The double-digit economic growth in Georgia ended in 2023

Resume:  In accordance with the 2024 adjusted draft budget, it is planned to collect GEL 19 billion in taxes which is 102% higher as compared to 2020 and 67% higher as compared to 2021. 

The state plans to collect GEL 22 billion by taxation in the consolidated budget (the state budget plus the budgets of the Ajara Autonomous Republic, self-governing cities and all other municipalities) which similar to central budget is 100% as compared to 2020 and 64% higher as compared to 2021. 

The budget receives incomes from several different sources, although taxes are the principal one. Tax collections account for nearly 80% of the budget. The remaining 20% consists of loans, grants, privatisation, fines, license fees and other revenues. 

In the reporting period, the total amount of taxes increased without a rise in tax rates. Under the unchanged tax rate, the increase in tax collections is attributable to two possible factors – an increased business turnover, meaning economic progress, and inflation. 

As compared to 2020, planned tax incomes has indeed doubled, although 2020 is less relevant for comparison because of the pandemic and COVID regulations. The 67% growth is an impressive one but it is not a doubling. In addition, if we take the past and the forecasted inflation rate into account, the real growth rate actually decreases to 40%. If we make a comparison with 2020, the real growth rate adjusted for inflation will drop to 55%. There is a small difference in numbers, although there is essentially an identical situation in the consolidated budget. 

Since the Minister ignored inflation and named an irrelevant period for comparison, FactCheck concludes that Lasha Khutsishvili’s statement is HALF TRUE. 

Analysis:

The Minister of Finance spoke about planned tax revenues during the presentation of the second revised version of the 2024 budget and stated (from 8:11):  “If we take a look at performance three to four years ago, tax revenues basically have doubled in Georgia and from GEL 11-11.5 billion and reached GEL 22 billion.”

After the committee hearings, the second revised version of the 2024 draft state budget was submitted to the Parliament on 3 November 2023. According to the revised document, the share of revenues was set at GEL 24.4 billion. Of that amount, GEL 20.6 billion GEL comes from incomes and the share of tax collections in revenues is GEL 19 billion.

Budget revenues (all types of revenue together) consists of four parts: income, the decrease in non-financial assets, the decrease in financial assets and the increase in liabilities. Incomes account for the largest portion. On the other hand, incomes consist of taxes, grants and other revenues where the main burden is on taxes. According to the draft 2024 budget 78% of revenues consists of taxes.

Lasha Khutsishvili did not specify what he meant in “three-four years.” Therefore, from the point of view of 2023 it means 2019-2020 but since the conversation was about the 2024 budget, this period will be 2020-2021.

Generally, the budget is increasing year-by-year given economic growth and inflation and an increase  in tax incomes is the driving force for growth. Crisis periods, such as 2020, can be considered as exceptions. 

In 2019, the budget’s tax incomes reached GEL 9.7 billion and decreased to GEL 9.4 billion in 2020. From 2021, growth has resumed. According to draft 2024 budget, tax incomes should reach GEL 19 billion. 

How should the comparison be made? If we are talking about 2024, then this year should be taken as the base year. For 2024, “three-four years ago” is 2020-2021. Given the pandemic and COVID-regulations, 2020 is out of the general trend and is irrelevant for comparison. 

If we compare the draft 2024 budget with 2020, we will get a 96% increase which can really be considered as a doubling. If we compare the data of 2021, then the growth will be 67% which is not double.

In 2021, GEL 11.4 billion GEL in taxes was collected in the budget and the aforementioned amount is fully in line with “approximately GEL 11-11.5 billion” named by the Minister of Finance, although there is a discrepancy when it comes to the draft 2024 as GEL 19 billion is planned to be collected from taxes in 2024.

In the reporting period, both the total amount collectable from all types of taxes, as well as the amount collectable from each tax separately, have increased.

It is possible that Lasha Khutsishvili meant the consolidated budget. In 2020-2024, the nominal growth will indeed be 100% from GEL 11 billion to GEL 22 billion and it was only 64% in 2021-2024 from GEL 13.4 billion to GEL 22 billion. Similar to the central budget, the doubling of nominal revenues collected from taxes was observed in the consolidated budget in the period from 2020 to 2024 but not in the period from 2021 to 2024.

Since 2017, tax rates have basically remained unchanged. The Economic Liberty Act, adopted in 2021, banned tax rate increases – except for excise tax – without a referendum. The decision was enshrined into the Constitution; however, in 2017, the constitutional lifetime guarantee was replaced by a 12-year reservation. Twelve years have not yet passed and the ban is still in effect. During the reporting period, the excise tax rate was not increased on important products from the point of view of taxation (fuel, tobacco, cars), therefore, the increase in income from taxes was not caused by an increase in the tax rate. For commercial banks, the profit tax rate increased from 15% to 20%, although the dividend withdrawal 5% rate was abolished. In most cases, the increase of funds collected from taxes without changing the tax rate proves that there is a growth of business turnover and the economy which is a positive event, although the effect of this increase is diminished by inflation.

In 2022, the inflation rate reached 11.9% and is 3% in the first ten months of 2023. There is a 3% inflation rate forecasted for 2024 as well which means that the purchasing power of GEL 11.4 billion in 2021 will be equal to GEL 13.5 billion in 2024. Even if we take 2020 for comparison, the 96% growth rate drops to a 56% growth when adjusted for inflation. In the case of 2021, it decreases to 41%. The same can be said about the consolidated budget. 

After the pandemic, the Georgian economy and simultaneously the state budget have increased. Growth is forecasted in the coming years as well, although it is accompanied by inflation. Even with a 10% growth, it takes seven years to double the real economy. The double-digit economic growth in Georgia ended in 2023.

If tax rates are unchanged, tax incomes largely depend on the size of the economy. Therefore, tax incomes also increase together with the growth of the economy but not at the pace that Lasha Khutsishvili stated.

In 2020-2024, the nominal income collected/collectable from the taxes has indeed doubled, although the growth rate adjusted for inflation is only 55%.  In 2021-2024 as well, the income growth rate decreased from a nominal 67% growth rate to a real 40% growth rate.

Since the Minister of Finance ignored the inflation rate as well as the pandemic year and compared the nominal figure to a period of questionable relevance, FactCheck concludes that Lasha Khutsishvili’s statement is HALF TRUE.

Author – Giorgi Elizbarashvili