Банкеръ Weekly

Briefs

TAXES ARE NOT A MEAL FOR THE PUBLIC BUREAUCRACY

Peter Dimitrov, Chairman of the Parliamentary Budget and Finance Commission, to the BANKER weeklyMr. Dimitrov, the steps that the Government is going to make regarding the 2006 tax concessions are getting clearer now. Prime Minister Sergey Stanishev announced some of them in public, too. What specific changes are to be made in the tax policy?- No concrete decisions have been taken so far. Still, there are proposals and willingness to make changes. Therefore, I would not say the decisions are final. It is important for the business to have the insurance burden reduced, so this is one of the directions for further reduction. The insurance burden in Bulgaria is among the highest in Europe and that logically reduces the competitive power of the local business. Of course, the reduction of the burden should in no way affect the insurance of the people. That is why cutting some useless and inefficient costs will be the approach that will guarantee the pension system will avoid any shakings.Would you tell us the parametres of the insurance reductions discussed?- No concrete parametres can be discussed until the Government takes a final decision. I think that, fortunately for the business, insurance payments will be cut significantly. That was the commitment the ruling coalition made.The lowest incomes to be exempt from tax on the individual income and the limit of the lowest nontaxable amount to be raised - these are also subjects to discussion. It is certain that the lowest working salary amounting to BGN150 will not be assessed, but there is also willingness for raising that limit. This is a considerable acquisition for the people in the lowest income group who will feel its effect on their standard of living.Will the Bulgarian Socialist Party (BSP) keep the word it gave before the elections for introducing a zero rate on the reinvested profit?- The idea seems to remain unaccepted for the moment, particularly by the administration which should implement this economic incentive. The reason is that there are technical difficulties in defining what reinvested profit is, as well as fear that there may be double tax exemption. I think that the administration would rather support the introduction of more accelerated amortization than a zero tax on the reinvested profit. But talks on the subject continue and I am among those who support the introduction of such a tax in the corporate assessment.What is the fear - that every personal computer and every car will be treated like an investment?- If the zero rate is introduced, there will probably be differentiation, so that incentive will not be applied for all reinvestments. It is known that people often invest in luxury and administrative splendour and not in technologies and jobs. Once the differentiation is made, investments will mainly be acknowledged in the production field. However, there are also practical problems - for example, how to make that in order to avoid encouraging grey processes in the economy?However, all those problems with the tax administration were known before the day of the elections. We also heard enough about how the zero rate set the ball rolling in the Estonian economy. What makes the tax administration of Estonia better than the Bulgarian one and what helps them to avoid the problems?- It has to do with the functioning of the entire state machine. It is not a secret that the information systems in the customs and the healthcare sector never started operations. This is why the potential of our tax administration is charged with corruption mechanisms. This is where the worries come from. If there is a transparent and controllable process of collecting duties, there will be no problems with the introduction of the zero rate. Will the National Revenues Agency (NRI) start operating on January 1, 2006 in accordance with the plans?- The agency will almost certainly start operating, but sticking to this deadline will be difficult. The reason is that the start of its operations must be guaranteed by legislation of good quality. It is certain that next year, after a new Tax Insurance Procedure Code is adopted, the institution will start working.Until last June the left wing kept claiming that if it took the power, the value-added tax (VAT) would be cut by 2 per cent. Later it became clear that this will only happen if there is fiscal possibility. Do you expect this tax to be cut in the near future?- In principle, the idea for reducing VAT has not been rejected. But it will hardly be implemented next year. The Coalition for Bulgaria promised that the VAT be reduced at the end of the mandate, we even specified the time - the rate would fall from 20 to 18% in the last two years. Now we think that it is much more important for the people to have the income taxes cut rather than the VAT reduced by 2 per cent. You realize that if you have a BGN100 monthly income, 2% of it accounts for BGN2. Whereas the reduction or elimination of the taxation of the lowest working salary has a repeatedly larger effect.It turns out that BSP, being the leading political power in the ruling coalition, is beating a retreat on almost all election commitments made to the voters. In the early summer the party was promising that bread, milk and other essential goods would be sold at lower prices as they would be assessed with a lower value-added tax...- I don't think there is a serious change regarding the tax promises. You are right about the differentiated rates, but they were not included in the coalition agreement. That was one of the conditions for the forming of the three-partite coalition for which BSP really beat a retreat. That is why a lower VAT for essential foods could not be achieved within this coalition. However, we have the will to keep all other promises we gave with regard to the tax policy. The commitment to reduce the insurance payments referred to the end of the mandate, too, but we're going to fulfil it in the beginning. The cumulative effect from the reduction of the tax insurance burden for this four-year period will amount to some BGN7BN. BGN2.5BN of it must remain in the population and BGN4.5BN - in the business. So we do not intend to give up our plans at all. The tax policy is a tool for supporting the people and the business. If it is only considered a dining table for the public bureaucracy, it should not be conducted at all.The left wing announced it would raise the financing for sectors such as healthcare, education, etc. Experts calculated that budget expenses would thus grow by some BGN14BN. At the same time you say that the Treasury will lose BGN7BN worth tax revenues. How will then the budget be balanced without increasing the deficit?- There will not be a deficit increase. That was a cliche used against the BSP just before the elections day. The simplest calculation shows that if growth in Bulgaria is between 6 and 8% of GDP, along with the natural inflation processes, resources are even oversupplied. In other words, the promises are not unfeasible, just the opposite. The problem is that there should be more realistic planning with regard to revenues and expenses. A lot of the money that goes through the budget is not spent efficiently, there is no program budgeting. A significant part of the money is lost like sand in the desert. Yet, the resources provided are not small. From that point of view, the planning process should be made realistic. That will help for avoiding what happened this year - there are revenues, but eventually the IMF detained them and they can be used neither for the social systems nor for stimulating the business.Speaking of the IMF, according to the agreement signed the Cabinet is only free to spend one third of the budget surplus.- Yes, but nobody forced us to plan the budget in a way that formed a huge surplus. Why wasn't the planning real, so that this resource exceeding BGN1BN would be planned as a revenue, respectively an expense of the republican budget? Because of the tricks played in the budgeting process and the avalanche growth of import, the IMF did the wisest thing - it made us send this money into the fiscal reserve. I hope that the new Government has learned the lesson and will not plan huge reserves.I see from what you are saying that in the past years your coalition partner, the National Movement Simeon II (NMSII), has used the budget as a matrix of figures that were updated every year with the inflation rate, for example. How are you going to avoid the practice of large budget surpluses?- This is an inertia process that will repeat this year. The introduction of the new system needs a certain period of time. The budget should have clear priorities on which the distribution of the national resources should be based. Then the amount of the revenues and expenses will be determined. The approach used so far was rather calculative - we planned the amount spent the previous year plus a small extra amount. But if we define healthcare a priority of the rulers, resources should be directed in that direction. Currently, the new team in the Ministry of Finance is trying to do exactly that with the new budget - find the priorities.Does this mean that the 2006 budget will be an improved copy of the 2005 one and a perfect one considering the distribution of revenues and expenses?- The budget must be entirely program-oriented and the money should only be given for work done. But foreign assessors, as well as Bulgarian experts claim that this cannot be achieved at once. Attempts for program budgeting have already been made by some of the ministries. I hope that by the end of the mandate that principle will have become dominating. It's good to have contradictions in the process of accepting the budget. We are not a uniformly marching nation, there are different social groups and interests. It's better to have clear priorities and clear budget policy. All budgets so far have been planned to repair, while now the policy is directed towards the revenues and the standard of Bulgarian people. Will the costs for covering the flood damages have a negative effect on the budget stability?- As to the floods, the money for compensation should be planned in the budget for the next year and the years that follow. The natural disaster cannot be just a personal problem. The principle of solidarity is dominating in the European Union and since Bulgaria wants to join it, it cannot leave the victims of the disaster alone.Speaking of compensations, will tax concessions neutralize the increase of excise duties?- It is difficult to say that, as there is no clear forecast in what direction the prices of oil and energy products will go. I'm afraid that there will not be such compensation. The sharper and accelerated increase of the excise duties is really needed in order to let us get ready for joining the euro zone in 2009. If we want that to happen, inflation in 2007 and 2008 should be up to 3 per cent. And if rates are not increased next year, we'll not be able to meet that criteria. So, we have to choose - either join the euro zone in 2009 or have a gradual and slower increase of the duties.

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