PROCEEDS FROM SOCIAL AND HEALTHCARE INSURANCE SHOULD GO UP
Jerald Schiff, IMF Mission Leader for Bulgaria, to the BANKER weeklyMr. Schiff, in December 2002 you voiced serious doubts that the planned revenues into the 2003 budget would be collected. Six months later the IMF Mission lead by you made almost no rebukes regarding the realization of the Treasury's planned revenues and expenditures. Don't you think you were too skeptic, having in mind that a budget deficit of BGN304MN was planned for 2003, and in end-March the Treasury reported a surplus of BGN111MN? - What happened was more or less in line with our forecast. You remeber that on December 16, 2002, we made some remarks regarding the collection of projected proceeds, i.e. those from social insurance contributions. Despite our doubts after some negotiations we agreed to set as a basis in the programme lower levels of proceeds from insurances as compared to those, planned in the budget. The results in end-March confirmed our forecasts. Proceeds from social insurance do not differ very much from our projections and are lower than expected by the Finance Ministry. But the other revenues into the budget are very good. That is probably due to the higher growth of the Bulgarian economy. We believe we were right in our estimates of end-2002 and we do not feel uneasy.What measures should be undertaken in order to increase the proceeds from insurance contributions?- The best way for raising the proceeds in that category is to improve the control on taxpayers. I expect that will happen when the National Revenue Agency starts operations. With its help the Government will be able to better guarantee the revenue side of the budget. Increasing the collectibility of social insurance contributions is important because it has a strong effect on the pension reform. On one hand, pensions are low and retirees expect to get them raised. On the other hand, both private persons and companies want to pay lower social insurance contributions. And this could happen if the collectibility is improved. Are there any hidden reefs in the Bulgarian economy, which could make big holes in the state budget in the following months?- The prospects for the budget's fulfillment are good and principally we have no remarks. But if the economy's growth slows down that would have a negative impact on the revenues into the budget. For the time being, however, there are no reasons for worries as the growth of the gross domestic product (GDP) in Bulgaria is much higher than in the European Union (EU). In addition, your national currency is quite strong. I hope that Bulgaria would improve its productivity and growth in order to overcome eventual problems that could arise due to the Bulgarian lev's appreciation (as a result of the depreciation of the US dollar against the euro, to which your national currency has been pegged).In recent months the local municipalities have been demanding BGN100MN in additional subsidies from the budget. What is your (and your colleagues') opinion? Should the Treasury release this money or not?- Back in 2002 we voiced our uneasiness regarding the municipalities' budgets. It was not clear how they would manage to finance the activities, entrusted to them. The central power put them in charge of various new tasks without ensuring funds for that, e.g. to take care for some of the hospitals.It is true that the State budget stipulates that if the municipalities are short of money, the deficit shall be covered by the Republican budget. But if that happens, the plans for financial decentralization shall be questioned. How can we speak about decentralization if the municipalities do not have sufficient financial resources to cover their annual expenses and rely on the State to do that?During the IMF missions in the past years there always stood a huge problem - the prices of electricity and central heating. They were not even mentioned this time. Is the export of electricity to Greece and Macedonia, which the National Electricity Company (NEC) temporarily ensured for the following months the reason for not raising the issue of the electricity prices?- We did not raise this question because we believe that the Government's policy in that respect is correct. Electricity prices were hiked in June 2002. We agreed there would be one more price increase in June 2003. At the present stage the prices ensure proceeds which cover the expenses of electricity companies. Concerning the price-formation of central heating, there have been achievements there, too. Although the prices of central heating have been hiked, consumers are already able choose themselves the quantity of heat they use and decide how to cut down their expenses for bills.Mr. Schiff, the IMF had quite a lot of recommendations about the Government-approved tax policy for 2003. Both you and Ms. Pritta Sorsa (IMF Resident representative to Bulgaria) doubted that the exemption from profit tax of firms investing in regions with high unemployment would have a positive effect. Have you changed your opinion on that matter or has there not been such an investment so far, which enjoys such tax relief?- Principally, the IMF's opinion is that taxes should be as low as possible and equal for everybody (as in Russia - 13% tax on all proceeds). I do not feel it is a good idea to treat anyone on preferential terms. In the beginning of your present mission to Bulgaria you voiced uneasiness with the failed privatisation of the Bulgarian Telecommunications Company (BTC) and Bulgartabac, although the IMF does not monitor the divestment process in the country. Did the Government have to sell the two companies at any cost, especially after it became known there were multiple violations of privatisation precedures in the Bulgartabac deal?- I am positive that the Government should not sell at any cost. In my opinion the most important thing is to draft a good privatisation strategy. But I don't believe it would be normal to sent numerous requirements to the buyers in it. When the Cabinet sets various conditions regarding the companies' operation after their divestment, its attitude to the investors in them is like the attitude to state-run companies. After all, the investors are private companies and the ultimate aim of their acquisition is profit.According to the Finance Minister Milen Velchev, the drafting of the 2004 budget has already started. Which rates would you recommend to be reduced - those of social insurance contributions, customs duties, corporate income tax (more widely known as profit tax), natural persons' income tax, or value added tax (VAT)?- The strategy for the gradual reduction of taxes is good, but it has two sides. It is no use speaking about a relief of the tax burden if we do not comply with the budget expenses. As far as I understand, the Government plans to cut down direct taxes - e.g. to reduce the corporate profit tax to 20 per cent. On the other hand, excise duties will be increasing gradually in order to bring them in compliance with those in the EU. The IMF does not object to such steps, but they should be well-grounded by the budget revenues and expenditures.