Банкеръ Weekly

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PROFIT TAX TO BE REDUCED IN 2004

PUBLIC SERVICES WILL BE GRADUALLY PRIVATIZEDDeputy Finance Minister Luybomir Datsov, to the BANKER weeklyMr Datsov, in the last days of July the Government again discussed the 2004 draft budget. A month earlier information appeared in the press that the Treasury was endangered of remaining empty. Is there really such a threat?- These were allegations of the media, which we cannot put under control. Thank God. According to me, this information was not justified as at that time the surplus in the budget was about 2% of the gross domestic product (GDP).But why didn't you introduce lower tax rates then?- Because the big surplus could melt away quickly as 33% of all expenditures are made in November and December and the budget will probably have a deficit in the year-end.Anyway, there is no smoke without fire. How would you explain that the 2004 draft budget report, discussed by the Cabinet in June, aroused such headlines?- The report in question was worked out on the basis of various ministries' and institutions' claims. It is quite long (editor's note: Mr. Datsov shows a document of about 100 pages), not just a few pages. The figures, cited by the media, are within that report, but they have been taken out from the context. You know that when the Government holds discussions on the drafting of the budget for the following year the ministers ususally want more money than the Treasury could allocate them. The Finance Ministry, on its part, has to present its standpoint on the budget and appraise any possible developments under one or another economic scenario throughout the year. Within the framework of the budget procedure negotiations between the Finance Ministry and the other ministries are held for several months until specifying the individual financing for each state-run structure and each policy that the State plans to follow (no matter if regarding social, investment, defence of argicultural issues). Your colleagues have simply managed to get summaries of the reports discussed at such meetings, and produced a sensation without grounds.How will the 2004 budget look like?- Briefly, it will differ significantly from the 2003 budget and from the budgets for the previous years. By tradition, the budget framework used to be worked out in May. It contains the forecasts about the macroeconomic indicators for the next three years - e.g. GDP growth and inflation rate, as well as the size of the main budget revenues and expenditures. Talks on that document used to begin in July. Four or five months later the draft budget was usually moved to the Parliament.An important detail is that the budget framework contains ceilings for the maximum size of amounts that each of the institutions could receive from the Treasury throughout the year. Unlike other years, in 2003 we began preparing the budget as early as in February. The budget framework was worked out in a new way - on the basis of 2003 prices, without adding to them the inflation rate and GDP growth. Using that approach, individual budget revenues or expenditures could go up or down only due to amendments to the effective legislation or because of the so-called structural reasons...What do you mean by structural reasons?- Let's consider the pensions by way of illustration. Effective laws stipulate elimination of the ceiling on pensions. This is a structural reason for increasing social expenditures, as due to it the budget should pay in 2004 BGN300MN more for pensions than in 2003. The elimination of the ceiling on pensions is not the only reason for that. You should bear in mind that as time goes on low-paid retirees will become fewer in number and those with higher pensions will increase.Have you already specified the macroeconomic frame from the 2004 budget?- The figures will probably undergo some changes, but we have generally pre-estimated a 5%-5.3% growth of the GDP and 4% inflation for next year. Budget expenditures will account for about 38% of the GDP (this is the so-called size of the public sector, with a downward tendency for the next few years, expecting it to decline to 35% of the GDP. Of course, this does not mean that the State's expenditures will be decreasing in absolute value. On the contrary, they will be going up, and I hope the GDP will continue to increase, too. But the Treasury's expenditures will be less as a percentage of the GDP and more funds will remain in the private sector as a result. Regarding the budget deficit, it is pre-estimated at 0.7% of the GDP in 2004, and we project the budget to become balanced by the year 2006, i.e. without a budget deficit.Do you plan a reduction of the tax rates or any other tax relief for next year?- The corporate income tax rate which is currently 23.7% will be reduced to 22% or 20 per cent. The exact rate is to be fixed after we see the results of the last review of proceeds from taxes into the budget for the first six months of 2003. Won't you cut down the social insurance installments' rate?- For the time being we project such a decrease in 2004, but the National Insurance Insitute (NII) will undertake the expenses for sick-leaves, which are currently paid by the employers for the first three days when employees are absent from work on a medical certificate. This is also a relief for the business. In our estimates, this would increase the Treasury's expenditures by another BGN50MN. There are other ideas as well, but I know that the measures which the Government plans to undertake in order to reduce taxes and ensure the necessary social protection, would add up about BGN400-500MN to the budget expenditures. It is said that the 2004 budget will be the first one, to be drawn on the principle of programme budgeting. Could you explain that?- First of all I have to say that only three institutions' budgets will be drafted in that way - those of the Ministry of Labour and Social Affairs, of the Ministry of Environment and Waters, and of the Ministry of Transport and High Technologies. But the aim is to work out all ministries' budgets on the basis of programme budgeting by the year 2007. However, it's much more important for us to introduce long-time budgeting, which should be combined with the various budget programmes of the different institutions. Let me explain what it's all about. There are three levels for organization and management of the budget. The highest level is the defining of the macroeconomic framework and the size of the public sector (or in other words - what portion of the GDP the budget expenditures account for). The Finance Ministry is responsible for that level. The next level, for which all other ministries are responsible, concerns the effectiveness of the budget. It depends on the way the budget resources are distributed to the individual ministries and agencies. The third level, for which the ministries are responsible, is the budget's efficacy. It depends on the rational spending of tax-payers' money, on the products and services they get from the ministries. This is the level, on which the stress is laid when applying programme budgeting. When the ministries demand a certain amount of money, they should specify the programmes to which the funds will go and explain their impact on the citizens and the State. Supervision of the programmes' implementation and reporting of results starts afterwards. Don't forget that a large part of the services, presently offered by the State, could be privatized - e.g. social care, healthcare insurance, higher education, etc. Even tax collection could be privatized. For instance, the collection and processing of tax declarations could be concessioned to private firms, that would fulfill the service against a respective remuneration. The decision if a certain service could be provided by the State or a private person should depend on which would be more efficient and more effective. The size of the public sector in the budget depends on that decision as well. Principally, the rightist governments worldwide are trying to reduce the size of the public sector, and the leftist - to increase it by entrusting to the State the social, healthcare and other similar services. Which attitude for offerting public services is more expedient?- All calculations we have made in the Finance Ministry have shown that the public sector should not account for more than 35% of the state's GDP. Our policy is aimed at reaching that percentage by decreasing the State's intervention in various sectors which are currently almost entirely financed by the Treasury. For the fulfillment of that purpose even the former government introduced the social insurance system with three columns. The NII is the first column, where the money that comes in throughout the year is equal to the amount spent on social insurance. Private pension funds, in which insurance is obligatory, are the second column. Private voluntary pension insurance funds are the third column. The aim is to increase the private social funds' share in the payment of pensions as time goes on. In about 20 or 30 years retirees will be getting the bulk of their pensions from these funds and not from the NII. This is exactly privatisation of the social insurance market. The same process is going on in the sphere of medical care where several private healthcare insurance funds have already been set up. After some time they will undertake most of the servicing. Isn't such a policy placing citizens on unequal footing?- Unequality is something natural everywhere in the world. In almost all countries the state enures to its citizens access to the minimum amount of necessary pension and medical services. Nothing more! If someone wants to get a higher pension or better quality medical services, he should make installments in the respective insurance fund. Such a policy will enable the Governement to set aside funds for other activities (such as defence and security, environmental protection, etc. and at the same time reduce the tax burden. The final result will be beneficial both to the business and the citizens, but time should pass before the positive impact become evident.

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