Economic Policy Review ISSN 1313 - 0544

IME Alternative “Low Taxes” Budget 2014

Author: IME / 05.12.2013
Rate This Article:

November 5, 2013

 

For more than 10 years IME has been presenting an alternative state budget with low taxes (see here). Our aim is to show that it is possible to have an alternative fiscal policy, which relies on structural reforms and growth, rather than simple redistribution and spending of public resources. The Alternative budget for 2014 focuses on decentralization and regional development, reforms in the healthcare and pension systems, reductions in the administration size and improvement of its efficiency. The alternative to the state budget abandons the deficit spending and the accumulation of new debt and relies on a balanced budget.

The fiscal policy in Bulgaria is facing serious economic and political risks. The country’s economy continues to be in a state of stagnation and even though the expectations for 2014 are for stronger growth, supported by the recovery in Europe, the budget must be able to face possible negative shocks. The political risks which the country faces are even more serious. There is a worrying tendency for budget deficits to emerge in election years – which means that budget consolidation and deficit reduction seems to be unavoidable after parliamentary elections (examples - 2009 and 2013). The political instability in the country is another negative factor since fiscal policy should take into account the likelihood of early elections.

IME Alternative budget sets a fiscal framework which is much more robust and sustainable against possible economic and political shocks in the country. While the government plan foresees deficits at least until 2016 – that is at least 8 consecutive years of budget deficits (2009-2016), IME’s alternative refuses this addiction to deficit spending and proposes a balanced budget for 2014. In addition, we suggest the removal or reduction of some taxes, which the Bulgarian taxpayer has not seen since 2008.

 

Main points of the Alternative Budget 2014:

  • Tax changes – removing dividend tax (currently 5%) and newly introduced tax on the earned interest from bank deposits (currently 10%), 10 % tax on sole proprietors income (currently 15%), removal of other inefficient taxes (e.g. inheritance  tax), reducing tax preferences (such as relief for farmers, food vouchers, preferential VAT for tourism), a gradual increase in the excise duties on cigarettes (EU requirement until 2018), which should start from 2014 in order to avoid drastic price rises in the coming years (increase the minimum excise duty from 148 to 154 levs per 1000 cigarettes). The overall effect of the proposed tax changes is positive and lead to an increase in the tax revenue amounting to around 100 million levs;
  • Real optimization of running administration costs (salaries and maintenance costs) in the public sector, amounting to around 10% of the planned costs – affects all administrative units (local administration included), while only spending on education remains unchanged at the expense of more serious optimizations in the defense and interior ministries. The overall effect of the proposed cuts amounts to over 1 billion levs less in expenses;
  • Limiting subsidies from the budget – removing national payments to farmers (these are payments in addition of EU subsidies), including tobacco producers (overall 264 million levs are planned for farmers from the national budget) and establishing a fund for priority project funding for animal husbandry and vegetable producers (managing up to 50 million levs). Also limiting government subsidies for distressed state-owned companies – record high in the government proposed budget. The overall effect of the changes would result in about 334 million levs less in expenses;
  • Fiscal decentralization instead of "fund" for regional development – transfer of one fifth of the income-tax revenues to municipalities. This will be around 500 million levs for local budgets, which is the sum allocated to the so called centralized regional “fund” (as proposed by the government). In this way the biased political decision of the ministers is avoided and resources will be directed naturally according to the economic activity and income tax revenues of different municipalities. Those funds can be provided only for capital expenditures (or to cover old debts) rather than covering running administration costs;
  • Pension reform – continuation of the planned (now stopped) reform to raise the retirement age (which will reduce costs for pensions by 46 million levs in 2014) and divert 2 percentage points of the pension contributions to private fund, reaching 7% pension contribution to the private funds, which was already planned to be done more than ten years ago;
  • Reform in healthcare system – breaking the monopoly of the National Health Insurance Fund (NHIF) and diverting 2 percentage points from health contributions to a selected private health fund. Such a step would somewhat restore the confidence in the system, giving incentives for employees to pay their contributions and allowing those private funds to provide better services.

The proposed changes aim to clear the tax legislation from preferences and inefficient taxes, to optimize the costs of the administration, to reduce the subsidies paid to farmers and distressed state-owned enterprises, to improve the management of state property and continue privatization, to strengthen the capital pillar of the pension system and to dismantle the monopolistic power of the state health fund, as well as to provide real funds for regional development, through financial (tax) decentralization, thus increasing the incentives for local authorities to create better environment for business and employment.

IME Alternative 2014 provides for sustainable public finances and a balanced budget, effective government spending, real funds and incentives for regional development, more choice for taxpayers in paying their contributions and an overall fiscal policy, which takes into account the economic and political risks in the country.

 

State Budget 2014 & Alternative IME Budget 2014

 

State 2014

IME 2014

Total revenues (mln. Levs)

30 886

29 870

% GDP

37,9%

36,6%

Total expenditures (mln. Levs)

31 453

28 938

% GDP

38,6%

35,5%

Contribution to the EU budget (mln. Levs)

905

905

Budget balance (mln. Levs) 

-1 472

27

% GDP

-1,8%

0,0%

Primary balance (mln. Levs)

-780

719

% GDP

-1,0%

0,9%

 

The presentation is available at IME webpagewww.ime.bg.

Contacts:

02/952 62 66, 952 35 03

 

Desislava Nikolova, dnikolova@ime.bg

Petar Ganev, ganev@ime.bg

Kaloyan Staykov, kaloyan@ime.bg

 

State Budget “Receipt” 2014 (bg)