New Ideas for the Bulgarian Economy

In April 2007 the ruling socialist party announced its new, corrected priorities for the socio-economic development of Bulgaria for 2008. It is interesting to see the reactions of some the members of the socialist party who announced that they are not satisfied with the proposed activities and will insist on corrections. Reactions from other partners are various. The trade unions cheered the idea of raising minimum wage and child allowances, but blamed the idea of privatization through the stock exchange and decreasing of social contributions. The rightwing parties declared that those "new" priorities are just populism and approach towards voters in the light of European parliament elections in May.

Since citizens, business and investors art trying to project what to expect, it is interesting and useful to see what these priorities are.

1. Raising budget salaries each year by 10% in July combined with optimization of administration – it is true that good administration is those with sufficient pay. But pay raise is possible only by reducing the size of the civil servants in Bulgaria and selection of those with qualification and knowledge. Unfortunately, recent developments of state administration reform since 2005 show that respective ministers does not cut their staff but insist on cutting other's. EU related appointment in administration makes it even hard to optimize Bulgarian administration.
2. Reduction of income tax and continuation of decreasing the social security burden over time – this is the most important intention with overall positive effect on the economy. However, the targets are very low and we doubt that any major difference will happen. In fact, there are plans to increase the maximum insurance threshold which is at the moment 1 400 to 10 minimum wage. This means that if the proposal for increasing minimum wage to 200 leva is implemented the threshold will reach 2 000 leva or 42% increase. In other words, instead of decreasing we have increase of tax burden. This however is not presented in such light and is hard for the people to judge. In fact, this again confirms the socialist believe that the state should penalize those who risk, play and win in the field of entrepreneurship.
3. Finishing the privatization – no doubt this is a good intention and should have been done years ago and therefore we have state companies such as Bulgartabac and Plovdiv airport (their privatization has been delayed again last week). What we cannot see however is the combination of privatization and liberalization in the economy.
4. Optimization of regulatory environment – there is no ruling party or coalition in Bulgaria that did not declared such intentions. At the moment, the number of real regimes is higher of those permitted by law. Therefore, it would be interesting to see what will be the true effect of these intentions.
5. Rising of minimum wage – we have wrote many times about its negative effects, especially on workers with lowest productivity than the minimum wage. If employers asses the labor of an employee to 160 leva for example but the minimum wage is 200 leva there are two options: (1) to hire the worker illegally, or (2) not to hire the worker. In both cases, the loss is for all parties – the employer, employee and the state. Therefore, the best option is to abolish the minimum wage, and of this is not viable in the short term future at least restraining from raising it regularly.
6. Social policy – the proposals are for increased child allowances, maternity leave for fathers, one time child birth payment increase, etc. What is not understood by the socialist party is that having a baby is pure personal decision. One time payments can not be an incentive for the society (except maybe for certain groups) to have a child. Rising of incomes is the only logical incentive and it would matter for all. Growth of economy through market oriented reforms will raise incomes and thus stimulate people to think about having more children.
7. Rising of health insurance contribution from 6% to 8% – heavy regulated healthcare sector in the country has been recording steady deficits for years. Giving more money will not solve the problems. On the contrary.
8. Criminalization of not paying taxes and social contributions – if one does not receive quality services he will not pay taxes or at least will not declare his real income this trying to avoid payments to the budget. The only way to stimulate people to start paying is to reform the social insurance system so bigger part of paid contributions is collected in people's personal accounts. Criminalization of non payment is going to just raise the expenses of hiding from the state.

Conclusion

We can see some change in socialist party logic towards stimulation of business and citizens. Such goals however are so low set that expected effects would be minimal in comparison to possible ones.

On the others hand, presented priorities are moderate and do not show any ambition for higher economic growth. And this is what Bulgaria desperately needs.