Банкеръ Weekly

Briefs

THE CABINET'S POLICY IS UNFORESEEABLE

Martin Dimitrov was born on April 13, 1977. He has a Master's degree in International Economic Relations from the University for National and World Economy in Sofia. He has worked on international projects of the Institute for Market Economy in partnership with the EU, the IMF, and USAID. Now he is an MP from the Union of Democratic Forces (UDF) and a Deputy Chairman of the Parliamentary Budget Commission. he has been an observer in the European Parliament since August 26, 2005.

Mr. Dimitrov, you said in the National Assembly the the Bulgarian Government has not been forced in any way to increase pre-emptively the excise duties on cigarettes, alcoholic drinks, and fuels. What are your arguments?
- The steps undertaken by the Cabinet regarding tobacco products and spirits is in no way related to Bulgaria's EU integration. The projected hike of excise duties for several years to come was made at once. It will result in a serious increase of smuggling and of inflation rate to over 6% in 2006. Besides, the Government failed to convince us that the measure was necessary and that there was any normal explanation behind it. Cabinet representatives said they preferred to introduce now the higher excise duties in order to be able to maintain a lower inflation rate during the two-year period prior accepting the euro as a national currency. This argument, however, cannot be serious. There are other instruments for reducing inflation, such as cutting down the value added tax (VAT), for instance.
So, as of 2006 the average Bulgarian citizen will be bearing the burden of excise duties on fuels, which are going up because of our country's future EU integration. But he will be also paying more for cigarettes and drinks, simply because the Government has decided to thrust deep into the taxpayer's pocket.
Is all that made only for raising the budget revenues?
- This is one of the possible explanations. The Cabinet has thorn the link between its promises and real actions. They were making schedules for the increase of excise duties over the years... But one morning we woke up and everything changed. SImply because the Government's financiers decided it should be that way. Which means that the policy of PM Sergey Stanishev's Cabinet is unforeseeable. Steps that have been projected as part of the integration for years and are already being fulfilled, are changed ad hoc. That creates problems to the business because it has to change its strategies and plans each day literally. In fact, the entire policy of the tripartite coalition's Government is like extremely unforeseeable.
Is it true that the widely proclaimed tax reductions for 2006 will in fact turn out to be tax hikes?
- Some taxes will go down indeed, but most of them will increase. It should be completely clear that the average Bulgarian will be paying to the Treasury more than in 2005. The situation is even strange. The budget surplus will be some BGN2BN this year. This means that the State has taken from the people BGN2BN more than approved by Parliament. In normal countries that would be regarded as a signal that taxes could be reduced and the business could be given a breath of fresh air. But in Bulgaria taxes are going up.
The only positive thing which the incumbent Parliament did, at that under considerable pressure on the part of UDF, was the reduction of the insurance burden. This is the only white skylark. Another positive step is the voluntary registration under VAT. As of April 1, 2006 small and medium-sized firms will be able to use a tax credit if their turnover is between BGN25,000 and BGN50 000. It was also initiated by UDF and later on supported by the National Assembly. There are certain reductions in the taxation of life insurances as well - from 16% to 12%, which should give an impetus to insurance.
Could we claim in this situation that Parliament is willing (albeit slowly) to change the major social spheres and the business medium in Bulgaria?
- The situation regarding the BSP-NMSII-MRF majority in the National Assembly does not look good. The reasons are clear - taxes are going up, reforms have been stopped. The change fo directors in healthcare is called a reform. What does it mean? This is pure speculation and a refusal to make real reforms. The situation in the sphere of education is similar. It is obvious that the problems in that system need urgent solutions, starting with the optimization of the school network and improvement of the quality of education. Higher salaries to teachers could be achieved within the framework of these reforms. The problem is that all these measures are not part of this Government's and this ruling majority's programme.
Is there an alternative to the present tax policy and why does it never happen in Bulgaria, as it has been proven to result in an economic growth?
- Still in September 2005 with my colleagues from the UDF we moved a package of tax bills and showed the possible alternative. The Government could have considered the possibility of reducing the insurance burden by 13% or pay attention to our proposal for cutting down personal income taxes by introducing three tax rates - a zero one, 10% and 17 per cent. Our idea for reducing VAT to 18% and the corporate income tax to 10% could be discussed too, as well as the opportunity for lifting the tax on dividends. This is the so-called rightist policy and alternative to the present government. We proposed it much earlier, before the 2006 draft budget was ready and amendments to the tax laws passed. Regretfully, most of our proposals were rejected.
You said the policy of Mr. Stanishev's Cabinet is unforeseeable. Isn't that dangerous for the business and for the financial policy's stability?
- Of course, it is. The only concrete thing in the Government's programme are the numbers on its pages. And the only European elements - the worst examples, taken from the practice of EU countries. Hence after it contains only wishes and is simply good for nothing.
Will the average Bulgarian citizen be poorer in 2006?
- Considering the 6% annual inflation rate - yes. The government does not have any intention whatsoever to speed up the economic growth which would contribute to the Bulgarians fuller pockets. It is increasing the tax burden and not making reforms instead. The bad news is that our countrymen will be growing poorer next year. Or they will not be able to get rid of the poverty, i.e. the present status quo will be maintained in case of a more optimistic scenario.
All changes in the fiscal sphere next year will be under the financial stability slogan. Do you think the National Revenue Agency that will start operations as of January 1, 2006 is a step forward in this direction?
- The situation regarding the National Revenue Agency is quite problematic. UDF has repeatedly warned of a possible trouble. The code for the agency's operation is not ready yet. Currently, there are joint groups which are working on it as nobody likes it. We have several times proposed to postpone the start of the new structure for April 1, 2006, but no such a decision has been made so far. There is no capacity at all either for the incorporation of the National Revenue Agency into the Bulgarian administration. Just imagine the havoc and mess in the revenues administration immediately before the EC's report on Bulgaria and the additional complications that could come up on the road leading to our country's EU membership.
There are many examples of failed structures of this kind in other countries. Shouldn't the team led by Plamen Oresharski oppose to the IMF's imperative request for the start of the agency?
- The IMF and the World Bank take the view that this step has been a commitment of the country for years and it has to be fulfilled. The present government undertakes the negatives of the former one in that aspect. Still, the parties that ruled in the past are the same that take part in the Stanishev cabinet, aren't they? They could have pleaded for tolerance on the part of the Fund and could have asked that the NRA begin operations next April. Otherwise, the risks are so big that it is not worth taking them. We are close to the middle of December and nothing has been prepared yet. The NRA is a time bomb that may explode.
In what direction will the explosion be? May there be reduction of the tax revenues, of the pension or health payments or may there be an administrative chaos?
- Even if there is no revenues decline, the confusion is inevitable. Citizens and businesses will be resent from one place to another, they will be buggered around just because the Government has not done its job. All that may also result in a decrease of the revenues to the treasury. Not to mention that the NRA is not prepared in the information aspect. Promises that the software will be ready by August 2006 sound quite unreal right now.
As a Deputy Chairman of the Parliamentary Budget and Finance Committee, did you receive an adequate answer from the financial minister to these questions?
- I have shown my concern both to the committee and to Plamen Oresharski. Generally, it is said that there is no choice and these are problems inherited from the previous government, but that the NRA should start working on January 1, 2006 at any cost. I still think that there are serious difficulties in realizing the potential risks.
What is your macroforecast for the economy of the country in 2006 as a result from the Government's financial policy?
- I expect the economic growth to be lower than it was in 2005. I think that BSP's strategy is to do nothing but have the economy surviving and avoid the problems of the Zhan Videnov ruling. The party wants to be remembered for having ruled the country without causing grave damages to the Bulgarian economy. The problem is that the country has not yet reached the level of economic development which allows maintaining the status quo without doing anything in particular. If the chances for reforms are missed, the price will be very high and it seems that some representatives of the ruling coalition are aware of this fact. I can find no other explanation for the inconsistent policy of the cabinet. Promises were given for a 6 to 8% real growth of the economy within their mandate. However, it is written in the report to the 2006 draft budget that a growth beneath 6% is foreseen until 2008. Unfortunately, this confession of theirs is quite precise - conducting this kind of policy will certainly not result in a growth higher than 6 per cent.
What are the expected scenarios about the level of the foreign investments in Bulgaria?
- I expect the level of foreign investments in Bulgaria to fall, too. Romania made important reforms and the business environment there is already better than it is here. They introduced a 16% flat tax and the economy is big, so it attracts foreign capitals strongly. Serbia introduced a 10% corporate tax, the same tax is 9% in Montenegro. Why then will investors come to Bulgaria where the rate is 15 per cent?
Another significant circumstance is that the Government is not planning to sell Bulgartabac. It will keep the tobacco companies and will even fix the cigarette prices next year. The Cabinet is going to determine the prices of all traders through the so called centrally planned administrative costs. That will result in such a huge cigarette smuggling that it will become a phenomenon in Bulgaria's new history.

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