Economic Policy Review ISSN 1313 - 0544

Draft government measures commentary

Author: IME / 17.05.2010
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The government anti-crisis measures came out last month. They have been presented as anti-crisis ones, but in fact they are budget ones – measures to reduce the deficit and to fulfill the budget. It is important to talk about the crisis too but nowadays the problems and goals are much more immediate – What to do to fulfill the budget? Proceeding from this we will comment the draft governmental measures.

We allocated them in three types – good, bad and controversial or more likely such which need an extra comment. We have specially marked these types of measures, whether good or bad in principle, which can hardly be called budget measures, i.e. they cannot solve the immediate fiscal problems.

 

GOOD:

The good measures are aimed at administrative expenditure reduction, business environment improvement including privatization and concessions as well as not raising the labour taxes and the obligation to return Value Added Tax (VAT) in time.

It is important that the measures explicitly state not to make commitments beyond those provided in 2010 budget. The budget is currently overvalued so it impossible to talk about taking extra commitments. It is necessary to think about cutting down the costs.

Cutting the administrative costs. This is maybe the most adequate measure of all as it attacks the real budget problem, i.e. the high state expenditure. One way or the other, the administrative costs should be seriously reduced, especially the Ministry of Internal Affairs (MIA) or the Ministry of Defense (MoD). The particular government proposals are:

·         90% reduction of the salary fund (without MIA and MoD) for the budget sector organizations salaries and activities in 2010 – there is obviously no other way. The administration keeps postponing the optimization of its staff and expenditures so this measure is unavoidable.

·         Temporary removal of the civil servants clothing funds for 2010 – good fund saving measure. It can however be vitiated in its infancy if judged by the rumors for earlier payment of the yearly remunerations, i.e. before the measure inures. It is clear that those departments who “cheat” before the measures adoption should be sanctioned.

·         Removal of all remuneration for taking part in interdepartmental commissions, working groups etc. – must be applied because it will save money. It should not be a temporary but a permanent measure because there is no logic behind these extra payments. Taking part in working groups, commissions etc. is part of the administration’s job done in working time hours and there should not be extra payment for this.

·         Minimizing all civilian and consultation services contracts – it is unlikely to pass without them but surely they should be minimized to save funds.

Business environment. All measures regarding concession, privatization, outsourcing and effective public property management are good, but leaving aside their “wishful” character they will not solve the fiscal problems. They should be followed in the long run but achieving budget balance is elsewhere to be looked up. The concession and privatization revenue are footnote recorded, i.e. as a deficit funding not as budget revenue. In other words they could only finance the deficit without reducing it by themselves.

  • Infrastructure concession (airports, ports, highways) – much has been talked during the years but less was done. There is great potential in it but less likely to seal real deals during the year.
  • State companies privatization including “Toplofikatsia” Sofia (installation of a centralized heating system) and the National Palace of Culture (NDK) – the so called “prohibition list” should be revised and the privatization process continued. There is no fast way to that and we cannot expect this at the moment. Besides that a large portion of the privatization revenue should be deposited in the Silver Fund in order to provide pension system stability which means we cannot count on part of the expected privatization revenue to finance the budget.
  • State consolidated company creation which will gather all the state minority shares in commercial enterprises and sell them at the Bulgarian Stock Exchange – same as above. There have been talks that such a company could go round the Silver Fund rule. To go round state’s own regulations with accounting and financial tricks should not be allowed.
  • State services outsourcing to private executors – good measure with zero effect expected for this year’s budget.
  • The public property to be united and governed by a new structure which will not be subordinated to any line ministry + public register for public property – good measure again but still won’t make any budget effect for the year.
  • State arrears to business register – good idea, still it is not clear how will it be administered and whether it will work. And how is this register supposed to help when the legal contracts are not? Anyway the budget effect is zero.
  • Insolvency procedure simplification – the need for fast and simple default procedure is seen especially in times of crisis. Nice, but there is no direct budget effect.

Labour market. The good measures on the labour market are:

  • Health insurance contribution rising was repudiated – the rise was not a good idea. Especially in the absence of any reform. There have been talks for next year’s rise. Either way, the refusal of an increase leaves no budgetary impact.
  • Persons who are not health ensured on other reason should pay insurance on capital and property revenue – if labour income is taxed, all other forms of income should be taxed too. It is unacceptable non-labour high income person not to insure himself or to be insured by the state. There is a positive budget effect but negligent.

Taxes. There are no tax reduction measures. Never the less the refund of VAT in legal terms and simplified tax payment (one payment order) are good measures.

If we are to summarize all the good measures, only those regarding the administration will cut expenditure, i.e. will fight the current problem – the budget hole. Everything else won’t solve the problem right now.

 

BAD:

The bad measures are not that much in number but their effect is bigger than the good ones. They regard the taxes, business and labour market support.

Taxes. Tax rise measures, which purpose is to provide extra revenue. In other words we should all pay for the inability of the state to reduce its record high spending.

  • VAT increase to 22% - the effect will affect everybody including pensioners and children. Extra consumption pressure. This measure will provide more income but to what price? Strongly procrisis measure!
  • “Wealth” tax (taxing the luxury property) – difficult to administer, low effect expected and image making problem. Does not solve any problems but creates new ones.

Business support. The Business support measures are related to the Bulgarian Development Bank (BDB):

  • Gathering extra external funds through BDB bond emission – the pursuit for ever greater role of the bank is evident and this is one of the tools in this direction. At the same time the bank is not guided by market principles, politics is being involved which is worrying.
  • BDB function expansion for pre-export lending – shows the same tendency. One growing state bank hides many risks, not for the clients but for the taxpayers.

Silver Fund. Silver Fund investment regime liberalization is proposed which allows investing in low risk Bulgarian financial instruments. The Silver fund resources should be wisely administered and protected from all kind of political risks (or games) in the country. Investing in Bulgaria poses serious risks.

Labour market. The insurance contributions won’t be reduced. The contribution size should follow the structure reforms, especially the pension and health ones. It is useless to write such a thing if nothing is known about what is going to happen with the pension and healthcare reform. That way one of the tools to combat unemployment is ruled out.

Actually the worse thing about the draft measures list is not hiding in what is in the list, but in what is not there. The absence of enough effective budget measures is the most unpleasant part of the document.

 

Controversial measures:

The draft document contains controversial measures which can hardly be regarded as good or bad:

  • Default rate rise for tax payment failure – the rate’s size is not as important as equal treatment for all. The interest rate for delayed business payments to the state, whether insurance or taxes should be equal but the principal should be extended to all delayed state payments to business.
  • Working force mobility increase through observation system creation and distribution of qualified workers on sector and regional level – labour mobility is created through good business conditions and flexible labour market and not through observation and distribution systems. Reminds us of the mature socialism which we try to forget.
  • Increase the maximum duration of overtime, which can be laid by one person within one year - in times of crisis the state recognizes that such a restriction is otiose. Instead of lightening the restriction, the state should completely remove it.
  • Introduction of “economic vacation” (i.e. unpaid leave) – again loosening labour market regulations instead of completely removing them. The flexible labour market need is most likely to be seen in times of crisis.

At the end we should comment some of the trade unions’ propositions. Proposals that are hardly designed to balance the budget, a so-called "social protection" - non-taxable minimum, increase the minimum wage, eliminating the verge of unemployment benefits. These measures are neither budgetary nor anti-crisis and focus on less revenue, higher costs and more interference in the economy. This includes the proposal to freeze government regulated prices of goods and services in the public interest. Even if adopting this proposal, consumers will bear the cost in one way or another, sooner or later.

There are ideas of issuing government debt. This measure also cannot solve the problem foundations – the budget revenue to exceed the budget costs. Taking this debt will more likely reduce the incentive to balance the budget, i.e. would postpone the problems with few months. Debt as well as privatization and concessions revenue are below the bottom-line. Unlike privatization and concession revenue, however, the debt will be back in time, i.e. it only temporarily solves the issue. There is the state image problem again – the rating agencies keep a close look at these indicators, which is one of the Eurozone admission criterion. Besides the tendency is often stable – either the debt falls or it increases. Once we start to raise it, there is no way to see its end.

 

What is the conclusion?

The Bulgarian state spends much, and not for investments or old obligations but current ones. These expenditures should be cut, there is no other way. The state should forfeit part of its functions and to close the respective sections and programs. Reforms should be conducted in the departments without exceptions. The proposed package has two main pillars in practice – administrative expenditure reduction and VAT rise. These are the measures expected to balance the budget, but they may be insufficient. The higher VAT is not a good idea; it has not been accepted by the society and may drop out. This means that the budget hole may not be filled without extra expenditure related measures. The state should seriously reduce its expenditure. Everything else is secondary.