What are the elements of Georgia’s fiscal stimulus?
Gardner: Part of the response to the crisis was to make up for plummeting private demand by increasing public spending—a key element in putting a floor on the contraction of economic activity in Georgia. This was made possible by allowing the public deficit to increase quite sizably, from about 4 to 9 percent of GDP between 2007 and 2009. Much of this increase is attributable to lost tax revenues but also to a reduction in the income tax rate in 2009 and higher spending, which increased by about 20 percent. But equally important, the structure of spending also changed radically, with a large reallocation of government spending to areas that had a bigger impact on economic activity. For instance, defense spending, much of it falling on imports, was reduced by 3 percentage points of GDP, freeing resources for an equivalent increase in social spending. When we estimated the fiscal impulse that derived from the combined effects of the larger deficits and the changed structure of spending,
