Банкеръ Weekly

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NEXT YEAR WILL BE RISKY FOR THE BUDGET

Peter Dimitrov was born in the town of Klissura in 1949. He graduated from the Moscow Economics and Statistics Institute. He is a doctor in economics. He was deputy rector of the Economic Institute in Varna. Since 1994 Dimitrov has been a Parliament member representing the Bulgarian Socialist Party. He is married.

Mr. Dimitrov, the ruling coalition announced that it had reached consensus on tax policy in 2007. Are twists or surprises possible in relation to the financial acts?
- There is consensus as a whole indeed, but of course all agreements will become true when they are voted by the Parliament. There are still some major issues to be clarified. There was only hesitation about the ratio of social insurance payments made by employers and employees - whether it should remain 65:35 or change into 60:40. But there are no doubts any more. Decisions on the main elements of the tax policy are clear - 10% corporate tax, 3% reduction of the social insurance burden effective July 1, 2007. Besides, the increase of salaries in the budget sphere from the beginning of July will be 10% and not 8% as planned before.
The Ministry of Finance had lots of arguments against the pension insurance payments reduction. Why did the members of the team led by Plamen Oresharski soften their opinion on the issue?
- You know that the role of the Ministry of Finance is to be conservative and to protect the budget revenues. Of course, tax policy is not a kind of a theatrical stage on which players are bargaining. Being prudent about the financial part is always a good piece of advice. That is why a decision was taken for reduction of insurance payments in the second half of 2007. Otherwise, we would have planned the alleviation from the very start of the year. We simply want to see how value-added tax revenues will flow and if there are no risky situations, pension installments will be reduced.
Value-added tax revenues in the new members of the European Union have decreased by 10 per cent. What are the forecasts for Bulgaria?
- Once Bulgaria joins the European Union, value-added tax revenues are expected to fall by some BGN450MN. But in some of the ten new members revenues due to this tax have shrunk by 30 per cent. So there is concern about how these processes will go in Bulgaria. We cannot think the current forecasts are definite and unambiguous. It's all in the zone of probability and unfortunately, there may be much more serious blows to the budget.
Wouldn't it be less riskier for the treasury if the National Revenue Agency had done its job on building the single information system?
- This is absolutely certain. But unfortunately, the horse that should be spurred on is not Bulgarian. Neither is the financing of the information system project since the loan was launched by the World Bank. To a great extent, the decision for selecting Bull company as constructor of the system has been taken under the influence of the international financial institutions, too. Therefore, the instruments for affecting the contractor are very weak. I think that if we had chosen a Bulgarian company to build the system, it would have been put in exploitation now. In all commercial banks there are systems for serving credit and debit cards. They are in no way simpler than the system of the National Revenue Agency. And they are being constructed fast and quietly and are operating successfully. From this point of view, the search for security through the appointment of a foreign contractor did not gave positive results.
Being the Chairman of the budget commission, do you have an official answer how long will the construction procedure last? And in fact, how long won't there be transparency when it comes to the revenues of the state?
- At the beginning of the summer we planned a special meeting of the budget commission in order to hear the management of the National Revenue Agency and the project contractor - the French Bull company. Unfortunately, the pre-joining marathon of adopting tax laws did not let us held that meeting. You know that the start of the information system had been delayed several times. The last commitment is set for January 1, 2007, but as far as I know it will not be working in full capacity again. And that is not good, mostly because of the concerns about the budget revenues. It's true that without this system there is no transparency in the budget revenues. The European Union itself complains of draining of value-added tax, the mechanisms are numerous and complicated enough, while losses exceed EUR20BN per annum. That is why the absence of the system naturally results in more risks.
Do you expect the adoption of the tax laws and the 2007 budget to be surrounded by dramatic tension in the plenary hall of the National Assembly, as it happens traditionally?
- I expect there will be lobbying as it has become practice in our Parliament. The equalization of the gambling tax rates and the corporate tax is about to provoke lobbyist statements. But I don't think that the 10% tax on profit rate was terrorized by the Parliament, just the opposite - it was accepted by all parliamentary groups. This is a step that is wrongly underestimated by some experts. The reduction is by 5%, but in practice the tax is shrinking by 33 per cent.
What do you think about the idea of implementing a tax on land and could it become effective next year?
- I don't think there is political enthusiasm for this to happen. The reason is a simple one - every time a tax is raised or a new one is implemented, people do not accept the move heartily. But as an economist I admit that the situation is not a good one. There is still vagueness surrounding the ownership of much of the land. Redistribution among the real heirs is not over, there are great massives of uncultivated lands. Therefore, a tax of this kind would be healthy, but I am not sure there will be such changes indeed.
Do you think that anyone from the parliamentary group of the Bulgarian Socialist Party will revive the idea about a wealth tax in the hall?
- The idea was to provide greater differentiation in the assessment of income, since tax is almost flat now, i.e. everybody is paying between 20 and 24 per cent. One of the proposals stipulated that personal taxes be higher for people with very high income. It means there would be another level of taxation for those paid over BGN1,400, especially as they are not involved in the social insurance system since no pension installments are paid above that amount. The alternative was to reduce the lower levels of taxation by implementing 16 and 20%, and to leave the highest rate at 24 per cent. However, it became clear that there are very alarming trends related to the budget sphere personnel. People who will administer the receiving and allocation of the European funds should be very highly-qualified. On the other hand, officials of this kind cannot be insured with symbolic salaries. That's why a decision was made that it was better to raise salaries in the budget sphere by a higher percentage next year rather than decrease personal taxes for all working people.
But isn't the wealth concept of the socialist party more curious? On January 1 Bulgaria will become a member of the European Union where the poverty line gravitates to EUR500. What is the reason why three or four months earlier people receiving an income of EUR700 are declared privileged by the tax and insurance system?
- I don't know why such comparisons are made. Firstly, no one from the Bulgarian Socialist Party has mentioned that a wealth tax is being prepared. This is about introduction of a fairer taxation scale. Since no insurance payments are due for income above BGN1,400, one way to provide justice is to increase the tax.
The main remarks of the opposition are again that no sufficient radical tax reforms are being implemented, even though the budget generates surplus traditionally. Money in excess for 2006 is already above BGN2BN. What is the reason for this budget competition?
- If the opposition proposes that we operate with no budget surplus and with deficit, it should say it aloud. But considering that the deficit on the balance of payments current account will probably be about 14% of GDP, an adventure of the kind is impossible. And it is particularly risky for the Currency Board and the financial stability in the country. Yes, there is surplus but it compensates the huge deficiency on the nation's current account - 14% of a GDP amounting to BGN55BN is a huge sum. And if anything happens to provoke reduction of the foreign investment inflow, what will this deficit be covered with? With the smiles of the opposition?
Lots of comments were made that the next budget year would be difficult - because of the payment to the European Union, the lowered value-added tax revenues, the procedural delay of the European transfers to the Bulgarian economy, etc. What is your opinion?
- Next year will be a risky one for the budget. I would add one more problem - export of electricity will decline because of the decommissioning of blocks III and IV of the Kozlodoui nuclear power plant, with Bulgaria's revenues falling by BGN350MN. This enormous amount will again have a negative effect on the current account of the balance of payments. The payment to the European Union is big, too (about BGN620MN). In turn, money from the community will arrive with at least one-year delay. The budget will also have to pay for co-financing the projects as well as for the remaining part which is actually under condition. It may turn out that if expenses haven't been made to the purpose, the entire financing will be on the account of the state.
Still, we should not always talk negatively. Our economy has never been in a period of such dynamic growth as it is now. To raise an alarm just because a transition year for our EU membership is to come is not serious. At least because we are not living in 1997.
Is there any danger of exploding inflation next year?
- Inflation appears when demand is higher than supply. And it is related to the tax reduction. The bigger the resource remaining in businesses and people, the higher the demand and the price growth. That is why the current policy of forming a great fiscal reserve is correct. For the time being, there is no reason to expect quite a solvent demand next year that would blow up prices.
Calculations show that in about 50 years we are going to catch up with the average European income. What do you think about these prophecies?
- I don't think these calculations and their inertia should be taken seriously. Look at Spain, Greece, Portugal, and you will get the answer. At the time Bulgarian people step on the European labour market, the mechanisms for remuneration and domestic prices will change...
Could censure be passed on the 2007 budget during its voting in plenary hall?
- I have not noticed such willingness on the part of the coalition partners. The self-restriction for redistribution within 40% of GDP has been preserved. The compromise that the payment to the European Union will not be added to this account has been coordinated already. But a large part of the budget systems is not operating effectively and there should be more drastic measures to cut their costs. You know that a 10% reduction of the administration staff had to be fulfilled, but it has not been completed. The next year budget is based on the same numbers of officials, there is even a slight increase in the staff number which is not positive. Therefore, the Parliament should insist on cutting the costs.
Another significant issue is that progress has been achieved in the preparation for establishment of a subcommission to supervise the spending of budget funds. It will start reviewing the expenses of the separate budget systems and I hope it will propose some changes. Because the fight now is to receive the money, but later nobody will control how it is spent. It should be just the opposite - the effects of the costs should be explained so that it could become clear where the money of taxpayers is going.

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