Economic Policy Review ISSN 1313 - 0544

IME Alternative State Budget with Low Taxes 2012

08.12.2011
Rate This Article:

Summary

 

The Alternative State Budget of Institute for Market Economics (IME) is presented for ninth consecutive year. Our goal is to show that an alternative fiscal policy with low taxes, balanced budget and structural reforms is possible.

The experience from the last three years showed that the policy of deficit spending and the postponement of reforms do not work. From 2009 to 2011 have been accumulated deficits for more than 5 billion levs, which have malted the fiscal reserve and did not stimulate the economy. At the same tame not a single tax was reduced. Just the contrary, the tax burden increased – the excise duties are up every single year, the social contributions and the minimum social insurance threshold also increased, new taxes have been introduced (such as a tourist tax, an insurance premium tax, taxes on online gambling) and we faced higher state and local fees. All this didn’t lead to any result and now is time to look at the alternative.

 

Philosophy of the Alternative budget 2012:

  • Conservative forecasts – elaborated under moderately negative scenario in Europe; 
  • Balanced budget – eliminating the deficit from 2012; 
  • Setting on budget buffers – re-introducing the ‘90%’ budget execution rule for all spending units and additional reserve for the budget line “Contingency” expenditure;
  • Reforms – tax reduction; program’s review and optimization of the state administration; reduction of the subsidies; effective budget transfers; decisively beginning of the long-term reforms (pension reform)

 

Tax changes and measures for balanced budget

  • Lower taxes – abolition of dividend tax (now 5%), 10% tax on sole traders (now 15%), abolition on the insurance premium tax (now 2%), shrinking of state and local fees;
  • Suspension of tax exemptions – some examples are the deduction of corporate income tax for farmers (20 million levs for 2010), nontaxable food vouchers (180 million quota for 2012), mortgage relief for young families (almost 2 million levs for 5 thousand families), the lower VAT rate for tourism (the administration doesn’t know what the effect of the relief is);
  • Reduction of operating costs in the public sector (salaries, maintenance) with 10 percent in relation to the planned – examination and evaluation of programs and reduction of administrative units;
  • Reduction of the subsidies with at least 25 percent in relation to the planned – mainly subsidies for farmers and railway transport;
  • Public servants, police and military to pay their social contribution like all else + reduction of the salaries due on retirement;


The effective application of these reforms will make the public administration more effective and will help to the real economy. We add to them some reforms in the social contributions:

  • Pension reform – redirecting 2 percentage points from the state pension contribution to a private pension fund; increasing the retirement age with 6 mounts from 2012; restriction of early retirement and more effective control over disability pensions;
  • Health care reform – removal the monopoly of National Health Insurance Fund (NHIF) and redirecting 2 percentage points from the health insurance contribution to a private health fund.

 

The proposed changes to the pension system are inevitable and a year ago we predicted the collapse of the adopted long-term plan for pension reform. Then we pointed that “the long-term reform of the present administration will fail during the first year” (12 November 2010), which already is a fact – lack of revenue in state fund, removed director of the National Social Security Institute and renewed debate for pension reform.

 

The proposals of IME in the alternative budget for 2012 will lead to more stability and enhance confidence – both critically important in the mid of the debt crisis.

 

The reasonable and balanced budget policy means stronger position in Europe in a time of a debt crisis and problems for many of the so-called “rich countries”. Such a budget is a good base for economic growth and for meeting possible external shocks through low debt, relatively low state redistribution and structural reforms. The introducing of the so-called “fiscal board” in the Constitution will further strengthen the prudent fiscal policy.

 

2012 Draft State Budget and Alternative Budget of IME

 

Budget 2012

IME 2012

Total Revenues

28 732,1

27 173,1

(% GDP)

36,0%

34,0%

Total Expenditures

28 928,5

26 255,0

(% GDP)

36,2%

32,9%

Contributions to the EU Budget

895,7

895,7

(% GDP)

1,1%

1,1%

Budget Balance (+/-)

-1 092,1

22,4

(% GDP)

-1,4%

0,0%

Primary Balance (+/-)

-378,5

736,0

 

Press-conference (November 16, 2011)


IME Alternative Budget 2012 has been prepared under the project “Better Governance in Bulgaria”, supported by the Think Tank Fund (TTF) of Open Society Institute – Budapest (OSI-ZUG). The content of all materials represents the position of the authors and not necessarily the policy of Open Society Institute – Budapest.