Банкеръ Weekly

Briefs

2006: FISCAL RUBICON IN ORESHARSKI STYLE

Finance Minister Plamen Oresharski announced that a campaign for filling the gap in Bulgaria's trade deficit would be launched next year and by end-2006 it should be reduced from the current 14% to 12 per cent. This is an imperative requirement of the International Monetary Fund (IMF).
In order to stabilize Bulgaria's balance of payments the fund's experts have advised
to increase additionally the value added tax (VAT)
Thus, by taxation instruments consumption will shrink, IMF recommends. The news was hinted at a month ago by Mr. Oresharski's two deputies, Georgi Kadiev and Lyubomir Datsov. When discussing the 2006 budget Mr. Kadiev announced from the parliamentary tribune that the fund was pressing us to increase VAT. And in an interview for the BANKER weekly in the beginning of November 2005 Mr. Datsov said that such a step was necessary due to the economic situation in the country. And as the budget procedure for 2007 is already at its start, VAT's hike is probably not only a part of the Cabinet's financiers' virtual ideas.
However, it's a fact that with a 20% rate Bulgaria is the European country with the highest VAT. It is uniform, high, and on top of everything - extremely disagreeable to the payer, financier Emil Hursev comments. In this country we witness an incredible tax terror, exercised on everyone who wants to restore VAT. There are suspensive terms for restoring VAT, unacknowledgement of tax credit, etc., which are neither met in any other country, nor described in financial literature.
Orthodox economists comment that the Government will be hardly ready to undertake the political risk or pay the respective political price of a future VAT increase. Such a measure would additionally pump up retail prices. At the same time inflation is expected to exceed 6% in 2006 due to the hiked excise duties on cigarettes, spirits and fuels.
It is still not clear what will happen
to the corporate income tax in the fiscal 2007
It seems its reduction is questionable or is kept as a reserve option if other changes in the sphere of indirect taxation are necessitated. Mr. Oresharski hinted that the decrease of profit tax by 2-3% in 2006 had been considered, but the Government's financiers preferred the more significant reduction of the insurance burden. It is known that as of the beginning of next year insurance contributions will go down by 6%, which saves to employers about BGN630MN. Mr. Oresharski's team shares the opinion that these free resources will be directed to technological innovation of enterprises, investments, and modernization of production, so that Bulgarian firms would be prepared to meet the competition pressure of the European Union (EU). Moreover, employees' wages will go up and most of their incomes will remain in the light. If the business does not react in that way and it turns out that the National Insurance Institute (NII) loses these BGN630MN, the gap will be covered by the State budget. But in that case the situation will have to be reappraised next year and due measures should be undertaken, Mr. Kadiev said to the BANKER.
Calculations show that because of the reduction of insurance NII's deficit to be covered by the State budget will hit BGN1.2-1.3BN, or 30% of the institute's expenses for payment of pensions. On the other hand, the thesis that collectability would increase as a result of the reduction of insurance rates is entirely wrong, experts in the branch believe. According to NII data, more than BGN500MN has already remained in the hands of business as a result of partial reforms in the insurance system since the year 2000. Anyway, these measures have not effected positively the collectability of NII's incomes.
The situation regarding the revenues into the Treasury will inevitably get tense due to
the speeded up start of the National Revenue Agency (NRA) as of January 1, 2006
For those who are acquainted with the mechanism of such institutions' operation it has become clear long ago that the start of the agency would just cause havoc in the proceeds administration. For example, 270 tax units in the country should be transferred to the 28 regional departments which the NRA will have. For the time being, however, there is still no readiness for such a huge transfer. And this jeopardizes revenues from taxes and insurances into the Treasury and the stability of the budget as a whole. Moreover, NII's 893 employees should be transferred to the NRA, while tax officials will have to be transferred to the customs in order to handle excise duties as per the provisions of the new Excise Duties Act, to be enforced as of July 1, 2006. And the building at Tsarigradsko Chausse which has not been finished yet cannot accommodate so many employees.
Risks to the budget do exists and other countries' (Hungary, Croatia and Latvia) attempts to fill in their insurance budgets through the establishment of mega revenue institutions shows that. According to a research of the International Labour Organization, instead of raising collectability and making it cheaper, the measure has resulted in higher expenses, and the money has been poured for the institutional building up and strengthening of the tax administration.
At the same time, the 2005 fiscal year analysis shows that
the Treasury has again accumulated some BGN1.1BN budget surplus
or 2% of the state's gross domestic product (GDP). The surplus money in the Government's box due to overfulfillment of the revenues actually amounts to BGN830MN-BGN840MN, figures provided by the financial ministry indicate. The rest of the money is part of the reserve in the capital of the state-owned Public Investment Projects EAD which accumulated BGN340MN from the Treasury.
But while the Budget Act allows a deficit of 0.5% of GDP, the agreement with the fund requires a 1% surplus. If there is a surplus, it cannot be spent freely, otherwise the country will violate its agreement with the IMF. That is why the Government will not dispose of the free money and reallocate it. Next year it will be banned from doing so because of the amendments to the State Budget Structure Act, which stipulate that the cabinet be able to spend without sanctions from the National Assembly up to 1.5% of the revenues in the consolidated fiscal program, if only there is overfulfillment.
It seems that the 2006 budget will have a double bottom, too, with a surplus of some BGN1.3BN-BGN1.4BN being planned in advance.This is the extra amount that will be collected from Bulgarian citizens and will be allocated to the reserve. The IMF keeps insisting on a budget surplus of 3% of the country's planned GDP (or over BGN1.36BN) for 2006, too. The creditors from Washington are binding their demand to the deficit on the current account in a direct ratio, i.e. if the negative balance on the current account gets worse, a larger deficit may be requested, too.
The idea sounds quite familiar - to make the plans on a macro level and to minimize the risks for the budget. However, it is not known how long companies and individuals will resist the endurance test of the fiscal Rubicon.

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