Irakli Kobakhidze: “The state budget also expands when employment rises.”
Verdict: FactCheck concludes that Irakli Kobakhidze’s statement is MOSTLY TRUE.
Income tax contributions to the state budget increased by GEL 840 million as compared to 2022 and by GEL 2 billion as compared to 2021, totalling GEL 5.5 billion, which represents a 57% growth. This increase is 71% higher when compared to the 2019 levels.
Income tax revenue is directly linked to employment levels, all else held equal, as employees represent the sector paying income tax. However, the number of employed individuals rose by merely 2.6%, from 898,000 to 920,000 in 2023 as compared to 2019. The substantial increase in tax revenue was significantly influenced by rising nominal wages which increased from GEL 1130 to GEL 1860 between 2019 and 2023. In turn, this wage increase was influenced by high inflation rates during the same period.
Other sources such as value-added tax, excise tax, profit tax, import tax, loans and privatisation also contribute to the state budget in addition to income tax. Total tax contributions also increased by approximately 73% from 2019 to 2023 at the same time as income tax revenue grew with a 67% rise in budget revenues over the same period. Notably, high inflation contributed to the aforementioned increase in budget revenues.
Thus, whilst the Prime Minister’s statement regarding the simultaneous increase in the economy, employment and budget revenues is accurate, it is also important to note that the growth in budget revenues was also due to high inflation that characterised the post-pandemic period which is not a ‘desirable reason’ in contrast to economic growth and high employment figures. Hence, FactCheck concludes that Irakli Kobakhidze’s statement is MOSTLY TRUE.
Analysis
Whilst commenting on unemployment, Prime Minister Irakli Kobakhidze stated: “A decrease in unemployment and an increase in employment have a direct impact on the state budget. As more individuals find jobs, they contribute income tax to the state budget. Therefore, the state budget also expands when employment rises. This is exactly what our country needs.”
The Prime Minister made the aforementioned statement whilst assessing unemployment figures. The unemployment rate dropped to 13.7% in the second quarter of 2024 representing a 3.1 percentage point decrease as compared to the corresponding period in the previous year according to GeoStat. Furthermore, the number of hired employees increased by 19,000, whereas the number of self-employed individuals rose by 41,000 during the same period.
The 2024 planned state budget includes GEL 19.1 billion in tax contributions, constituting 78% of the total revenue. The remaining amount of GEL 5.5 billion is estimated to represent other types of income, loans, grants and privatisation.
Georgia imposes six types of taxes: value-added, excise, profit, income, import and property taxes. Each of the aforementioned taxes generally increase on an annual basis, excluding certain occasional exceptions.
Graph 1: Common-State Taxes (USD Million)
Source: Ministry of Finance of Georgia
The graph does not feature property tax as it is categorised under local taxes and contributes to the budgets of local municipalities.
Income tax is levied on physical entities, generally representing hired employees.
The income tax rate is fixed at 20%. For instance, if an individual’s gross wage is GEL 1,000, a 2% pension tax is deducted first (if they are a part of the Funded Pension Scheme) and 20% of the remaining GEL 980 (GEL 196) is then deducted. The income tax would be five times higher, totalling GEL 980, if an individual’s wage is GEL 5,000.
Income tax contributions can grow in two ways: by increasing the number of employed individuals or increasing the average nominal wage.
The number of hired individuals rose by merely 2.6%, from 898,000 to 920,000, whilst their average nominal gross wage increased from GEL 1,130 to GEL 1,860, representing a 64% growth in 2023 as compared to 2019. Income tax contributions to the state budget increased by 71%, from GEL 3.2 billion to GEL 5.5 billion, over the same period.
Although the rise in employment played an important role in increasing income tax, the primary underlying reason was still the significant increase in wages. Whilst the number of hired employees decreased by 2%, from 845,000 to 829,000, income tax revenue still increased by 13% from GEL 3.1 billion to GEL 3.5 billion due to the 15% rise in nominal wages (from GEL 1,130 to GEL 1,305) in 2021.
Although hired employees contribute the largest share to the total income tax revenue, their contribution is not equal to 100%.
Apart from hired individuals, real estate renters/lessors also pay income tax. Furthermore, income tax is imposed on real estate resellers – if an individual sells real estate within two years of purchase, they are subject to a 20% tax on the sale. Additionally, physical entities which organise gambling games pay a 15% on the winnings (reflecting the difference between the bets received and the money distributed amongst the players).
Individual entrepreneurs with small business status, whose annual income does not exceed GEL 500,000, also pay income tax at a rate of 1%.
During times of economic expansion, not only employment but also wages increase. Furthermore, production value and business turnover also grow, resulting in an increase in other types of taxes in addition to the income tax. Notably, the total tax revenue increased by 73%, from GEL 9.7 billion to GEL 16.7 billion between 2019 and 2023.
Whilst the number of employees and the income tax revenue increase simultaneously, the state budget does not expand solely due to this factor. Furthermore, even the income tax increases primarily due to higher wages rather than a larger number of hired individuals. However, it is still important to consider the broader context. The Prime Minister linked the decline in unemployment and the rise in the state budget to economic growth. The economy has experienced an above-average growth with 7.5% in 2023 and 9% in the first half of 2024. Considering all of the above, FactCheck concludes that Irakli Kobakhidze’s statement is MOSTLY TRUE.
