Negative trends continue to exist in Bulgaria’s legislation, according to the economic policy review report by the Bulgaria-based Institute for Market Economics (IME).
The report analyses the performance of the Bulgarian Government in its first year in power.
The number of permanent parliamentary commissions, and respectively, costs, have increased. Some of the bills which go into Parliament are not publicly available. Other bills are not accompanied by the motivation letters required by law, and these explanatory memorandums, where available, are not based on a cost-benefit analysis principle at all. There is neither an institution nor practice to conduct a regulatory impact assessment in the pre-adoption phase of the legislation process. The State Gazette is still not available on the internet; it is in fact possible to buy an electronic copy, but at the prohibitive price of about 6000 leva a year. In general there is nothing to be lined up as positive outcome, with just a single exception: not long ago the Cabinet expressed its willingness to introduce a better regulation principle in terms of conducting regulatory impact assessment on a regular basis; however, this has not yet happened.
In the area of public administration, the country faces great challenges to achieve the necessary quality of administration and administrative services and at the same time, to find its place in the common European process of applying the principles of effectiveness, transparency and accountability of governance. On the verge of the accession of Bulgaria to the European Union, the pace of the reforms in the state administration is still unsatisfactory.
The present Government’s privatisation policy during the last year can be characterised as refraining from any actual action in terms of privatisation.
According to the Ministry of Finance, between August 2005 and June 2006 privatisation receipts data reached about 109 million euro resulting from previous deals. The Privatisation Agency data suggests that the ratio of privatised assets to the number of assets subject to privatisation and to total assets is 91 per cent and 60 per cent respectively in 1995 prices. The Government intends to privatise companies in the sectors of energy, transport, machinery, and production and trade of special items. However, it has neglected to include hospitals, schools, land, forests, dams, and infrastructure that could and should be privatised.
The real activity in the area of privatisation is the sale of minor stakes which is actually the final stage of selling already privatised companies. One should take into consideration the positive fact that some of these deals were done through the stock exchange thus favouring the transparency of the procedure and reaching the highest price.
The main aspects of tax policy are the reduction of personal income tax, reduction of payroll tax by six percentage points, increasing of excise duties on oils, alcoholic beverages and cigarettes, and increasing the tax base for real estate resulting in a higher tax obligation and a higher waste fee. The overall effect of these changes is higher tax revenues. In 2006, the corporate income tax rate did not decrease but changes were made concerning the fixed assets depreciation and taxation of some expenditure. The zero tax rate on reinvested earnings was not implemented.
The heaviest burden is applied to labour. In 2006 the rate was between 29 per cent to 43 per cent for gross wages of 81.8 euro and 715.8 euro, respectively, while in 2005 the rates were 33 per cent and 46 per cent. As a result of the progressive personal income tax and regressive payroll tax, those who have an average income pay the highest rates while those with low and high income pay relatively less. Corporate income taxes were kept unchanged at 15 per cent while taxation on dividends was seven per cent. The overall tax burden is too high, but the Government does not have the intention to reduce it in the near future, according to official documents.
Budget expenditures’ effectiveness continues to be low and one should note the increase of their total size and of particular groups.
The promised optimisation of the number and activities of administration and budget servants as a whole virtually did not happen.
The Government continues to fulfil functions typical for the private sector instead of withdrawing from them. The quality of public services remains a significant problem because it remains the same or worsens, thus forcing people to search for alternative suppliers and reducing their willingness to pay taxes.
Government policy concerning the payroll tax could be supported. Reducing pension contributions by six per cent and increasing the share of insurance in the private pension fund (capital-based) from three to four per cent of wage is a positive development. Still, the payroll tax is one of the highest in Europe leading to high taxation of labour and discouraging persons to supply their labour, as well as employers to hire them formally.
The social policy of the Government can be characterised with several tangible measures. Unfortunately, most of them lead to increased spending from the state budget without any significant reforms in social welfare system. As we have said many times, the family allowances, as written in Bulgarian law, are in case the family does not have the means to survive. This way, according to the state, social solidarity is put in place, i.e, someone who has low or no income should receive help to raise their child. Therefore, we cannot claim that this policy aims at encouraging births at all but supports the family in need. Certain groups with lower income or incomes earned in the informal sector have incentives to participate in the system for many years and thus the number of recipients never decreases and the monthly payment is miserable.
Administration problems, lack of efficient control over recipients and lack of incentives of participants to leave the system are among the most widespread issues that need to be solved. Therefore, reducing the tax burden, especially the social security contributions, will have a significant positive effect on the economy. This means increased economic activity, more jobs and increased incomes.
And that means greater possibilities for raising a child. There will always be people with low incomes resulting from any number of reasons, a lack of education, for example. State policy, however, should not encourage these people to receive child allowances.
Imposing a limited time for receiving welfare cash payments benefits by unemployed has been introduced. It was set at 18 months.
This change will lead to positive developments if actually put into practice. The change does not harm the rights of participants and, at the same time, puts limits for long-term participation. The lack of a time limit for welfare benefits does not stimulate seeking employment and leaving the system, does not allow the state to cut its expenditures and creates a culture of dependence. Future steps for reform should be transferring the labour market intermediation from the state to private companies.
Unemployment benefit payment has been increased. The minimum was set from 80 leva to 90 leva and the maximum amount rose from 140 leva to 160 leva. There are plans for a future increase in 2007 by attaching unemployment benefits to the statutory minimum wage in the country.
As we have already said, before increasing any payment, one should first reform the system.
There is an idea of imposing a requirement to work before receiving benefits. The idea has been in the air for some time. We fully support it and hope it will be put into practice. The labour policy of current Government shows that it has no intention to withdraw and rely on market forces and, therefore, we will hardly see any significant positive developments that we strongly need.
The statutory minimum wage has been increased to 160 leva or about 6.7 per cent.
At first sight, this change appears positive, especially for low-income people, but in practice there are various negative effects. Among them we can point out that: (a) it imposes an additional burden on state budget, but the real costs will be borne by the business sector; (b) a statutory minimum wage impedes the free labour negotiations between the employer and employee; (c) minimum wage and its growth create a higher risk of unemployment because when the marginal costs per worker rise and the marginal revenues remain constant or fall, then the employer will simply hire fewer workers and, thus, the employment levels will be lower than the case when there are not such wage restrictions; (d) minimum wage is harmful for low-productivity workers, for young people who wish to start working, for some disabled persons and, in fact, for the most vulnerable social groups.
In sum, the labour minister should halt further increases and promote the abolishment of minimum wage. If this does not happen our only hope is that the finance minister should categorically stop any request for increase and push for its decrease.
Public sector salaries were increased by six per cent in July. Since the increase is not the result of higher labour productivity in the state sector, we think that this hampers ordinary citizens’ rights that finance this change. The increase in salaries, when combined with state administration growth and additional privileges of “civil service” make it more difficult to justify a tax reduction. This in turn, hampers the economic growth and increase of incomes in the private sector.
The most “significant” change during the first year of this Government has been the increase of teachers’ salaries by four per cent in January and by an additional six per cent in July.
The discussion about educational reform varies from increasing expenditures up to eight per cent of the GDP to change in methodology for wage formation of teachers, introducing of qualifications for teachers and accepting the subjective evaluation of school principles when promoting teachers.
The most important change in the Ministry of Education proposals is consideration of the introduction of a voucher system.
