For a sixth year running, Bulgarian think-tank Institute for Market Economics (IME), has put forwards its alternative to the Cabinet draft Budget. As on previous occasions, the main theme is "tax less, spend less".

"IME's alternative Budgets always had one goal - to show a different take on public finance, based on the belief that changes in Bulgaria are possible and that they can be done now, not in the future," IME economist Petar Ganev wrote in an opinion piece for Dnevnik daily.

The key difference between the Cabinet's draft, already passed by Parliament at first reading, and the IME proposal is the drastic cut of mandatory social insurance contributions from the current 33.7 per cent of gross income to 10 per cent, and even that would not be paid as tax, but deposited in a pension account with a fund chosen by each employee. That measure alone would reduce the Government's revenue in 2009 by six billion leva or about one fifth of the amount envisioned in the Cabinet's draft, although smaller-scale hikes in other taxes would add to 900 million leva in revenue to cover part of that loss. Other proposed changes include a zero tax rate on reinvested profit, a cut to 10 per cent of the 15 per cent tax rate for sole proprietors and scrapping the five per cent dividend tax. Government spending would then be cut across the board to compensate for the lower revenue.

This way, the Government would stimulate investment and savings by reducing the tax burden on both employers and employees, which would improve Bulgaria's competitiveness and soften the impact of the global financial crisis, Open Society Institute senior economist Georgi Angelov, who contributed to the alternative Budget, said at the presentation on November 23. Instead, the abandonment with which the Cabinet was spending a big part of the 2008 Budget surplus was already turning investors away from the country, Angelov said, adding that the credit rating cuts announced by Standard&Poor's and Fitch Ratings were a direct consequence of that policy. Unless Bulgaria's Cabinet changed its approach, it could join neighbouring Romania on the list of countries with junk rating.

"The global credit crunch has put Bulgaria's governing coalition in an unfamiliar environment," Ganev said. "In fighting the crisis, it is easy to increase public sector spending, but that would only make matters worse. Rather than offset the loss of foreign investment with taxpayer money, we must create the conditions for that invstment to return. Surplus spending is more likely to scare investors off, which will negate the effect of [increased] spending, even if one assumes that it is needed and efficient, which is more than debatable."

Promises of change
Bulgaria's Prime Minister Sergei Stanishev has conceded that the Cabinet would have to amend the draft Budget before the bill is put for voting on second reading in Parliament. Lawmakers passed the bill on first reading on November 19.

"No reasonable suggestion must be rejected," Stanishev was quoted as saying by Dnevnik daily, without giving additional details. Stanishev did reject out of hand, however, the suggestions to cut taxes and social security contributions.

The Cabinet's draft Budget emphasises more spending on infrastructure, social sector, education and healthcare. The bill envisions a 20 per cent increase in pensions and a 10 per cent hike of wages in the public sector. Social expenditures will make up 31.3 per cent of all Government spending in 2009, with pensions alone coming in at 6.6 billion leva, or 22.5 per cent of all Government spending. The opposition has criticised the draft as pouring more cash into unreformed sectors, which Finance Minister Plamen Oresharski countered by saying that the Cabinet could not "tell teachers and doctors, pensioners and welfare recipients to wait for their wages and payments while we are dealing with the fallout from the crisis".

Despite recently acknowledging the rising risks in the Bulgarian economy after months of denying any impact altogether, the Cabinet remains bullish in dismissing the warnings of analysts abroad, who see Bulgaria among the countries in Eastern Europe, along with the Baltic states and Romania, that are most likely to see their economies slow down dramatically over their reliance on foreign direct investment and high current account deficits.

Thus far, neither Oresharski, nor Stanishev have offered any details on how the Budget bill might be amended, but Dnevnik daily quoted Finance Ministry sources as saying off the record that agriculture and healthcare were the two sectors most likely to see their budget allocations increase, yet also that the changes would not be significant.