BULGARIANS incomes are expected to rise by a mere five per cent next year amid inflation pressure resulting from higher excise duties and more expensive power and fuels.
This is one of the main conclusions emerging from the provisions of Budget 2006, which was approved by the ruling three-party coalition on October 6.
The leaders of the Bulgarian Socialist Party (BSP), the National Movement Simeon II (NMSII) and the Movement for Rights and Freedoms (MRF) decided to pursue a zero budget deficit for next year and 5.3 per cent economic growth.
A reduction of five to six per cent in social security contributions will also be introduced to help counter the grey economy. However, the coalition has dropped earlier plans to propose a flat rate for income and corporate taxes, as well as to apply a zero tax on reinvested profit.
Announcing the decision, Finance Minister Plamen Oresharski did not commit himself to specific figures, saying that they had yet to be co-ordinated with employer organisations, trade unions and the Ministry of Labour and Social Policy.
Oresharski also declined to say by how much and when pensions would be adjusted to cope with inflation. The draft budget framework will be based on a forecast for 4.4 per cent inflation in 2006. Asked about pension adjustments as of January 1 2006, Oresharski said only that the budgets expenditures component was socially orientated.
Prime Minister Sergei Stanishev told journalists that the three expenditure priorities were social commitments, European integration and Bulgarias preparation for EU membership; and coping with flood damage.
The draft framework plans that up to 40 per cent of GDP will be redistributed through the budget, as well as a zero budget deficit. The main priority was maintaining financial and macroeconomic stability, especially in an environment that had not been particularly favourable for the Bulgarian economy in recent months, Stanishev said.
The Cabinet has agreed to a proposal by Oresharski to reduce the social insurance burden by five to six per cent. Thus the tax burden will be eased by up to 600 million leva, leaving considerable investment resources available to businesses. This will make an impact on wages and the revamping of production, which should help prepare Bulgaria to cope with EU competitive pressures. This policy is expected to have a multiple effect on business and on labour market liberalisation, Oresharski said.
Monthly incomes ranging from 180 to 250 leva will be taxed at 20 per cent of the excess above 180 leva. The respective rates for higher incomes will be 22 per cent for 250 to 600 leva and 24 per cent for 600 leva and more.
Oresharski has been told to immediately start consultations on the macroeconomic framework, tax policy and spending priorities with employer organisations, nationally represented trade unions, and the relevant departments.
Stanishev said that the current account deficit for 2005 would exceed 10 per cent, which was above the level projected by the previous government. The gap is also likely to be the same in 2006.
This trend substantially impairs Bulgarias starting position in its talks with the International Monetary Fund. Furthermore, the jump in oil prices is reflected in the trade deficit an indicator of the unsatisfactory level of competitiveness of the Bulgarian economy. This is why the governments tax policy is designed to create an environment that could encourage larger investments by Bulgarian companies.
Oresharski said that the IMF programme was based on a 7.6 per cent current account deficit, while the actual level would top 10 per cent. The difference should lead to a further reduction in spending.
Analysts said that the major change that would benefit all income groups in 2006 is the prepared reduction of the mandatory social insurance to 23 per cent from the current rate of 29 per cent. Low-income groups will also benefit from changes in the first brackets of the scale for personal income taxation.
The overall effect will be offset by higher insurance thresholds, and a slightly higher base for income taxation as social contributions are deducted from gross income before charging income taxes. The tax benefits will mainly go to employers, as they will cover 65 per cent of the insurance contribution next year relative to 35 per cent for employees. The ratio is 70 to 30 per cent this year.
Some employers are expected to spend part of the insurance gains on higher salaries, while other may move out of the grey economy. Both scenarios should increase raise tax collection. Excluding possible effects from improved fiscal compliance, the Finance Ministry estimates that pension insurance cuts will cost the state budget about 700 million leva (1.5 per cent of next years GDP) but will raise income tax receipts by about 100 million leva to form a net revenue loss of 600 million.
In line with EU requirements however, the Cabinet will continue to expand the burden of excise duties on alcohol and cigarettes, and possibly fuels too. The negative effect next year will be boosted by the plan to reach EU thresholds for cigarettes and alcohol as soon as possible, to stave off inflation pressure at a time when Bulgaria will have to meet the euro adoption criteria and also to offset social insurance reduction.
Overall effects from excise duty hikes will most likely equal the net effect from income and insurance tax relief, but risks from sale contraction and smuggling will pose risks to the revenue part of the budget.
Another move that might put a heavy burden on many Bulgarians is in the Cabinets plans to update the valuations of real estate used for tax purposes. This would increase property tax and refuse collection fees by more than 20 per cent. This is a significant change. Bulgaria has one of the highest rates of real-estate ownership in Europe and the world. It is estimated that 90 per cent of all Bulgarians live in properties that they own..
