Bulgaria to raise excise duties with a view to lower inflation before EU entry

SOFIA – Bulgaria plans to bring in a sharp hike in excise duties quickly so that it avoids inflationary pressures around the time of EU and eurozone entry, a deputy finance minister said yesterday. Georgi Kadiev also told Reuters in an interview that the government proposes to cut the social security burden on employers in order to spur growth. Kadiev said the proposed changes would mean an acceleration in both growth and inflation next year if they are approved as expected later this week. «We expect economic growth of 5.5 percent next year if the tax changes are approved. We see inflation at 5.2 percent, due to the increase in the excise duties,» he said. Kadiev, 39, a Harvard-trained former economic analyst, is a leading economic figure in the ruling Socialists, who took the helm of a three-party grand coalition in August. The Balkan state cut its 2005 economic growth target to 4.9-5.0 percent and hiked its end-year inflation target to 4.5 percent last month due to surging oil prices and devastating floods that hit the country this summer. The Finance Ministry aims to reduce social security payments by six percentage points to 36.6 percent of gross salary, with the payments formula adjusted so that employers rather than employees reap the benefits. It hopes this will encourage firms to move out of the gray economy that analysts say creates at least a fifth of Bulgaria’s gross domestic product and suffocates growth. «For business, the social security burden is painful… It is creating a vicious circle, a self-perpetuating gray economy of unregistered revenues and profits,» Kadiev said. The ministry also plans to increase minimum non-taxable wages to 180 levs ($110.8) a month, from 130 now, but will keep income taxes unchanged in a four-bracket system. Under the plan, corporate taxes will stay put at 15 percent and value-added tax at 20 to compensate for the cuts. A majority of Bulgarian employers evade social security costs by paying their staff far more than the salaries officially on the books – a practice decried by foreign investors, who lose competitiveness if they play by the rules. Inflation up Kadiev said the ministry aims to increase excise duties on alcohol and cigarettes earlier than originally planned to avoid inflationary pressure in 2007 when Sofia plans to join the wealthy bloc and the ERM-2 waiting room for the euro. «We want to reduce all pro-inflationary factors ahead of 2007 and 2008, with the presumption that Bulgaria wants to be ready to join the eurozone as of January 1, 2009,» he said. Bulgaria must stay in the mechanism for two years before adopting the euro, and although it may be ready earlier, the eurozone’s usual practice of enlarging at the year’s start makes January 1, 2010 the most probable date for Sofia to join. Under Bulgaria’s EU accession plan, it must raise excise taxes gradually to the single market’s levels. Kadiev said the combined effect of the measures – a 58 percent jump in cigarette duties and 18 percent hike for alcohol – will fuel annual inflation by around a percentage point. The central bank backs the moves. «If we do not do it now, the government will have very little room to maneuver and ensure the 3 percent inflation needed… prior to adopting the euro,» he said. He said the hikes would also allow the government to boost living standards in this impoverished country of 8 million, where average monthly salaries run at around 150 euros, instead of depressing them after 2007 to curb inflation. Kadiev said the planned tax changes should bring 2006 budget revenues to 39.6 percent of GDP, or around 17.8 billion levs. This year’s revenues were planned at 38.9 percent of GDP, or 16.2 billion levs, but the government has far overshot that target, posting a cumulative surplus of $810 million in August. He confirmed the ministry is aiming for at least a balanced 2006 budget, where expenditure should not exceed 40 percent of GDP, and said he expected it to be drafted in the next 10 days, following approval of the tax amendments.