The flat tax rate was meant to be the panacea for Bulgaria’s persistent problems with the grey economy, but even before the economic recession and the threat of mass redundancies come autumn, the social security contributions remain higher than what many employers are willing to pay.

Seven months into the year, the budget deficit of the National Social Security Institute (NSSI), the Bulgarian state institution that manages pensions, maternity leave, unemployment and disability payments, was growing faster than initially projected, Bulgaria’s new Labour and Social Policy Minister Totyu Mladenov said on August 17. Mladenov estimated the end-year deficit at 558 million leva, about 120 million leva higher than the forecast three weeks earlier by NSSI’s former head actuary Hristina Mitreva, now one of Mladenov’s deputy ministers.

To bridge the gap, the ministry launched joint checks by the Chief Labour Inspectorate and the National Revenue Agency to ferret out cases of employers paying lower social security contributions by declaring lower official wages than the real ones paid to their employees.

According to Mladenov’s estimates, between 300 000 and 400 000 people were employed in the grey economy. He announced the campaign to verify employment contracts during a check at a pizzeria on one of Sofia’s central boulevards.

"We hope to bring a lot of people into the light, which will help limit the deficit," Mladenov said, but declined to speculate how much money would be raised by improving social security contributions collection.

The campaign comes a week after Mladenov first said he intended to implement stricter oversight. In an interview with Bulgarian National Radio on August 11, he said: "The checks are very infrequent. I checked the number of joint checks by the Chief Labour Inspectorate and the National Revenue Agency and there were only about 120 in the first seven months of the year."

"It is very easy to track who is on a labour contract, who is on a fixed term employment contract, who pays what amount. We will step up these checks and I believe that they will have an effect," Mladenov said.

One major target for the checks will be the taxi industry, where the ministry will be co-operating with the Transport Administration inspectorate of the Transport Ministry. According to Mladenov, about 40 000 taxi drivers had no contracts and were not paying any social security contributions.

Making ends meet
NSSI’s revenues were expected to fall 484 million leva short of the projections set in the institution’s budget for 2009, Mitreva said on August 17. The drop was partially because of rising unemployment, caused by 92 000 people being made redundant since the start of the year, but also to the lowered social security contributions rate.
In addition to ensuring that more employers paid the correct amount of social security contributions, the ministry was considering a plan to drop the existing ceiling on social contributions, Mitreva said.

Under the current rules, anyone earning more than 2000 leva a month paid social contribution on their salary up to that ceiling. At the same time, according to statistical data, more than 73 000 Bulgarians earned more than 2500 leva a month, Mitreva said.

As it is, NSSI stood to collect only 88 per cent of the revenue projected in its budget for 2009. According to former NSSI executive director Yordan Hristoskov, the reason for the shortfall was the former Socialist-led cabinet’s Budget framework, which projected economic growth in 2009, while the latest gross domestic product estimates showed the economy contracting by more than four per cent in the first half of the year.

On the spending side, the ministry will use European Union funds on social aid instead of its Budget allocation, eliminating some of the overlap.

"About 190 million leva go to measures encouraging employment every year. Under the EU operational programme for human resources development, which has a budget of 1.2 billion euro until 2013, only a very small amount has been used," Mladenov told BNR on August 11.

Bulgaria’s previous government, headed by Socialist leader Sergei Stanishev, had used, by July 2009, only 15 million euro under the human resources development programme, according to the ministry’s data.

"Our efforts will be to find the best solutions so that these funds are not wasted and at the same time help [the unemployed]. If we manage to use those funds as they are meant to, I think that we will help the labour market a bit, especially in this time of crisis," Mladenov said.