Банкеръ Weekly

Briefs

ECONOMY IN THE TRAP OF PROBABLE COALITIONS

GYMS ABOUT PLATFORMS OF RULING COALITION TO FOLLOW BARGAINING ABOUT NEXT CABINETWhile in love opposite characters usually attract each other, controversies about ruling in the economy mean standing still and a dim economic future. That is what awaits us if the politicians who will enter the executive power fail to make the political platforms of their parties meet. After coalition passions calm down and bidding for ministerial posts is completed, they will inevitably have to solve the far more sophisticated task of preparing an unified economic programme. But what will be the result of mixing contradictory visions of various political forces in aneventual conglomerate between BSP, NMSII and MRF?Analysts are unanimous that such a ruling would lead to higher spendings of the Treasury at the expense of taxpayers.Being the party which won most votes at the 2005 parliamentary elections, BSP has imperatively stated it would be vindicating the thesis for the State's stronger presence in the economy. The socialists declared that the government should be redistributing up to 42% of Bulgaria's gross domestic product (GDP). The money will go for plugging up gaps in the army, police, legislative and education systems, as well as for salaries to clerks, higher pensions and social assistance. In its pre-election platform the NMSII promised 7% lower expenses. According to the experts of PM Simeon Saxe-Coburg-Gotha, roughnesses in the Bulgarian economic reality could be smoothed away not through the State's participation, but by market methods and more freedom for the private sector. In its programme documents, the ethnic Turks' MRF staked mainly on the modernization of the agricultural sector, land-consolidation, and efficient absorption of the EU structural funds. Thus, according to the experts of MRF, the differences in the social and economic development of various regions in the country would be eliminated. It's clear that the three parties have diametrically different visions about the economic ruling of Bulgaria, as well as different interests in terms of their participation in it. In that sense, their eventual future coalition would be an expensive compromise. Such a coalition and the government it would form will have a narrow horizon and it would be difficult for them to make decisions about complex economic reforms, experts from Industry Watch commented. The big steps in the economy will be postponed for a consecutive time and the cabinet will be occupied with petty, current problems and individual deals, resulting in short-term effects and benefits to the rulers. Dr. Steve H. Hanke, professor of Applied Economics at the US Johns Hopkins University, has also predicted a week coalition government. If the socialists are more influential in it, they will realize their programme, projecting higher expenses and that will encourage corruption. There will be a two-year period when the international economic environment would not be as advantageous as it has been so far, and that would set difficulties in front of the new cabinet, no matter how it is formed, Prof. Hanke forecast. I expect interest rates to go up as a whole and foreign investors will be much more careful when undertaking risks over the next one or two years. Therefore, we are currently in a transition period from a very positive international medium for countries like Bulgaria, to a more negative environment. That has nothing to do with the government in Sofia, added Prof. Hanke. In his words, the next cabinet will manage to carry out in due time the necessary minimum of reforms for Bulgaria's admission to the EU.Financier Emil Hursev commented that an eventual coalition between BSP, NMSII and MRF would be a good option. A similar configuration has ruled the country so far, but with a different weight of its players, Mr. Hursev believes. Thus, no radical changes could be expected from such a triad, which is in fact good news for the business. Bulgaria's macroeconomic status quowill remain unchanged, most observers who are not connected will the rulers, forecast. Moreover, it will not be because of the government, but despite of it. The fiscal system and the monetary policy are expected to be stable. A safe bank system, a balanced budget with a surplus, and growth in the private sector are predicted as well. The problem is that the lack of reforms on a macroeconomic level will keep the economic growth within the limits of the so far 4-6% on an annual basis. As a result of that the incomes of Bulgarians, which are only 28% of the average in the EU, will not increase significantly. Of course, a kind of a populism could be expected after the elections and budget money might be extended for wages, pensions, etc. There are also forecasts that the one-time 20% increase of budget salaries, promised by BSP, may be realized. NMSII may also keep its promise to raise the minimum working wage from BGN120 to BGN150, i.e. by 25%, which was objected by the International Monetary Fund (IMF). Financiers forecast serious dramas regarding corporate taxes in the sphere of taxation policy.Prior the elections the socialists promised to maintain the profit tax at its current 15% level and introduce a zero tax for reinvesting the profit. The experts from the team of Finance Minister Milen Velchev, however, said they were planning to reduce the corporate tax to the 12.5% record low level for Europe. They believe that the zero tax for reinvested profit would result in many taxation frauds and is also connected with a number of complex legislative amendments.BSP and NMSII have similar positions regarding the value added tax (VAT), which is a serious item in the budget, accounting for 47-50% of all budget proceeds, together with customs revenues and excise duties (accounting for 13%). A month before the vote in both BSP and NMSII circlesthere were serious hesitations about the future reduction of the VAT rateAccording to the socialist Roumen Ovcharov, abrupt movements in the sphere of taxes are dangerous, and cutting down VAT from the present 20% to 18% could be realized only if proceeds into the budget allow it. Calculations show that a 2% lower VAT would result in about BGN400,000 lower budget revenues. On the other hand, NMSII experts said that a lower VAT would be in favour of the rich, as it is essentially paid by consumers. Therefore, it would be better to keep VAT's rate and cut down more significantly the natural persons' tax and the corporate tax. Thus, NMSII will also observe its commitments to move to a flat tax rate and a reduction of the tax burden. BSP's pre-election promises to introduce minimum VAT rates (a zero rate was also mentioned) on bread, milk, some medicines, central heating and scientific literature, sound quite old-fashioned. The socialists' economic consultants were so far explaining that the VAT could be cut down smoothly from the current 20% to 17% in 2009 and to introduce the so-called structured VAT. They proposed also to reduce the term for reimbursement of VAT to 30 days. Of course, they made the reservation that the killer tax would depend on the revenues into the budget and the proposal would be effected only if there was no pressure for expanding the range of VAT-exempt goods. It is difficult to imagine how a symbiosis of party pretensions in a coalition between BSP, NMSII and MRF would look like. The alchemists from the socialist party declared it was realistic to open not less than 240,000 new working positions, that would cut down unemployment to below 10 per cent. They also plan to increase the money for education so that in 2009 they reach 5.8% of GDP, and the funds for healthcare to go up to 6% of GDP. BSP has also promised that the State would undertake repayment of part of the housing credits extended to young families if two children are born within five years of their marriage. NMSII has generously projected that the average working wage would reach BGN500 before the end of the next mandate. The party plans unemployment to drop below 10%, promising to create 250,000 new working positions. GDP growth is expected at 8% and investments until 2009 - at EUR6.3BN.NMSII's other commitment in that sphere is a 3-5% reduction of payments for pension insurance. Moreover, up to 10% of the insurance payments should be transferred to people's personal deposits in private pension insurance funds. Thus, NMSII programme projects pensions to reach 75% of the working wage. The money for retirees will increase still further by the establishment of a special Silver Fund, to be finance by proceeds from privatisation deals, licensing fees, budget surplus, and the fiscal reserve. There will be a collision between BSP and NMSII regarding the pension reform, experts claim. Socialists declared themselves against the start of the National Revenues Agency as an institution that will be collecting tax, healthcare and insurance instalments. Most of BSP's experts advance various theses, leading to the revocation of the points system for getting a pension, introduction of a flexible system, etc., which would in fact make early retirement possible. While the NMSII obviously puts the accent on the development of the private pension system, which is in fact the philosophy of the pension reform, implemented in Bulgaria. Whatever the differences between the left, liberal and/or ethnic principles in the eventual coalition after the parliamentary elections, the new government will surely declare itself stable and to a certain extent a scapegoat to Bulgaria's EU orientation. It is another question if such a configuration is in line with the trust, placed by the people's vote.

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