Economic Policy Review ISSN 1313 - 0544

It’s the Rules that Matter

Author: Svetla Kostadinova / 27.09.2007
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The current Bulgarian government released its biannual report. It gives us the opportunity to clearly define the principles and approaches used during the ruling. These are:

  • 1) Many problems are solved by spending more money - despite the statements made in 2005 for reducing of state expenditures it is obvious that they don't decrease but on contrary. However, government spending distorts market incentives which in turn reflect inflation, prices and wages. We should bear in mind that these are our money but decisions on spending are taken by clerks with questionable knowledge and interests.
  • 2) No assessment is made of how government decisions will affect citizens and business. By assessment we mean expenditures imposed by certain regulation and whether benefits will exceed costs. This means that (1) the government cannot count and therefore doesn't do it; (2) it doesn't want to do it because is countless and want to support specific groups in the society or (3) it knows that the calculations will show lack of any economic logic. Whatever the reason, it is clear that the government should be accountable about any expenditure and policy because it spends our money.
  • 3) If something good can be postponed it for sure is delayed - the excuse is often lack of money, administrative capacity or time. The truth is that many of the reasonable delayed reforms do not need any of these - reduction of social security contributions to 10% or finalizing of privatization does not require such resources. There are, of course, reforms that require some financing but even when such is secured there is delay in time, i.e. trade register reform. We don't even mention such fundamental reforms as healthcare, education and pension system that lack official long-term vision of what should be done.
  • 4) Some of the good ideas that succeed to edge into government's agenda are almost always accompanied by other reforms that neutralize the positive effect or minimize it. An example is the idea of introducing 10% flat income tax that is coupled with increase of maximum insurance threshold and excises.
  • 5) The bold, radical and effective reforms are insufficient - reduction of corporate tax and social security contributions, introduction of maximum period for recipients of social welfare benefits, etc. are just not enough for significant improvement of living standards and business environment.
  • 6) Transparency is still not a requirement - giving information especially regarding administration' work and decision-making process is still not a rule. This hampers planning, complying and working with administration.
  • 7) Overspending of administration - the report shows that some ministries can easily be shrunk by half without hampering overall work.

In addition, we can say that there are no indicated causes for unsuccessful implementation of some of the government programs in the report.

Last, but not least, there is no calculation how much does it cost to all taxpayers government decisions/policy. Good results are fine, but it is also important how much resources are used and how. Unfortunately, hardly anyone from the government knows exactly the "price" because there is no cost-benefit analysis of regulations in Bulgaria still.

Each politician knows that if he wants to be remembered he should do something radical and at the beginning of his mandate so the results appear until its end and be enough for reelection. Current government made so far something positive - reduction of corporate tax to 10%. Several good reforms have been started but it questionable whether there will be political will to be finalized because of the increased pressure for more money from groups in the society. The question is does the government assess the situation realistically and what it will do. The report does not say anything on this.