Банкеръ Weekly



The young economic experts around the National Movement Simeon II (NMSII) were convincingly explaining about a year ago how they intended to encourage investors. We are upholders of the supply-side economy, Vladimir Karolev said then, supported by other enthusiasts. A pre-election programme needs a doctrine and the accent was put on the zero profit tax, which is an essential element in the theses of supplysiders* as well.Then, the fright from the 2002 Budget swept most of the promises and the wish to guarantee the social payments did the rest. Thus, small steps replaced the bold reforms, and immediate increase of the most primitive taxes was proposed instead of a revolution in the sphere of taxes. NMSII's coming into power was accompanied by many try-outs and mistakes, and no consistent line of conduct could be seen in the initial chaos.Now, when the ministers began planning the following year, the logics of future reforms should be already sought. It is difficult to trace the initial promises in them (except the licence regimes, that are to be relieved). But a turn tohelping the poor is evidentIt does not only concern children allowances, which were redistributed to people of incomes below BGN150. The networks for granting energy financial assistance were expanded and there are plans to deprive the more solvent people from pay-free (?!) health care services.The recently announced intentions in the sphere of taxation policies went even further. Not only the idea for a zero profit tax was completely rejected, but no substantial relief for the depreciation of assets was proposed. The tax on incomes will be reduced instead, at that with an accent on the lowest ones. The employed will get another relief as well. The hike of their share in the insurance burden will be postponed (that is, the employers will be again paying 75% of it next year, instead of the promised 70%).By that the ruling economists have practically admitted that they do not rely on increased investments to solve the problems of unemployement and incomes. Consumption already seems to have a priority and is expected to promote the growth of the economy.The discussion on whether supply is determined by demand or vice versa principally resembles the dispute on the egg and the hen. It is hardly of any interest to people, especially those who do not uphold any of the well-known theories. There is no pure theory and there is no purely leftist or rightist policy. The choice of priorities depends on the current problems and future targets. Is it now the most appropriate momentto encourage consumptionat the expense of investments? On the face of it, this seems to be so. In the first place, the people are poor, and secondly, investments go up for one reason or another. Thus, they suddenly rose by 29% in the last quarter of 2001.But this is a misleading conclusion because of three reasons.The first agrument lies in the analysis of figures. Indeed investments have been persistently increasing after the crisis of 1996-1997 and especially after 1999. But only in the last years they exceeded the calculated depreciation allowances. (At that, it should be born in mind that the National Statistic Institute counts vehicles as investments, too.)Secondly, the state of the fixed assets and the collapse of the so-far structure-defining enterprises require much more than a 2-digit growth of investments.And last, is it possible for Bulgaria's industry to meet increased demand. The obvious anwer is no. Higher demand will mean increased imports, which would exert additional pressure on the country's payment balance. It's true that the growth of investments also results in higher imports, but this effect will be compensated over the coming years.Realizing the banality of these arguments, one cannot help wondering if it is possible that the authors of the new economic policy have overlooked them. It seems doubtful, at least because the IMF scrutinizes all risks for Bulgaria's payment balance. Then, what are the motives forreconsidering the prioritiesright now?There are two possible explanations. The first one is that the encouragement of consumption seems a much easier, faster and more popular measure. The improvement of the business climate, the promotion of investments, and the liberalization more difficult steps. Together with everything else they require political will, good capacity of administration, and trust in the capabilities of business.Secondly, it seems that the incumbent ruling circles can still afford such a turn. Although the current account of the payment balance shows a downward tendency, hope remains that the deficit will be covered by proceeds from privatisation or new foreign laons. They may be also counting on the momentum of the restructuring of plants, which has alerady begun. It is unlikely that investment projects whose implementation has started would be stopped, although taxes shall not decrease. On the whole, the stability over the last few years encourages the ideas for the promotion of demand. And this is the superficial excuse for the appeals to actively utilize the surplus money of the currency board.But if consumption is the backbone of the New Time economy , how long would the New Time last? It seems that the answer - one mandate - does not depend on the patron's personal plans alone.* Supplysiders - literally means economists of supply. This is not a very popular school, whose most famous representative A. Lafer advocates the idea that the reduction of taxes increases their collectibility. The chief measures, recommended by the supplysiders, are connected with the improvement of business environment, promotion of competition, restructuring of monopolies, etc.

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