The State Budget by March 2007

The Ministry of Finance has recently announced the data on the implementation of the state budget toward the end of March 2007. The total revenues in the consolidated budget reach 5.051 billion leva, and the total expenditures- 4.334 billion leva. Consequently, the surplus is 539.5 million leva, which is equivalent to around 1% of the expected GDP for this year.

The growth of total revenues is more than the growth of expenditures for the first three-month period of the year. While the revenues in the consolidated budget increase with 15.4% compared to the same period in 2006, the expenditures increase more slowly – with 9.8%. The tax revenues rise with 12.2% which is mainly due to the revenues from corporate tax and excise duties. While in the case of excise duties the high contributions to the total revenues are due to the rise in the rates, in the case of profit tax the rate has been reduced to 10% in the beginning of the year. Although it is early to make any explicit conclusions and the revenues up to this moment are defined almost completely by the former rate, the increase of 45% indicates that this measure reduces the incentives for evasion and "brings to light" a part of the profits in the economy. Business possesses more affinity to pay, as the costs of hiding are close to, or even exceed, the costs of paying.

A stable increase in terms of the revenues from the personal income tax is also observed – an increase of 22.2% compared to the same period of the preceding year, while the revenues from social security contributions rise with 10.8%, despite the redistribution of 1% point to the fully funded pillar. A part of the explanation for this increase lays down in the expansion of the base due to higher incomes and employment. Still, the extension of the range of personal income tax, which already applies to foreign persons and also affects the social expenditures, should also be taken into consideration.

The development of the VAT revenues is according to the expectations. While during the first two months of 2007 a substantial decrease in this indicator was registered – for example, in January the decrease was with 30.7%, now the decrease is with around 7.2%. The reason is that the EU membership resulted in changed regime of taxation. Yet till the end of the year a growth in the VAT revenues is expected, as in this case they will probably exceed the revenues, already collected in 2006.

The growth of the expenditures in March compared to the same period of the preceding year is with 9.8% which represents an acceleration of the rate compared to the first two months of this year. The growth in January 2007 was moderate-2.6%, and in February-7.9%. In comparison with 2006, during the whole year the rate is 9.7%, while the increase in the nominal GDP is with 14.7%. This development allowed for the reduction to the lowest value of the percentage of state expenditures for manufactured goods in the last years. Maintaining this policy by the government (the policy of slower increase in the state expenditures in relation to GDP) will also allow for a decrease in the redistribution through the budget. This means that it is possible to follow a conservative fiscal policy by means of sustaining a surplus, and in addition certain resources will be made available for a reduction of the tax burden.

The recent proposals by one of the parties from the ruling coalition do not unfortunately correspond with such a policy. The proposed ideas are mostly directed to a solid increase in the government expenditures, however without being accompanied by any intentions for their optimization. Still, in the framework of the coalition, and mostly from the standpoint of the Ministry of Finance, these proposals might not be even approved and implemented.

The execution of the budget during the first three months of the year is a result of the positive development of the economy. The hypothesis that people act rationally in principle and react to the fiscal stimuli is confirmed. The reduction of some tax rates is effective and leads to higher incomes and employment, and to a more adequate account of these indicators in the government statistics. The percentage of the "gray economy" is still high, which could be changed through a further reduction of taxes. This reduction can occur through optimization and, accordingly, through restriction of the growth of state expenditures. The way to do this is to extend the reforms in the pension system, healthcare, education, public administration, and management of state property. It is the sustenance of a long-term stability and improvement of the effectiveness of these expenditures that should be the major goal of every government. 


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