Robert Hagemann: Corporate Tax Cut is Risky

Novinite Insider » INTERVIEW | October 27, 2006, Friday // 00:00
Bulgaria: Robert Hagemann: Corporate Tax Cut is Risky Photo by Yuliana Nikolova (Sofia Photo Agency)

Robert Hagemann is Chief of the IMF mission in Bulgaria. He was approached by Darik Radio to comment Bulgaria's draft budget for 2007.

Tsvetana Minkova from Darik News talked to Robert Hagemann *

Q: What are the risks that Bulgaria's budget for 2007 might face?

A: The risks we see to the budget are that revenue is at risk from two sources. One is that accession to the EU is accompanied by changes in revenue collection methods, particularly VAT. I'm not an expert on all this and exactly what the administrative arrangements are but the collection moves from the border to internally. That raises some uncertainty about how effectively VAT will be collected. Until all of the institutional needs to actually collect in the new environment are put in place and tested and reformed there is some risk to VAT. We see estimates ranging from 1%- 2% of GDP decline, 2 % being at the very high end. The second risk is that corporate taxes were cut. When you cut taxes there are possibilities of revenue increases but that usually takes some time. The environment you're entering in is already risky to two revenues by virtue of the changes that accompany accession. On the expenditure side I wouldn't say there are risks. Perhaps spending will be less than budgeted because of the difficulties of absorbing funds from the EU. Some of them require co-financing so that will be the spending.

Q: Which is a greater risk for the budget - VAT or the current account balance?

A: The greater risk is that administrative changes in collection of VAT will cause some leakages that will take a bit longer to stop because we see the current account balance remaining high mostly through very buoyant imports and recovering exports. I'd say the likelihood of import is remaining strong and goods coming in that will eventually be taxed is favourable. There is less of a risk on the import on the current account balance side to VAT collection. We've seen estimates that range from 1% to 2% of GDP of revenue losses on the VAT associated with accession. Maybe even 1% is an overestimate but it's because there are risks and the government's draft budget we have discussed does take into account prospective revenue losses. We're a bit less optimistic on the ability to avoid and minimise the losses.

Q: Do you think budget 2007 still keeps restrictive policy on expenditures?

A: The IMF is urging the government to target a 2% of GDP surplus. Revenues exceeding expenditures by 2%. The spending based on what we see as possible revenue achievement and even adjusting the overall spending to a level that will achieve that 2%, real spending would increase by 6.4 %. The priorities of the government in terms of spending across the social sector, the real sector, pensions, and investments are decisions that it itself makes. IMF is really not involved in the structure of spending. It's a really difficult question to answer. We urge all governments to not neglect the social sector and indeed to reduce any unproductive spending and increase productive spending. With real spending increasing by 6.4 % the government budget is believed to increase the public sector wages by 10% and that is a very significant increase with inflation falling next year continuously.

Q: What level of inflation do you expect for the next year?

A:We're looking at inflation coming down to a bit over 3 % by the end of the year.

Q: There is some information that the spending on the budget will reach 41%...

A: I have not seen a budget that targets over 40% of spending in 2007. The government has committed again and reiterated to us while we are here that they would hold spending below 40%.

*Translated by Lora Petrova, Sofia News Agency

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