weeks time as of October 30 to conduct their own analysis of
reform of the public sector in Bulgaria and about shrinking the
public sector by 12 per cent. This was decided by the ruling
coalition on October 30, when the leadership of Bulgarian
Socialist Party, on the right side, faced its two coalition
partners the National Movement for Stability and Progress
and Movement for Rights and Freedoms met to discuss the
final version of budget 2008. The education and health care
sectors will receive the largest increase offunding in 2008,
4.2 per cent of GDP each. Social welfare will continue to be
the most expensive sector with 12.2 per cent of the GDP. The
military will get 2.1 per cent of GDP. The document was sent
to Parliament on October 31.
Photo: GOVERNMENT.BG
The Finance Ministry has released preliminary data on the implementation of the consolidated state budget from January until the end of August.
Total revenue collected was 7.8 billion euro and spending was 6.1 billion euro, meaning a fiscal surplus of 1.47 billion euro. This exceeds five per cent of projected gross domestic product (GDP) for 2007.
Consolidated programme revenue rose by 17.4 per cent relative to the same period last year. Tax revenue contributed the most to this growth, increasing by 1.04 billion euro or by 19.5 per cent compared to August 2006. The development of corporate tax revenue is the most dynamic given that it grew at a rate of 43.4 per cent despite the lower tax rate of 10 per cent from the beginning of 2007. Actually, some revenue is collected in line with the previous tax rate and the growth rate is slowing slightly; it was 45 per cent in July and 47.4 per cent in May. Still, higher declared profits with such significant percentage imply that companies are reacting properly to the given incentives. The process of lowering tax rates has proceeded gradually in recent years, but results unambiguously show that the direction is the correct one. Moreover, corporate tax revenue to August represented 99.6 per cent of projected revenues for the whole 2007.
Personal income tax revenue increased by 31.2 per cent; the rate has been accelerating since the beginning of the year. The reason may be higher wages and employment. The tax brackets were mostly unchanged in 2007 that, along with nominal wage growth, led to higher taxation of a larger share of workers. This means that the effective tax rate is higher. As a whole, revenue to August was 76.7 per cent of that projected for 2007.
Social security tax revenue grew at a relatively poorer rate, even though minimum thresholds were increased this year and insurance income and employment in the country have increased. Still, there was an upward trend in the growth rate, reaching 14 per cent in August. The total social security tax burden is about 36.5 per cent (for the third category of labour) meaning that the rate is the highest for all taxes. The decrease by three percentage points from October will improve the situation slightly, but at the cost of lower revenues to the end of the year. However, in longer term it will lower the taxation of labour and the tax wedge between the labour costs for employers and the net incomes for employees. Thus, greater portion of generated incomes will be at peoples disposal leading to more incentives for them to work.
As to indirect taxes, there is also a clear upward trend in collected revenues. Comparison with the previous year would be improper because of methodological changes in data generation imposed by the European Union membership of Bulgaria.
Value added tax revenues continue to be the largest source of funds for the consolidated state budget. Their growth rate has been accelerating since the beginning of the year. Although in the first three months this was negative, in August the growth rate was 14.6 per cent, which is 275.6 million euro in absolute terms. The main determinants are the greater economic activity and higher imports (intra-community acquirements). According to the official data the collected revenues account for 66.2 per cent of projected for 2007. It could be expected that the plan will be completed which will confirm previous forecasts by the IME arguing for higher VAT revenues in 2007 that in 2006.
The total budget spending increase by 9.2 per cent by the end of August means a gradual acceleration compared to previous months. (The growth rate was 6.6 per cent in May and 8.9 per cent in July.) Probably, at the end of the year this rate will be even higher bearing in mind the budget surplus and expected sizeable additional revenues. Again, as in 2006, the Government will spend a considerable amount of money that otherwise could not be taken away from net taxpayers and redistributed without their consent.
The budget surplus policy has its pros and cons. Its purpose is to drain liquidity and thus counteract the current account deficit and relatively high inflation. The effects are not unambiguous because public savings tend to crowd out private savings. The overall result is that the savings rate is not improving and the current account deficit keeps growing. In the longer term, this could limit potential economic growth because public savings are not directed toward productive investment. On the other hand, inflation is lower, because the fiscal surplus leads to lower increase in money supply in the country. It is a well-known economic truth that inflation is an entirely monetary phenomenon, so the Governments policy is probably effective in this respect.
Budget implementation in recent years, and in the current year, implies that the Government could spend less money in doing its work. Using part of the surplus at the end of the year is not necessary at all; it is done to serve the ruling majority and public sector employees. The state administration is very large and expensive, and the number of teachers relative to the students exceeds the average for the developed countries where education is better than it is in Bulgaria. The health care system absorbs more and more money for a poor output, and the police and the judicial systems do not protect life and private property of individuals.
Given this situation, a substantial improvement in public spending efficiency is necessary. The growth rate of spending should be lower, the principle of value-for-money should be applied which means actual implementation of programme budgeting. There should be a competition for funding among the different programmes, which is not the current practice. (Presently, the names of particular divisions or directorates in the ministries are presented as programmes and receive funding.) Such a reasonable policy will allow for lowering the share of total Government spending in GDP and further direct tax cuts.
The main priority of the Government should be reform of budget spending. The way this is done should be that total spending should rise at a rate slower than the nominal GDP growth rate. The target of reforms should be that costs of public goods not exceed more than 30 per cent of GDP. Of course, the state should not interfere in so many areas of the economy and should relinquish to the private sector infrastructure building, the operating of pension and health care systems supporting only people in real need. In this way, economic growth potential will be significantly higher.
