With the recent figures on Bulgaria’s economic growth coming in short of expectations – and government forecasts – the post mortem is now well under way into how the country could do better next time. A planned series of tax cuts might do the trick, many analysts say, yet whether the scheme currently promised by the administration will fit the bill seems more controversial.
The predictions used by the Agency for Economic Analyses and Forecasts (AIAP) to calculate the 2003 budget forecast a GDP growth rate of 5.0%. However, National Statistics Institute data recently showed the actual figure to be 4.3%, or 240m euros less than was bargained for. The GDP total itself was Lv34.5bn.
Initially, analysts identified agriculture, or more specifically a decline in the gross added-value of the sector, as the main culprit for the discrepancy. Agriculture’s contribution to gross production fell by 1.3% y-o-y in 2003, while industry’s contribution increased by 7.1%.
Yet many others looked at the country’s tax profile for answers. The Institute for Market Economy (IME) suggested that a lower tax burden would have added greatly to growth, and went on to state that if the government is to reach its 2004 target of 5.3% GDP growth, something needs to be done about this quickly.
There are some compelling statistics suggesting that the IME might be right. Budget revenue in 2003 accounted for almost 41% of GDP – 3 percentage points higher than the initial figure projected. The Sofia financial paper Kapital pointed out that since the 2003 budget had been balanced, the same numbers would apply to state expenditure. Thus, the state had collected and spent a little over Lv1bn more than projected last year.
Good news looking from the perspective of tax collection, perhaps, although March 2004 figures showed unpaid taxes had risen to Lv1.86bn from Lv1.81bn in February. Yet from the point of view of developing a strategy for growth, it can be argued that the improved rates of tax collection may have imposed an unnecessary constraint on business investment.
This argument has not gone unnoticed by the government. On April 26, Prime Minister Saxe-Coburg announced his backing of a Ministry of Finance plan to cut corporate taxes from 19.5% to 15% next year, while also cutting all income tax rates by 2%. This would leave the highest income earners taxed at 24%, while income tax rates for lower income groups would fall from 12% to 10%.
The move would also follow a pattern. The government cut corporate tax to from 23.5% to 19.5% at the start of the year in a bid aimed explicitly at boosting investment. Yet sceptics argue that the tax cuts are also about electioneering, as the deeply unpopular government will face the voters at the ballot box next year. Measures to introduce lower taxation for families with more than one child (under 18 years of age), coupled with an increase in the level of tax-free monthly income from Lv120 to Lv130, have also been considered by many to be questionable.
Minister of Finance Milen Velchev is strongly behind the tax-cut plan. On April 24, he told reporters that businesses and individuals would gain some Lv210m if the plan were implemented in 2005. Some Lv150m of this would go to companies, with the remainder to individual taxpayers.
Velchev also said that the plan would cut government revenues by some Lv350m: Lv200m to corporate tax cuts, Lv100m to family incentives and Lv50m to income tax cuts.
Making up for shortfalls in government revenues would come down to boosting tax-collection rates, the minister added. Official figures showed there were some 5158 debtors being pursued for outstanding taxes last month, while the State Revenue Collection Agency was chasing some 105 non-performing debtors, 101 of whom had been banned from overseas travel. No doubt the powers of this agency will be expanded if the government is serious about tightening collection.
Tax cuts however, do have their critics. First of all, the plans have not gone down too well in the EU, particularly among net EU budget contributors such as Germany. The government in Berlin argues that it is unfair for German taxpayers to foot the bill for Bulgarian economic development (much of EU grant aid will initially be sliced from German wage-packets) while Bulgarians enjoy lower and lower tax burdens.
Few would argue, though, that Bulgaria’s small- and medium-sized enterprises (SMEs) need encouragement to grow in order to provide the strong, long-term economic growth that Bulgaria needs to achieve levels commensurate with its status as an EU member. Tax cuts, which are likely to help SMEs considerably, are therefore a major potential stimulus to sustainable long-term growth. That the government is, perhaps, making them in order to boost its electoral popularity may be a sign of politicking, but they may nonetheless bring some benefits to Bulgaria’s businesses.
