Банкеръ Weekly

Briefs

RULING TANGO FOR THREE

The BSP-NMSII-MRF triumvirate is unraveling the basis of its economic policy. Interests in the future coalition are balanced due to compromises on account of the taxpayers, observers sayThe old lady and her refined yellow partner are dancing a swift political tango under violet spotlight. In fact, the ruling dance is a profitable deal, although with controversial results. The Bulgarian Socialist Party (BSP) is giving generous promises and chances for a coalition are growing even though considered a great political compromise. A union among the BSP, the National Movement Simeon II (NMSII) and the Movement for Rights and Freedoms (MRF) would enable the socialists to land successfully on the ruling stage. Also, it would help the NMSII and its leader establish permanent positions on the political ground. As to the third party in the ruling of the country, the MRF, it will keep playing its well-known role of a highly-paid consultant.With suitable music provided, the coalition not yet born is already making plans for Bulgaria's economic future.Is it possible that only packing remains of all economic promises given by the three parties that are likely to take up the country's ruling? Despite the seeming delay of the debates on forming a future cabinet, BSP, NMSII, and MRF are showing progress in defining the economic priorities of the next ruling. After two-day consultations the experts of the three parties worked out a seven-page document titled Government Priorities of the European Integration, Economic Growth and Social Responsibility.It became clear from the arrangements between representatives of the future coalition thatthe economic status quo will not changeregardless of whether the next ruling will be established in a mandate of the BSP or the NMSII. Willingness for mutual compromises in the economic field has already been declared. Retreats from the politicians' election statements are a sign that revolutionary turns in the policy of the potential ruling coalition are rather improbable. It turns out that BSP's social lures fit excellently to the market populism proclaimed by the liberal alliance, observers comment. It is also in harmony with the claims of the third participant in the next cabinet which will defend the interests of its electors.The three parties unanimously declare they support the idea of maintaining a 6% to 8% economic growth, continuing the processes of privatisation and concessioning, and developing the capital market. The potential coalition promises that pensions will grow up to 10% of the GDP and that a silver investment fund will be established in order to support the pension system. The main ideas launched by BSP with regard to the reform in the judicial system have been adopted, too.That yes and no actually mean maybe is demonstrated by the text regarding the participation of the multinational coalition in Iraq. The left-wing peremptory election promise to immediately withdraw the Bulgarian contingent has toned down to initiating a withdrawal of the Bulgarian military contingent from Iraq without even mentioning a concrete deadline.How much does the balancing of interests in the future ruling body cost?BSP's tax promises which were among the party's most jealously defended ideas on the eve of the elections appeared totally defeated in the single coalition document.It became clear that the left beat the retreat as far as a differentiated rate for convenience goods was to be introduced. BSP intended to introduce lower VAT rates for a restricted range of products such as children goods, medicines, bread, milk and several foods. The idea typical for the left wing aimed at relieving part of the essential goods consumers because of their low income.Now the socialists are giving up the idea for a differentiated value-added tax saying that the EU member countries are unifying their taxation, too. Besides, they add, in that case the macroeconomic situation would not be distorted, nor would the government interfere in the economy by regulating the prices of some goods and services.However, BSP accepted the idea launched by NMSII for a VAT reduction from 20% to 18 per cent. The team led by Milen Velchev insisted that the reduction be made as of the beginning of 2006. The move was included in the tax draft bills presented by the Finance Ministry about two months ago.It now becomes clear that the VAT reduction will be made when there is fiscal opportunityOther arrangements in the tax field reject the introduction of steeper scales of assessing individual incomes - a change that BSP insisted on making as it protects people with lower income.In return to this gesture, the NMSII withdrew its claims for gradual introduction of the flat tax in the field of direct taxation. The flat tax is not part of the left-wing policy, so BSP cannot afford accepting it even if it liked it, the socialist financial expert Georgi Kadiev declared before the elections. Moreover, the red party would not be able to explain it to the left parties that are its partners in the socialist international, because it would face their critics immediately, Mr. Kadiev added.It is written in the single seven-page document that the socialists' claim for a zero tax in cases of reinvested profit would be part of the future fiscal policy of the new cabinet. The idea came from the party led by Sergey Stanishev which explained the measure would have a very positive effect on foreign investors and that, in turn, was quite important for the achievement of an 8% economic growth on an annual base, planned by the socialists.There is another change in the socialists' position regarding the rise of incomes in the budget sphere. While their election agenda promised a single 20% rise of the salaries from January 1, 2006, the new document only stipulates a significant increase of the working salaries in the budget sphere associated with Bulgaria's integration into the European Union, following coordination with the International Monetary Fund. However, the new definition does not make it clear when the salaries of the officials will be increased and by what amount. The document only keeps the left's commitment about the size of the annual income increase - by a percentage equal to the growth of GDP plus inflation.Engrossed in political calculations, the future rulersremain deaf for the urgent needs of those who push Bulgaria's economy aheadAnd the requests are quite simple - for example, to reduce administrative interference in the private sector and to have a more transparent economic environment.A few days after the elections, in a special appeal to the major political forces in the National Assembly the Bulgarian Industrial Association requested that the tax rates be kept unchanged. Moreover, it insisted on introducing obligatory VAT registration for all traders. Another claim is to have the counter-inspections on VAT refund privatized (so far, the inspections were made by the tax authorities). The business representatives appealed to the new government to amend the regulations in a way that would make state departments pay punitive interests, too.There are also some usual claims for significant decrease of the insurance burden, for drastic fall of the administrative costs, and for reduction of the subsidies launched to losing sectors of the economy. The businessmen's appeal for restriction of the licensing and permission regimes is on the agenda again, too.Budget surpluses should be spent through the Parliament and not the Council of Ministers, the Bulgarian Economic Chamber proposed. Equality in the award of contracts financed by the European funds will be required, too.No answer has been given to these substantial claims so far. The only thing that is almost known now is that the tango will be danced by three.Basis of the coalition agreement:- VAT reduction down to 18%, when there is fiscal possibility;- annual increase of incomes by a percentage of the GDP growth and inflation;- a single significant increase of incomes in the budget sphere following coordination with the IMF;- gradual increase of pensions up to 10% of GDP;- introduction of a zero tax rate when profit is reinvested;- budget expenses level up to 40% of GDP;- continuation of the privatisation;- gradual increase of the share of infrastructure and healthcare in the GDP.

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