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As a result of the combined impact of the pandemic, people’s natural reaction to it (a drop in activity/consumption) and the legislative restrictions, Georgia’s economy took a serious hit which was reflected in decreased income and (temporarily) lost jobs.

On 26 February 2020, Georgia reported the first case of a COVID-19 infection. This was preceded by banning flights with China (29.01) and Iran (23.02). As the virus spread area started to expand, restrictions became tighter and a state of emergency was declared on 21 March 2020. The number of economic fields subject to restrictions increased rapidly and in time almost all economic activity was suspended, barring some exceptions (medical facilities, grocery stores, commercial banks, etc.) as envisioned by the respective legislation. It is planned to gradually ease the restrictions in two-week intervals and based on the current approach will be completely removed by July 2020.

As a result of the combined impact of the pandemic, people’s natural reaction to it (a drop in activity/consumption) and the legislative restrictions, Georgia’s economy took a serious hit which was reflected in decreased income and (temporarily) lost jobs. Given the magnitude of the damage, the necessity of the government’s help vis-à-vis business and people has come at the forefront of the agenda. Initially, the government announced certain initiatives (tax relief for tourism businesses, utility payments, etc.) and Prime Minister Giorgi Gakharia unveiled the government’s anti-crisis economic plan on 24 April 2020. The plan envisions spending GEL 1.35 billion of budget funds on social assistance and GEL 2.1 to stimulate the economy. This article offers a review of the social package section of the anti-crisis plan.

Whom Will the Government Support?

There are two main challenges whilst defining the circle of social assistance beneficiaries. On the one hand, the fiscal burden on the budget has to be reduced as much as possible and, on the other hand, people in need should not be left without assistance (that is, the chances of people being “omitted” should be reduced). The likelihood of “omitting” is non-existent[1] when assistance is universal[2] but it would be a very heavy burden for the budget. Targeted assistance requires less financial resources although the probability of “omitting” someone is higher and depends on the criteria used by the decision-makers in selecting the beneficiaries. As expected (given the paucity of budget resources), the authorities opted for a less costly targeted assistance and divided the people in need into several categories.

1. Hired employees who lost their jobs or were furloughed will receive monthly GEL 200 payments for six months for a total of GEL 1,200. Nearly 350,000 will receive this assistance and this will cost GEL 460 million from the budget.[3]

This group of beneficiaries comprises those officially employed; that is, people who were paying an income tax and this information was registered in the database of the Revenue Service. It has a simple principle – if a citizen took his salary at least once (income tax was paid on his behalf) in January-March 2020 and has no official income since April, he is eligible to collect assistance (from May). If his salary payments resume, the assistance payments will cease. This category of officially employed is a group where the likelihood of “omitting” is low and people who have truly lost their incomes will not be left without support. There are also risks associated with this approach.

First and foremost, this might encourage temporary “covert employment” meaning that assistance payments will be made to those who “are not eligible.” Supposedly, employers will formally send some of their employees to unpaid leave and use different methods for paying their salaries (presumably in a decreased amount) in order to allow employees to collect government assistance and reduce their salary expenses as well.[4] On the other hand, the aforementioned decision vis-à-vis assistance payments and processing them in time will function as unemployment welfare assistance and this bears all of the shortcomings associated with such a policy. In particular, the income level in Georgia is quite low and, therefore, there are many individuals who receive/received monthly salaries of close to GEL 200 when being employed. Under this decision, a person loses the incentive to find a job and consequently does not get involved in the economic process (even if he is able to find employment in this situation). This negative effect could be mitigated if the assistance were a one-time payment and the beneficiary would not lose it in the case of finding employment. Naturally, the fiscal cost of this alternative is higher, although under the already soaring unemployment it would cut incentives for people to refuse employment.

2. Self-employed people will receive a GEL 300 one-time assistance payment if they provide proof of lost income. GEL 75 million will be allocated from the budget for this purpose with the estimated number of beneficiaries at 250,000.

This decision shows[5] that the authorities prioritised helping those citizens who paid income tax. Although, it is illogical not to apply the approach used for hired employees to self-employed individuals who had an official business (registered as taxpayers with the Revenue Service) and did not evade tax payments (individual entrepreneurs or natural persons having the status of small or micro business owners). As opposed to the group of non-registered self-employed individuals, there is no difficulty in identifying the aforementioned category and the Revenue Service is in possession of information about their incomes and economic activity (electronic transportation documents, declarations, use of receipt printers, etc.).

The government’s assistance offered to self-employed individuals is four times less as compared to the assistance offered to hired employees. In addition, it is hard to pass the eligibility criteria here. Therefore, the authorities are allowing for a higher chance of “omission.” In particular, it was announced that people providing services to natural persons (nannies, personal drivers, artisans, private teachers, etc.) are not eligible to collect the assistance because it is mandatory to present a document issued by a legal entity as the proof of employment.

Of additional note is that issuing such a type of document on the part of certain legal entities equates a breach of Georgia’s tax legislation[6] and so legal entities will likely refrain from issuing them in order to avoid problems with tax authorities. Therefore, the number of people (taxi drivers, mini bus drivers, market vendors, agriculture market vendors, etc.) who will be able to provide proof of their incomes is quite limited.

On top of the already existing procedural barriers, some self-employed individuals will have to voluntarily refuse the government assistance. In particular, socially vulnerable citizens who take government assistance avoid the official registration of their incomes in order not to lose their right to collect benefits.[7] Supposedly, self-employed individuals in this category will not take the risk to lose their social assistance in exchange for a one-time assistance payment and do not provide proof of income.

Of necessary note is that judging in terms of fairness, the idea that people who pay income tax will receive more assistance is right (it is, however, incorrect to use a different approach for self-employed individuals who are registered taxpayers[8]). It would not be fair that a person who evades tax responsibilities received the same assistance as those who pay their taxes. In this case, an honest citizen gets compensation for that part of his income which he paid to the government as taxes (in fact, he is getting back part of his own tax payments). In the first case, a person would have received compensation for his hidden income at the expense of an honest taxpayer.

Naturally, in this situation many highlight a humanity principle which the government has to demonstrate in the time of a crisis. However, this principle cannot be implemented without the assistance being universal. Universal assistance means giving out equal payments to everyone without additional criteria. In this case, the government would have increased the budget’s social expenses several times or distribute lesser payments to each citizen from already existing funds. In the latter case, the already little payments would have decreased substantially, even below the subsistence minimum. Giving out such payments would be a wasted resource because it is a huge burden for the budget whilst individually it makes no difference for a beneficiary’s social well-being. The first alternative (unconditional universal assistance) is utopian since the social component in Georgia’s budget is already high and further substantial growth is non-realistic.

On the other hand, the “humanity” of universal assistance is in itself controversial. If universal assistance is implemented, the number of people who will receive assistance without need will be high. As a result, money which such people will take will be subtracted from those who desperately need more assistance given their social situation. It is possible to use a quasi-universal approach when only those people who really keep their income (for instance, public servants) will be excluded from the pool of assistance recipients whilst others continue to receive benefits.[9] However, the government does not currently possess the necessary information in order to effectively use this approach (to filter the list of people with confirmed income as much as possible). In fact, the only group that can be excluded and guaranteedly be identified is the part of those hired employees who continue paying income tax. Under this approach (the so-called quasi-universal approach), the number of identified potential beneficiaries is so high that the budget of Georgia currently cannot afford effective assistance payments for them.

The difficulties associated with approaches in regard to assisting self-employed individuals warrant clarification. In order to provide targeted assistance to this group of people, a list of their names has to be created. Table 1 shows the distribution of Georgian nationals in terms of their economic activity. Of all of the listed categories in the table, the government has a list of names of only working-age people (the total number of working-age people, including employees, self-employed individuals, people outside the workforce and the unemployed) and hired employees which amounts to 3,037,126 and 849,318 people, respectively. However, in regard to working-age people whose number comprises 2,187,808 if we exclude hired employees, the groups to which they belong cannot be identified (self-employed, unemployed or those outside workforce). Therefore, in the case of self-employed individuals, the unemployed and people outside of the workforce, their number is known but there is no list of names. The National Statistics Office of Georgia does not register such people individually (it is technically impossible) and their number is measured by statistical methodology only. Therefore, whilst speaking about providing assistance to 840,000 self-employed individuals, this process is not technically feasible if a self-employed person does not provide evidence of his status himself. This is because it is impossible to substantively distinguish whether or not a person is self-employed, unemployed or is outside of the workforce in the absence of a list of names. Of further note is that only that a part of self-employed individuals can be identified who are registered to pursue entrepreneurial work (individual entrepreneurs, people having micro and small business status) although such people comprise only a small part of self-employed individuals.

Table 1: Distribution of People in Terms of Economic Activity

Category of People in Terms of Economic Activity

Number

Identifiable Status

Total population over the age of 15 years (working-age)

3,037,126

List of names is identifiable

Total active population (workforce)

1,911,206

Full list of names is unidentifiable

Employed

1,690,170

Full list of names is unidentifiable

Hired

849,318

List of names is identifiable

Self-employed

840,366

Full list of names is unidentifiable

Unspecified

486

Full list of names is unidentifiable

Unemployed

221,036

Full list of names is unidentifiable

People outside of the workforce

1,125,920

Full list of names is unidentifiable

Source: National Statistics Office of Georgia

Generally, the one which is the right choice (government supporting everyone or supporting taxpayers alone) can be a matter of subjective discussion whilst objectively speaking the Georgian government has a largely correct approach although using a differentiated approach for hired employees and for self-employed individuals registered as taxpayers is illogical.

3. Incentive for employers to keep jobs. The employers are given a six-month GEL 750 income tax relief from the salaries of their employees with monthly salaries under GEL 1,500 (maximum 750*0.2=150 per one job). This tax relief concerns the private sector alone and GEL 250 million was allocated from the budget for this purpose.

The Government of Georgia presented this tax relief as a part of the social care package which initially caused some confusion. Legally speaking, it remains unclear whether or not the unpaid tax belongs to the employee or the employer.

As clarified by the Revenue Service, this money is legally owned by the organisation. The employer will charge income tax to the employees as before but will be allowed to spend this money at will instead of transferring it to the budget. It depends on the goodwill of the employers if they will use the saved money to give additional salary to their employees or not. The Doctor Goods company has already stated that it is going to do so, although given its economic profile (producing sterile and non-sterile textiles for medical purposes as well as producing bio-safety suits during the pandemic) the company is likely not affected negatively by the crisis. Businesses in the affected fields, however, will find it difficult to follow suit. Therefore, the government’s initiative is more of a step taken to keep short-term business liquidity (which is important). The social effect here is incentivising business to keep jobs, although how effective this factor (tax relief) will be for encouraging business to do so is debatable. Not taking exceptions into account, it is unlikely that an organisation will continue paying GEL 600 in exchange for a GEL 150 tax relief[1] to an employee whose services are temporarily not required.

4. Vulnerable groups will receive GEL 100 assistance payments for six months. This is GEL 600 on average and GEL 83 million will be spent from the budget for this purpose.

These groups are as follows: families with social rating points from 65,000 to 100,000 (70,000 families, 190,000 individuals), large families with 0 to 100,000 social points (21,000 families, 130,000 individuals) and disabled people with a visible disability and disabled children (40,000 individuals). This decision is an expansion of the pre-crisis package in order to make sure that by covering vulnerable groups people with special needs are not “omitted” from the pool of potential beneficiaries.

5. Pension indexation will start from January 2021. For pensioners over the age of 70 years, pension will further increase in the amount of 80% of the economic growth rate. In addition, the annual growth will be at least GEL 20 and GEL 25 for pensioners over the age of 70 years. The pre-crisis plan to increase pensions by GEL 30 to pensioners aged 70 years and above remains in force.

It is “unclear” why this point ended up in the anti-crisis plan because people will not immediately feel its results whilst changes which will be enacted from July 2020 have already been known. The remainder of the anti-crisis plan refers to the crisis response measures and does not include actions to be taken in the post-crisis period. Therefore, presenting the aforementioned point as a part of the anti-crisis plan is “unclear,” outside of the chronology and is more political in nature.

Certainly, the inflation adjusted indexation of pensions means a growth of assistance. For instance, if the level of prices increases by 3%, the pension will also increase by 3% and, as a result and theoretically speaking, a pensioner will be able to purchase the same goods as before the increase in prices. In fact, a large sum of pensions in Georgia is spent on medical services, medications and food. The growth of the level of prices in these groups is traditionally higher as compared to inflation (a general increase in the level of prices). Therefore, this decision cannot fully offset the price increase effect, although it will provide a partial counter-balance.

According to current forecasts, inflation and the economic growth rate will not be as high as to make the growth of pension over GEL 20 under the indexing rule. Therefore, the pension for individuals under the age of 70 years will increase by GEL 20 and by GEL 25 for individuals over the age of 70 years from January 2021. Given the number of pension recipients, this will increase budget expenses by nearly GEL 15-20 million.


[1] Persons with an unstable working regime will face the likelihood of being “omitted.” For instance, this includes people with seasonal employment such as those who did not work in the first quarter of the year given the nature of their job although they were supposed to have income in summer.

[2] Everyone gets assistance notwithstanding their social status or being affected/unaffected by the crisis.

[3] If each person from 350,000 gets GEL 1,200, a total of GEL 420 million has to be spent. Although, the number of people who will receive this assistance is an estimate and could be over 350,000. Therefore, allocating surplus funds for the programme is a standard budget practice.

[4] This motivation for the employee is partially counter-balanced by the income tax subsidy point. See Point 3.

[5] On the one hand, the burden of proof is transferred to a citizen and, on the other hand, the amount of assistance is four times lower.

[6] Georgia’s tax legislation envisions charging income tax at the source of payment.

[7] According to the current legislation, socially vulnerable keep their social assistance for one year after finding employment although this does not completely stop the desire to hide income.

[8] As opposed to non-registered self-employed individuals, this category of the self-employed does not receive income covertly, is registered and pays taxes. In their case, there is no difficulty in terms of identification.

[9] In contrast, the government in this case is not looking for people to help but, rather, for people not to help and provides help to everyone else.

[10]This refers to the social aspect of the decision in a short-term period. In terms of supporting short-term business liquidity, this decision is effective.


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