009, President Mikheil Saakashvili's proposals to cap government spending and make tax increases subject to an obligatory referendum met with criticism and disapproval.

Fast forward to today: the Liberty Act seems on par with several similar initiatives coming out of capitals as diverse as Berlin and Madrid.

In August, Spanish Prime Minister Jose Luis Rodriguez Zapatero proposed creating a constitutional amendment to force the government to balance the budget. The law is expected to pass in November, before planned elections.

Germany and France have called on all governments in the Eurozone to incorporate similar laws in their constitutions.