OUTPUT VOLATILITY IMPACTS ON FISCAL POLICY SUSTAINABILITY, CASE OF GEORGIA

Abstract

  The article discusses how fiscal stability affects macroeconomic sustainability and whether stability means strong economic growth in Georgia.The results of the analysis conducted in the article is supported by those numerous studies which indicate that fiscal stabilization reduces output volatility. Based on the existing analysis, we can say that fiscal policy can make a significant contribution to stabilizing output.
  Fiscal Stability Indicator (FISCO) for Georgia has been calculated and cross-country analysis has been performed. It has been found that fiscal policy contributes more to stabilization of output in developed economies than in transitional markets and developing countries. The fiscal stabilization indicator for Georgia is 0.42 and is statistically significant, which indicates that one percentage point change in output causes 0.42 percentage point change in the total budget  balance  (as  a  share  of GDP). The FISCO indicator is 0.41 for developed countries and 0.24 for transitional markets and emerging economies.
  Based on the correlation analysis, it has been revealed that higher fiscal stability is associated with lower output volatility. However, here also, the difference between the groups of developed and transition and developing countries is significant: in developed countries- the relationship between fiscal stabilization and output fluctuation is stronger and sharply negative than in transition and developing economies.
  More often, fiscal policy is used as a stabilization mechanism when the economy lags behind the desired pace of growth; And are less likely to resort to policy mechanisms when booming. Due to the proven importance of the fiscal stabilization in economic sustainability it can be concluded that  the  use  of  fiscal  stabilization  as  a  mechanism  only in  the  «black days»  can  greatly worsen the sustainability of government debt, as governments appear to lack the advantage that they can reduce deficits and create fiscal buffers to better address future negative shocks in times of growth.