2004: Ten Important Positive Developments in Bulgaria

In 2004 we witnessed not only negative things in Bulgaria, but some positive developments, as well. They are important because they lead to increased prosperity of Bulgarian citizens.

1. Privatization
Privatization is important in order to achieve faster economic development – the bigger the private sector, the more value added is created because of the strong economic incentives that affect the private sector, but not the state.

In 2004, according to the Privatization Agency, shares of 1376 companies were sold. Of these 1168 were minority packages (remaining state shares in already privatized companies) and 208 were sales of majority packages of shares. The total financial effect of these transactions is about 3 billion levs* . In 2004 are privatized 2.58% of the state assets so till the moment the privatized assets are more than 57% of all state assets. In 2004 are privatized more assets than in 2002 and 2003 put together. Furthermore, several strategic privatizations were made – the Bulgarian Telecommunication Company was sold as well as the electricity distribution companies.

2. Lower taxes for the entrepreneurs
Taxation affects the incentives for creation of more wealth and jobs. Lower taxes lead to more entrepreneurship and more investments. Therefore lower taxes are important for increasing the rate of economic growth.

The corporate tax was cut to 15% and after that Bulgaria is among the 8 countries in Europe with lowest corporate tax rates and is equal with four of them. Moreover, the dividend tax was cut by half to 7% (0% for EU residents). Furthermore, the tax-deductible depreciation rates for new production equipment were increased. What is more, the top marginal tax rate for individual income was cut to 24%.

3. Third GSM operator
Competition and new companies that enter the market lead to increased benefits for the customers through lower prices, more diversity and higher quality of the goods and services. The branch is developing faster and the connected branches are also benefiting. As long as the communications are important for most businesses the increased competition will have positive effects on the economy as a whole.

Along with the privatization of the Bulgarian Telecommunication Company the third GSM license was given to the company. It is expected the third GSM operator to start delivering its services in April. After that we expect positive effects for the consumers.

4. The minister of finance defended the classical liberal ideas
The ideas for a society, based on liberty, private property and individual initiative made the United States of America and the Western World the wealthiest and most prosperous part of the world. These ideas, that we call classical liberalism (or libertarianism) were not so well known in Bulgaria. However, that is changing. With the passing of time more and more people realize the importance and advantages of the market economy, private property, competition; realize liberty as a high value. That development has serious positive effects on the economy. It was the basis for the December libertarian speech of the minister of finance Milen Veltchev (and probably was reinforced by it) in which he defended the classical liberal principles, insisted on zero profit tax and flat income tax.

5. Increase of investments
In order to increase the wealth more must be produced. In order to produce more, there is a need for more productive assets, i.e. capital. Therefore the increase of investments is important for increasing the possibilities of the economy to produce more. Three consecutive quarters the gross fixed capital investments are above 20% of GDP and the foreign investments are also increasing.

6. Socialist party is becoming aware of the economic rationality
For the economic development to persist, all parties with chances to win the elections must realize the principles of economics. This reduces the risks and the ling term (private) planning becomes possible. In 2004 some signs are noticed that socialist party starts to realize the importance of the business for development. Bulgarian Socialist Party supported the corporate tax cut to 15% and even proposed zero corporate tax on the reinvested profit. Moreover, it hinted that government spending must be capped at about 40% of GDP. Without exaggerating these signs of development in the socialist party, we cannot let them pass and we encourage them.

7. Fast growth of the private sector
During the first three quarters of 2004 the private sector increased by 10%. As the private sector accounts for 77% of the economy, this development has positive effects on the economy as a whole, despite the drop of the public sector. The fast increase of the private sector will result in more employment and higher wages. This will increase the trust in the private sector, which is beneficial for the long-term development.

8. Integration in the global economy
The more an economy is integrated in the global economy, the more opportunities for creation of wealth prosperity exist. This is especially true for small open economies like Bulgaria. The international trade of Bulgaria (the sum of the import and export) reached 127% of GDP, which is a good indicator for the present situation.

9. Low inflation
The low inflation creates opportunities for more efficient usage of money as unit of account and medium of exchange; it decreases the inflation tax rate and creates economic stability. In the years as a result of the introduction of the Currency Board Arrangement the yearly inflation in Bulgaria is low and the exchange rate with the euro is constant.

10. The flat tax gains momentum
The proposal of the Institute for Market Economics for introduction of a flat rate of 10% for the income tax, corporate tax and social security tax gathers momentum. It was publicly endorsed by more than 100 economists, financiers and intellectuals in an open letter. To a great extent some of ideas were supported by politicians of different political parties. The minister of finance supported the economic and social importance of a flat tax. UDF proposed 10% corporate tax rate and 10-20% social security tax rate. DSB defended the need for a lower tax burden. The chances for Bulgaria to turn into a low tax country are increasing.

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* Under the currency board arrangement the exchange rate of the lev is fixed at 1.96 levs per Euro.