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The political choice for the fiscal 2008
submited on 13.10.2007 in category Political stability | Fiscal affairs | Monetary policy | Regulated markets | Privatisation | Macroeconomic developments
submited on 13.10.2007 in category Political stability | Fiscal affairs | Monetary policy | Regulated markets | Privatisation | Macroeconomic developments
In recent months syndicates have been active participants in the public debate on the formation of the fiscal policy. In August they declared themselves opponents to the suggested income tax reduction to 10%. In September the focus shifted from the tax to the expenditure policy of the government with the beginning of the teachers’ strike.
Meanwhile the budget execution to August confirmed many independent analysts’ standpoint that revenues are being forecasted too conservatively. For the eight months of 2007 17.4% more revenues have been accumulated in the consolidated budget, as compared to the same period in 2006, with the surplus reaching BGN 2.874 billion. The government continued to pay out debt and accumulate fiscal reserve, which reached BGN 8 billion. All tax revenues grow at rates, faster than the GDP nominal growth, which means that the tax accumulation is increasing. For the corporate tax this confirmed also the thesis, that low tax rates after all stimulate tax payment.
In this situation for the government it will be hard to defend its position in the debate with the syndicates. It is clear that arithmetically speaking, there is in the budget money even for higher than 100% teachers’ wage increase. In the same time it should be made clear that if every sphere, financed by tax payers, asks for and receives similar budget increase, the public expenditure would double and thus the state will redistribute ¾ of GDP. There is no reason to expect that if teachers receive whatever they want, all the rest public sectors will not follow them. In fact this is what we forecasted also in May, when the employed in the public transport protested and received a wage increase.
Going a little bit further in the debate it must be noted that the state as an employer of 830 billion people (i.e. 29% of the employed) plays an important role on the labor market. With its policy – regarding the number of employed and their benefits, it affects labor incentives and labor force supply for the private sector. When income in the public sector is growing faster than income in the private sector, the business begins to feel the difficulties of hiring and keeping the personnel. On the other hand, income in business sector can grow in the long term only in direct relation to labor productivity growth.
In the forthcoming 2008 budget debates the question will be to cut taxes or to increase expenditure. This debate has a macroeconomic as well as purely arithmetic dimension. In macroeconomic sense the alternatives are stimulating the economy through more public consumption or lower taxes – for us this dilemma seems solved in favor of the latter approach. In the arithmetic aspect we have to get through many similar to the teachers’ wages debates, for what part of the surplus “could be allocated to…”
The considerable revenue accumulation, the surplus and the increasing reserve are rather a political impediment before the opportunity for reducing and restructuring public expenditure. In the recent few years, and especially in 2007, it is very hard to defend reforms solely because of the willingness to spare budget resources. It is really necessary changes, aiming at more effective taxpayers’ money spending to be defended reasonably, namely via vision for more stimuli, accountability and relation to particular results in each public service.
Positive signals for tax changes in the future came in the last week from the announcement of Minister Petar Dimitrov, who declared willingness Bulgaria to turn into an economy with the most favorable tax treatment on labor and capital with the formula 10:10:10, having in mind corporate and personal income rates and social insurance. In the same time, the financial minister communicated its position that in Bulgaria there is already no potential for tax burden reduction because we are already among the more favorable from tax perspective economies in the EU. It is worth reminding that (with few exceptions) countries in the EU need not serve as examples for rapid economic growth and if Bulgaria chooses “average” values in the tax policy (as it is with other economic policies), we will probably receive “average’ for the EU income growth (around 2% annually).
Meanwhile the budget execution to August confirmed many independent analysts’ standpoint that revenues are being forecasted too conservatively. For the eight months of 2007 17.4% more revenues have been accumulated in the consolidated budget, as compared to the same period in 2006, with the surplus reaching BGN 2.874 billion. The government continued to pay out debt and accumulate fiscal reserve, which reached BGN 8 billion. All tax revenues grow at rates, faster than the GDP nominal growth, which means that the tax accumulation is increasing. For the corporate tax this confirmed also the thesis, that low tax rates after all stimulate tax payment.
In this situation for the government it will be hard to defend its position in the debate with the syndicates. It is clear that arithmetically speaking, there is in the budget money even for higher than 100% teachers’ wage increase. In the same time it should be made clear that if every sphere, financed by tax payers, asks for and receives similar budget increase, the public expenditure would double and thus the state will redistribute ¾ of GDP. There is no reason to expect that if teachers receive whatever they want, all the rest public sectors will not follow them. In fact this is what we forecasted also in May, when the employed in the public transport protested and received a wage increase.
Going a little bit further in the debate it must be noted that the state as an employer of 830 billion people (i.e. 29% of the employed) plays an important role on the labor market. With its policy – regarding the number of employed and their benefits, it affects labor incentives and labor force supply for the private sector. When income in the public sector is growing faster than income in the private sector, the business begins to feel the difficulties of hiring and keeping the personnel. On the other hand, income in business sector can grow in the long term only in direct relation to labor productivity growth.
In the forthcoming 2008 budget debates the question will be to cut taxes or to increase expenditure. This debate has a macroeconomic as well as purely arithmetic dimension. In macroeconomic sense the alternatives are stimulating the economy through more public consumption or lower taxes – for us this dilemma seems solved in favor of the latter approach. In the arithmetic aspect we have to get through many similar to the teachers’ wages debates, for what part of the surplus “could be allocated to…”
The considerable revenue accumulation, the surplus and the increasing reserve are rather a political impediment before the opportunity for reducing and restructuring public expenditure. In the recent few years, and especially in 2007, it is very hard to defend reforms solely because of the willingness to spare budget resources. It is really necessary changes, aiming at more effective taxpayers’ money spending to be defended reasonably, namely via vision for more stimuli, accountability and relation to particular results in each public service.
Positive signals for tax changes in the future came in the last week from the announcement of Minister Petar Dimitrov, who declared willingness Bulgaria to turn into an economy with the most favorable tax treatment on labor and capital with the formula 10:10:10, having in mind corporate and personal income rates and social insurance. In the same time, the financial minister communicated its position that in Bulgaria there is already no potential for tax burden reduction because we are already among the more favorable from tax perspective economies in the EU. It is worth reminding that (with few exceptions) countries in the EU need not serve as examples for rapid economic growth and if Bulgaria chooses “average” values in the tax policy (as it is with other economic policies), we will probably receive “average’ for the EU income growth (around 2% annually).
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