17.Jan .2022 22:30

Who Benefits From Increased Inflation? | The Case of Georgia

Who Benefits From Increased Inflation? | The Case of Georgia
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In yesterday's Forbes Week, Giorgi Isakadze, editor-in-chief of Forbes Georgia, unpacked the simple truths behind current increased inflation and provided an analysis on who benefits from it.
 
"When you buy any services or goods, know that you pay 18% of the value of these goods in VAT. In many countries, the price of products is presented without VAT and buyers know exactly what VAT they pay, but this is not the case in Georgia. In our case, VAT is not presented separately in the final price of the product. To put it simply, let's give two examples: bread and fuel. Simply put, if a year ago, bread cost 90 tetri. This time the price of the bread itself was 76 tetri, to which was added almost 13.7 tetri in the form of VAT. The bread producer received 76 tetri, while 13.7 tetri was transferred to the country's budget. If you bought 1 loaf of bread for 90 tetri, about 14 tetri would go to the budget.
 
In 2021, the price of bread was set at 1 GEL and 10 tetri. At this time, the bread producer directly gets 93 tetri and the amount of VAT paid by them, (13.7 tetri in the previous case) increases to 16.7 tetri. This means that the budget takes 17 tetri from each loaf of bread sold. Yes, from each loaf.
 
The same can be said for fuel. Fuel prices rose more than 40% last year. This is due to the global situation. Currently, the cost of 1 liter of fuel is about 3 GEL and 10 tetri. It is worth noting that recently prices have dropped by about 5 tetri. The fuel price now is 3 GEL and 10 tetri. Of this, 47 tetri is directly related to value-added tax, i.e. VAT well known to you. This amount goes back to the budget for every 1 liter of fuel you buy.
 
Remember last year, when the price of the fuel was 1 GEL and 86 tetri. The volume of VAT was also lower and amounted to 28 tetri. Therefore, the price of fuel increased per liter, the cost of VAT also increased by 19 tetri. Out of every liter sold, 47 tetri goes to the budget. In this particular example, we only discussed the topic of VAT, but the excise tax goes to the budget too, which currently stands at 38 tetri per liter.

So, how much does the budget take for each loaf of bread? Yes, about 17 tetri. Ye, on 1 loaf. Yes, against the background of increased prices. And fuel? VAT per liter - 47 tetri. What is added to this? An excise tax of about 38 tetri. What did we get from the sum of these two taxes on fuel? From every liter of fuel you buy every day, about 85 tetri to 1 GEL goes into the budget.

The increased VAT goes to the central budget and is spent by the government. This increase has only one beneficiary - and that is the government.

What and how does the government spend these funds? This is a separate issue. However, the simple truth is that in a situation where citizens directly criticize producers and distributors for rising prices for fuel or basic food, no one is talking about the contribution of tax policies to increased prices. This makes products even more expensive for the consumer.

Nor does anyone say that the increased prices, to some extent, are beneficial for the government to fund its exorbitant costs, which have not been reduced dramatically in recent years. It is also clear that VAT is not the only and direct cause of high inflation in Georgia, because inflation has other important determinants - the exchange rate, market demands, budget deficit, etc. However, in each case, when the manufacturers and distributors of the product decide to increase their price, this decision is automatically reflected in the VAT and leads to an increase. What even causes this? That's right, budget revenue increases. I'm happy with the increase in revenue too - though the main question is, at what price?

This is the current reality against the background of the lack of foreign direct investment in Georgia - to some extent all this has been compensated by the remittances of our emigrants, with which they help their families daily. I want them to know that they are very supportive of our country and its very poor economy. I also want you to know that in economics, which is not an exact science, not everything is one-sided.

Together with my colleagues, I want you [the viewers] to know and see, with simple examples, where the money you pay goes. I also want you to know that whether you are buying bread, fuel, a movie ticket, you are paying your share of everything in the form of various taxes.
 
We have studied this topic in more depth and I can say with certainty - the results of the artificial involvement of the National Bank and the government in stabilizing Georgian lari has worked on some level and is understandable. So they CAN do that, can't they? Nor should we forget that if anyone is interested in the country having high prices or inflation due to government spending and more revenue, know that this is again the Georgian government. The government, of which the Parliament has not been critical at all - neither about the crisis of the virus or inflation. No major issues are on the agenda. We look at parliament and we hear traditionally cautious comments, which is frustrating given that the crisis of coronavirus and inflation will remain our main challenges in 2022."