The Alternative Budget of IME

Two weeks ago was presented the sixth consecutive Alternative Budget with low taxes of the Institute for Market Economics (IME), between the first and the second reading of Budget 2009 in the Parliament. The alternative budgets of IME had always aimed at presenting a different view of the state finances, based on the notion that changes in Bulgaria are possible and should not be postponed in time but accepted now, at the present moment.   

The debate about the basic functions of the state has always been open and in a time of world economic crisis is more urgent than ever. It's a fact that the share of the public sector, in most countries around the world, is to put it mildly, "exaggerated" and Bulgaria is no exception. In our country even the main functions of the state (such as protecting the right of ownership and enforcement of contracts) are seemingly left in the back ground while forward are brought other inappropriate for the state functions, such as undertaking economic initiatives, for example, the state is controlling the power industry (Bulgarian Energy Holding), transports passengers around the country (Bulgarian State railways), produces cigarettes (Bulgartabak), subsidizes the agriculture, etc., etc. All of these have a visual effect – the people have electricity, travel, smoke cigarettes – but what is neglected are the invisible effects from that intervention. It is not by accident that this column (Dnevnik Newspaper) is called "The visible and the invisible". The market forces are based on individual interests and behavior, when this foundation is replaced, the market forces in question could not function properly. The results of all that are fewer opportunities for the people, fewer choices, slowed down development and why not "stolen happiness".

The optimum size of the public sector (the redistribution through the budget/GDP) is an interesting topic where the researchers reach different conclusions depending on the methodology used. Despite that, it could be observed that the researchers are in agreement that the optimum size of the state is between 20 and 25% of the GDP. In that respect Bulgaria is very far from the optimum levels, since redistribution during recent years is around 40%. We believe that the optimal levels is achievable, but it goes hand in hand with higher effectiveness of the public spending and undertaking key for the country reforms in the areas of education, healthcare and the pension system.

The World financial crisis without any doubt places the Bulgarian politicians in an unfamiliar environment, their decisions could have a very significant effect on the individuals, if they do not fit with reality. While fighting with the crisis it is easy to increase the size of the public sector, but it would only worsen things. Instead of compensation for diminishing foreign investment with the money of the taxpayer it is better to make it that these investments return and even to attract new ones. Spending the surplus would more likely frighten the foreign investors, which would immediately eliminate the effect of its spending (even if we assume that that it is expedient and efficient, which is more than debatable). On the other hand, more savings in the country would have meant more resources and respectively investments. The mechanism for generating these savings is the existence of personal pension accounts, which is the necessary reform for the pension system. Let every Bulgarian to set aside part of his income in a personal account, which will guarantee his old age.

Our position is that the crisis makes prudent fiscal policy even more necessary. That means: 1) less but more effective government spending; 2) drastic reduction of the tax and social security burden and the quasi-taxes; 3) maintaining macro-economic stability. Some of our specific proposals are:

• 10% social security payments (now – 33.7%) – personal pension account.
• Significant reduction of the quasi-tax burden – state taxes and a like.
• 10% income tax for the sole proprietorship.
• Eliminating the tax on dividends.
• Reducing the number of people employed by the government sector – by at least 10%.

Key to our proposal is the reforms of the pension system and the healthcare system. The ten percent social security payment is put into a pension fund selected by the payee. At the same time the pensions of the current pensioners are financed entirely from the state budget. The increase of the pensions and the long term stability of the system are ensured through accumulation of funds, but please let it not be through a centralized Silver fund, but 5 million "silver" accounts. With respect to the healthcare we propose more choices and competition. Everybody decides alone into which fund to make the healthcare payments and respectively negotiates with it the exact parameters. The state defines a standard package of health services, financed by the funds and finances the healthcare payments of the retired, the children, unemployed, poor. It is required that market negotiations take place between the health funds, the hospitals and the medical professionals.

The differences between the alternative budget of IME and the Government one are significant. The revenues of the Government's are 32.6 billion levs, while that of IME – 27.4 billion levs. The expenses in the Government's one are 30.4 billion levs, while the alternative of IME are only 25.2 billion levs. Thus in our proposal the government expenses are only 34% of GDP of the country, which is also far from the optimum, but the proposal is specifically for next year and we have taken into account that it is not realistic to achieve lower levels within the framework of only one year.

The IME's alternative is not likely to be applied in its full, but our experience shows that part of the proposed measures over the years gradually become government's policies. A detailed description of our proposal (focusing on specific reforms) is available in out internet site http://www.ime.bg/.