Presenting alternatives is one way of analysing the draft budget for 2008 that was submitted to Parliament on October 31. Since 2003 the Institute for Market Economics (IME) has been preparing an alternative to the draft budget with main features: low direct taxation – 10 per cent corporate tax (introduced in 2007), 10 per cent income tax (to be introduced in 2008) and 10 per cent social security contributions (SSC).
The social contributions have been decreased twice in 2007 so far, by nine per cent each. At present they are at a 36.7 per cent rate which is still considered high enough. Following this the IME’s Alternative Budget lays out the implications of:
1. Low direct taxation
2. Reduction of state expenditures
3. Increased efficiency in spending revenues
4. Public sector reforms
People react to incentives
Many people have challenged the IME’s belief that a reduction of the tax burden will not result in shrinking the grey economy sector. The results, however, are quite convincing. The tax revenues accumulated by the state after the reduction of corporate tax to 10 per cent are booming.
They have reached unprecedented levels and this is a consequence of the lower rate, which has lead to greater savings for companies and more investment, which in turn leads to an overall increase in business activity and higher revenues.
One should not forget the side effects of these developments for the labour market either, unemployment is at a record low level and salaries are increasing, although they are still lower than the European Union average levels.
Another important factor is the record high inflow of foreign direct investments that has outpaced all previous year.
In other words, the reduction of the corporate income tax has many dynamic positive effects and it is clear that the decreasing of labour taxation will have similar effects on the economy and people.
The proposed reform by the Government in 2008 of income tax resembles the proposals IME has made since 2003.
The third element of IME’s income tax part of the Alternative Budget 2008 is the reduction of the SSC to 10 per cent. Next to lowering this rate the IME proposes that the entire paid contribution should go to private pension funds, chosen by the insured, while pensions paid to current pensioners should be paid out of the state budget.
This is a way for the Government to accelerate and finish the pension reform that has been discussed and modelled since 1999 but has never been implemented.
Furthermore, by completing this reform, and a significant cut of wasteful budget expenditures, an increase in pensions of at least 25 per cent will be possible.
Naturally IME’s ideas for reform cannot be implemented without a reform in the expenditure part of the budget. There are several areas where rapid changes are possible.
Competition in healthcare
The monopoly of the National Health Insurance Fund should be removed since it leads to poor medical care, lack of choice and non-payment of health contributions. Every citizen should have the right to choose where their health contributions should go, which means different private health funds. Of course, the state should guarantee a minimum health package for pensioners, the poor and children that should be paid out of the state budget. The rest of the people, however, should take care of themselves by paying and choosing between competing health funds.
Reduction of administration
According to IME’s calculations at least 20 per cent of the people employed in state administration can be cut without a significant social price. According to different estimates there are at least eight to 10 per cent reserves, or free vacancies, in the system and if an assessment is made of the employees, such a cut should be achieved easily.
This, in turn, will allow for higher salaries for the rest of the administration that will be part of the motivation for people to work for the state and the quality of their services.
Additionally, the expenditures of the administration should be decreased by at least 14 per cent by closing some of its structures that have proved unnecessary or highly inefficient.
Reduction of budget subsidies for loss making state enterprises
There are several state companies that have been accumulating losses for many years. They operate in a non-competitive environment and are supported by the state budget. Because of this there are no incentives for them to improve and, on the other hand, they drive out private companies. Abolishment of many of the state subsidies will cut budget expenditures and will be a real driver for real reforms.
Choice in education
The process of decentralisation of powers and finances should be accelerated and external assessment of teachers and pupils should finally be implemented. Universities should receive autonomy and the right to determine the number of students and their fees.
There are many other reforms that should be put in place, such as the transfer of infrastructure expenditures from the state budget to private sector by transparent auction, reduction of interest expenditures, limitation of granting state guarantees, etc.
Effects
The IME’s proposals are expected to lead to more investments, incentives for people to pay taxes that would mean a reduction of the grey economy, an increase in budget revenues and higher disposable incomes. In other words, a high growth rate of the economy. This is what we really need so to reach EU levels in next 10 years.
Indeed some of IME’s proposals have been implemented with success by various governments over the past years which has led to positive results. Therefore, the reforms included in IME’s Alternative Budget with Low Taxes 2008 could serve as a programme for reforms to any government that wants to see the prosperity and well being of its people.
