Social insurance cuts announced in 2006 budget

In 2005, the tax-free allowance was BGN 130 while the national minimum wage was BGN 150. In 2006, the tax-free allowance is being increased to BGN 180 and the national minimum wage to BGN 160. This is a concession towards low-income groups, following reductions of the tax rates for the highest income groups in the past four to five years (in 2000, the highest income group was taxed at 40%).

Other changes introduced, from 1 January 2006, are as follows:

• Introduction of an option to deduct from the taxable income, upon completion of tax returns, an amount of BGN 360 for one child, BGN 780 for two children and BGN 1,140 for three or more children.

• While corporate tax remains at the 2005 level of 15%, taxes on company expenses will decrease as follows: tax on repair and maintenance costs (including fuel) of company cars drops from 17% to 10%; tax on social expenses (food and rest of workers and employees) is reduced from 17% to 12%; entertainment costs will be taxed at 10% instead of the previous 17%.

• Appraisals of real estate for tax purposes are to increase by up to 30%. These have not been updated since 1998 and according to official statistics and to those of real estate agencies, the prices have increased two- to three-fold. The increase will be greatest in large cities and resorts (e.g. Sofia, Plovdiv, Bourgass, Varna), with 25% for towns of average size and 20% for smaller villages. This will lead to a significant increase in building tax and waste collection tax for the population, which are directly tied to the tax appraisals. The measure will have an impact on all households in the country, since according to the last population census in 2001, some 91.3% of households live in their own residences and only 8% are tenants. It will also indirectly affect tenants in terms of rent increases.

Views of employer organisations

Employers have always argued that social insurance contributions and taxes are too big a burden for the Bulgarian business sector. They have consistently pressed for a policy of reduced social insurance and taxes.

Employers claim that the high social insurance contributions acts as a disincentive to take on workers, given the huge differences between the employer’s labour costs and the worker’s net income. The same goes for entrepreneurs - the high taxes do not motivate them to take risks and expand their undertakings. According to employers, the implementation of a consistent tax and social insurance reduction policy would lead to several major effects. For one, the grey economy would shrink, since the favourable changes would encourage illegal businesses to go legal. This, in turn, would create a more competitive environment, as well as leading to improved collection of social insurance contributions and taxes. The overall effect would be a higher volume of taxes and social insurance contributions at lower rates. It would also result in reduced corruption, since the large quantities of money circulating from the grey economy are a prerequisite for increased corruption.

Following the 2006 budgetary changes, employers are expected to benefit by around BGN 600 million from a six percentage point reduction of social insurance contributions for pensions and by about BGN 50 million from the other direct tax deductions. The business sector is expected to use the BGN 650 million in savings to create new jobs and to increase wages.

The Bulgarian Industrial Association (BIA) BG0310103F published an analysis aimed at proving that wage increases for the last five years were outstripping labour productivity growth; hence the tax deductions (including the changes in contribution ratios between the employers and the insured) are predominantly directed towards the business sector.

Views of national trade unions

The trade unions reiterate that the 2006 budget causes inequalities between employees and business interests. They argue that over the last four to five years the business sector has been granted some BGN 1.4 billion in the form of deductions, but that this has not positively affected the labour market situation or led to an increase in wages.

The Confederation of Independent Trade Unions in Bulgaria (CITUB) BG0307204F initiated a public discussion on the draft 2006 budget. It proposed solutions in support of the national economic development priorities, to help increase incomes and improve the quality of living. The CITUB is of the opinion that the step towards reduction of labour income taxation is limited and inconsistent. The relief based on the income taxation table is BGN 176.6 million with about BGN 78.9 million based on the initial application of family income taxation elements. Nevertheless, the population will be burdened with payment of several excessive property taxes and fees, as well as with indirect taxes that are several times higher than before.

The trade unions warn that an unfair burden will be placed on the average household, whose subsistence costs increased by 10% at the end of 2005 because of the strong pro-inflation pressure of increased oil prices at the end of the summer, as well as two subsequent price shocks. One of these shocks was caused by the increased price of power supply and its resulting effect on foodstuffs and services; the other, which will start from the beginning of 2006, relates to the increase in excise duties on goods and higher taxes and fees.

The proposal for a phased reduction of VAT from 20% to 18% was not well received either, nor was the introduction of differentiated rates for foods, power supply, textbooks, books, etc. Moreover, the trade unions argue that the family income taxation as a tool for achieving better social justice needs to be improved. For example, tax allowances for the first two children could be increased to help improve the financial capacity of families to better raise and educate their children.

According to the CITUB, the best solution for business is the eradication of tax on reinvested profits, which could in turn lead to the creation of new jobs. Unfortunately, none of the successive governments have so far considered implementing this measure. One proposal aimed at changing the balance between employee and business interests while retaining the treasury interests, was that made by the two trade union head offices, the CITUB and the Confederation of Labour Podkrepa (CL Podkrepa). They proposed retaining the 2005 ratio between the social insurance contributions payable by the employer and the insured, i.e. of 70:30. Since this proposal was not accepted, it is hoped that the new ratio of 65:35 will at least remain as it is for the coming four years.

Commentary

Based on the changes depicted and the views of the social partners, it can be concluded that the philosophy underlying the 2006 budget has not changed from previous years. The calculations show that, despite the deductions related to social insurance and income tax, the direct and indirect measures undertaken in the budget will ensure higher tax revenues. Arising from the new higher taxes, fees and excise duties, these tax revenues are expected to generate more than BGN 80 million. In effect, the social insurance and tax burden as a whole will not decrease; on the contrary, it will increase. The redistribution of the budget remains at about 40% of GDP, despite the declarations and intentions of some political parties to drop it significantly to 35-36% of GDP.

It is unlikely that the deductions for the business sector will be transformed into new jobs and wages. This is not only due to existing practices and experiences, but also because inter-company debts exceeded BGN 42 billion, i.e. it is even above the GDP level. Thus, it is more likely that the freed-up funds will be used to repay some of the companies’ debts, rather than to increase wages.

Unsurprisingly, some radical proposals for reform are becoming increasingly popular, for example, the proposal to introduce a flat tax. In autumn 2003, experts of the Institute for Market Economy presented the main features of 'a new alternative policy, which will boost the economic growth and raise the population’s wealth'. The flat tax is central to this new proposed policy. Two years later, in the heat of a pre-election campaign, the same experts, acting as economic advisors to the Union of Democratic Forces, proposed a radical alternative: a 10% levy for all direct taxes, including social insurance contributions. None of the political parties support this concept, although it is accepted by some party experts and by some employers. The trade unions, however, have rejected this alternative as unreasonable. (Lyuben Tomev, PhD, ISTUR)