Economic Policy Review ISSN 1313 - 0544

IME Alternative State Budget with Low Taxes 2013

05.12.2012
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October 18, 2012

 

The Alternative State Budget of Institute for Market Economics is presented for tenth consecutive year. Our goal is to show that an alternative fiscal policy with low taxes, balanced budget and structural reforms is possible. In these ten years some of the principles and proposed measures of the Alternative Budget were adopted by the State: 10% tax on profits, 10% flat tax on income, limiting government spending and the deficit – as already written budget rules in the law. Nevertheless, we witnessed a failure of structural reforms in the public sphere and especially in the social security – the mandatory burden continues to fall mainly on the middle class, with no choice for the individual.

Alternative Budget 2013 looks at the budget as a tool for growth and not just as a self sufficient accounting instrument. We put our focus on the middle class and jobs creation, as this is the only way towards recovery and poverty reduction. Budget 2013 must not only spend public money effectively and achieve results, but also be resilient to shocks – that is one with no deficit and with automatic mechanisms for negative scenario.

Our experience in recent years shows that the policy of deficit spending and delay of reforms is not working – 2013 will be the fifth consecutive year of deficit spending and employment will continue to decline. IME proposed budget relies on alternative policy (not just spending) measures that will lead to jobs. The result of strict government intervention in the labor market in the recent years, especially in terms of wages and freedom of contract, is visible to everyone – jobs were not “protected” and no new jobs are being created, which leads to less economic activity, thus more poverty. We rely on fewer regulatory and administrative burdens on labor, freedom of contract and choice. Only in this way can be adequately addressed the regional disparities in the country.

IME Alternative Budget defines the middle class and writes down policies that will make it grow and become stronger. The main motto is “incentives and choice, rather than obligations and promises". This is most apparent in social security policies where the middle class bear the burden, and on the other side gets empty promises. The biggest challenge to the Alternative Budget in the last decade remains exactly this – more incentives and choice in social security for those working today.

 

Tax measures and policies for a balanced budget:

  • Lower taxes – eliminate tax on dividends (currently 5%), 10% tax for sole traders (now 15%), removal of other inefficient taxes (inheritance tax) and reduce state and local fees;
  • Eliminating tax exemptions – some examples of such exemptions are the deductions of corporate tax for farmers (60 million levs budget losses in 2011), non-taxable food vouchers (20 million levs budget losses in 2013), the eligible costs (tax deductions) for some activities in personal taxation (over 60 million levs budget losses in 2011), lower VAT rate on tourism (100 million levs budget losses in2011);
  • Reduction of administrative costs (salaries, maintenance, privileges) in the public sector by 10% – review, evaluate and rank budget programs, cutting inefficient structures;
  • Increased own revenue instead of State transfers for various institutions – such as universities;
  • Reduction of subsidies by at least 25% – mainly for agriculture and railway transport.

 

Implementation of these measures will make the administration more efficient and reduce the burden on the real economy. We shall also add the social security measures:

  • Pension reform – let the workers decide on their preferred pension system, either the National Social Security Institute (solidarity pension) or the private pension funds (savings in personal accounts). State to recognize current pension obligations and handle the current payments with respect to the tax revenues.
  • Health reform – break the monopoly of the National Health Insurance Fund and divert 2 percentage points from the health contributions to selected private health fund.

Proposed changes to social security provide real incentives for workers to participate. Instead of empty promises in return for pension contributions, they can choose personal savings accounts. Instead of blind payment for the health system, the contributions will partly take into account personal health preferences. This is a genuine policy of incentives, which relies on personal choice, not one that simply writes down decisions for all and punishes any disobedience. 

 

Our proposals in the Alternative Budget 2013 will lead to sustainable public finances, effective spending to achieve results, economic growth, new jobs and a stronger middle class, which will provide incentives and choice, rather than obligations and promises.

 

State Budget 2013 and Alternative IME Budget 2013

 

Budget 2013

IME 2013

Total revenues

30 548

29 105

(% GDP)

37,5%

35,7%

Total expenditures

30 740

28 168

(% GDP)

37,7%

34,6%

Contribution to the EU budget

908

908

Budget balance (+/-)

-1 100

29

(% GDP)

-1,3%

0,0%

Primary balance (+/-)

-225

904

 

 

The presentation is available at

IME page www.ime.bg.

Contacts:

02/952 62 66, 952 35 03

 

Petar Ganev, ganev@ime.bg

Desislava Nikolova, dnikolova@ime.bg

Kaloyan Staykov, kaloyan@ime.bg