- Political stability
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Budget thinking in a state of growing economy
submited on 02.11.2007 in category Political stability | Fiscal affairs | Monetary policy | Regulated markets | Privatisation | Macroeconomic developments
submited on 02.11.2007 in category Political stability | Fiscal affairs | Monetary policy | Regulated markets | Privatisation | Macroeconomic developments
Three weeks ago we wrote that the main debate when making the 2008 budget will be between defenders of tax reduction and supporters of government spending increase. The base for these alternatives’ existence is the willingness to balance the budget, i.e. to fix the large surplus.
Now we see that the government has chosen a median version. Some taxes will fall, but on the whole the tax burden will not decline. To the active part of the society the most important change is the introduction of a 10% income tax rate and the reduction of the tax insurance burden by 3 basis points. The increase of the excise was an expected step, connected with the EU membership arrangements – so that this is not even an emphasis in the large number of comments on the budget.
When forming the expenses there are a few questions, upon which the future more effective taxpayers’ money spending depends:
1. The teacher’s strike accelerated the introduction of the delegated budgets and in practice it will apply from 2008 on the principle “money follow the student” – at least in the state schools. This will in the long term free the central authorities of their unusual function to be the teacher’s employer and to set their wages.
2. If the intentions of reducing the administration get realized, this will be a considerable step in the process of creating cheaper and more efficient bureaucracy. Now is also the moment to introduce differentiated payment system of state employees. The suggestion helps setting the dilemma “fewer and higher paid employees/many, but low-paid employees” – it is valid for any organization in general, but now it will have to receive an answer from every sector minister.
3. Now that every department makes a program budget, it is reasonable to expect that some programs were worse executed than others or that certain activities were over-financed. In these cases the program budgeting is an instrument for contraction of inefficient expenses not only in the sector, but rather for concrete projects, which do not produce positive outcome. At the moment the ministries must have reports at least for the first half-2007, so that they can be used.
There are also two suggestions in the tax sphere, which would change substantially incentives for economic activity and labor – the increase of the size of the maximal insurance income and the possibility for further tax insurance contributions in the mid-2008. Although the first possible change does not affect many tax payers, it must be noted that they are the most dynamic part of the entrepreneurship and the high qualified workforce. And the additional reduction of the contribution rates in case of fiscal opportunity would be a reasonable step on the background of the expanding tax base and the “enlightenment” of the economy.
On macro scale however pressing remains the question whether the government is getting used to making not anti-crisis budgets, but budgets in a state of rapidly growing economy instead. The consequent revenue accumulation growth and the realized considerable surpluses in the last years raise a reasonable doubt. Yet another “new” thing for Bulgarian politicians is the paradox of reduced tax rates and growing revenues. All this must not be a surprise, if we take into account the fact the Bulgarian economy is in an upward trend – and all following consequences. Higher employment means more taxpayers and on the other hand – fewer clients of social welfare. Higher investments imply higher profit and tax base respectively. The development of the financial sector provides incentives for “enlightenment” of the economy.
Under such circumstances it is normal for a fast revenue growth to exist. It is also logical to have a contraction in the social transfer payments – the number of poor people is declining and activities in this direction must receive less financing. Meanwhile higher revenues must allow more investments in the public sector – and it in the long term generates value, accumulating more capital.
Several signals of the announced priorities of budget 2008 hint awareness of these realities. The most important is “the acknowledgement” of a large 3% of GDP surplus, 25% tax revenue growth and the refusal of maintaining a “buffer” in the transfers toward the corresponding departments. A more detailed answer however we will receive after analysis of the program budgets of the different ministries.
Now we see that the government has chosen a median version. Some taxes will fall, but on the whole the tax burden will not decline. To the active part of the society the most important change is the introduction of a 10% income tax rate and the reduction of the tax insurance burden by 3 basis points. The increase of the excise was an expected step, connected with the EU membership arrangements – so that this is not even an emphasis in the large number of comments on the budget.
When forming the expenses there are a few questions, upon which the future more effective taxpayers’ money spending depends:
1. The teacher’s strike accelerated the introduction of the delegated budgets and in practice it will apply from 2008 on the principle “money follow the student” – at least in the state schools. This will in the long term free the central authorities of their unusual function to be the teacher’s employer and to set their wages.
2. If the intentions of reducing the administration get realized, this will be a considerable step in the process of creating cheaper and more efficient bureaucracy. Now is also the moment to introduce differentiated payment system of state employees. The suggestion helps setting the dilemma “fewer and higher paid employees/many, but low-paid employees” – it is valid for any organization in general, but now it will have to receive an answer from every sector minister.
3. Now that every department makes a program budget, it is reasonable to expect that some programs were worse executed than others or that certain activities were over-financed. In these cases the program budgeting is an instrument for contraction of inefficient expenses not only in the sector, but rather for concrete projects, which do not produce positive outcome. At the moment the ministries must have reports at least for the first half-2007, so that they can be used.
There are also two suggestions in the tax sphere, which would change substantially incentives for economic activity and labor – the increase of the size of the maximal insurance income and the possibility for further tax insurance contributions in the mid-2008. Although the first possible change does not affect many tax payers, it must be noted that they are the most dynamic part of the entrepreneurship and the high qualified workforce. And the additional reduction of the contribution rates in case of fiscal opportunity would be a reasonable step on the background of the expanding tax base and the “enlightenment” of the economy.
On macro scale however pressing remains the question whether the government is getting used to making not anti-crisis budgets, but budgets in a state of rapidly growing economy instead. The consequent revenue accumulation growth and the realized considerable surpluses in the last years raise a reasonable doubt. Yet another “new” thing for Bulgarian politicians is the paradox of reduced tax rates and growing revenues. All this must not be a surprise, if we take into account the fact the Bulgarian economy is in an upward trend – and all following consequences. Higher employment means more taxpayers and on the other hand – fewer clients of social welfare. Higher investments imply higher profit and tax base respectively. The development of the financial sector provides incentives for “enlightenment” of the economy.
Under such circumstances it is normal for a fast revenue growth to exist. It is also logical to have a contraction in the social transfer payments – the number of poor people is declining and activities in this direction must receive less financing. Meanwhile higher revenues must allow more investments in the public sector – and it in the long term generates value, accumulating more capital.
Several signals of the announced priorities of budget 2008 hint awareness of these realities. The most important is “the acknowledgement” of a large 3% of GDP surplus, 25% tax revenue growth and the refusal of maintaining a “buffer” in the transfers toward the corresponding departments. A more detailed answer however we will receive after analysis of the program budgets of the different ministries.
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