Bulgaria should fight corruption and crime and that would result in increased inflow of foreign investments, Steve H. Hanke has said. He is a Professor of Applied Economics at the Johns Hopkins University in Baltimore. File photo by Sofia Photo Agency
Steve Hanke is a Member of the advisory board of the IMF Assessment Project and a special counsellor to the Economic and Monetary Resilience Council of Indonesia. He was approached by Darik Radio to comment Bulgaria's new state budget for 2007.
Tsvetana Minkova from Darik News talked to Steve Hanke.
Q: What is going to happen as Bulgaria cut short the period of imposing excise tax?
A: Almost every time there's a new budget you call me and ask for my comment and the IMF is always tangled up on the issue of the government and as you say the IMF is a convenient scapegoat for whatever the decision is made by the parliamentarians designing the budget for the government.
My number one conclusion is that whether the IMF made them do it or didn't make them do it or disagrees with them is a little bit irrelevant. The thing is that the government decided to impose the excise tax at the rate of increase by twice as fast than everyone had originally thought.
The IMF isn't really the problem. I think the reason these controversies come up is that the whole budget process itself is not too transparent. In other words if it was less opaque and more transparent there would be no surprise. So no one would have to blame the IMF or the EU or anyone. There would be no surprise.
Q: Should money from excise tax be spared in these 2.6% of the GDP for the army?
A: This is exactly my point. If the budget process was transparent that shouldn't have been a problem. They have an obligation and an agreement to put 2.6 % of the GDP into the military and that was a long time ago, what's a surprise. It shouldn't be a surprise if the budget process was transparent. It is a problem because the process is not clear. It will cost a little more to run transport vehicles and probably you'll have some modest increase in prices.
I'm not too excited about it; again it's a kind of a factual thing. If the price of an input goes up in the production of something, usually the price of the output goes up a little bit. That's true in a competitive environment. But if the industry is monopolised and there's monopoly power or even if it's a public utility a small increase of the price of the input might result in a large increase of the price of the output.
Let's stand back and think about this. What happened in the last years with the price of oil? It was high. To people in Bulgaria and the US and any place in the world it acts exactly like a tax. Now with high oil prices we have to pay more for running our cars and we don't have as much money left to buy other things. It all starts reverberating through the economy. The question is how large is the excise tax? What percent increase on the price of gasoline will it amount to?
Q: Could these 2.6 % be collected from other sources?
A: People who use gasoline are going to pay the lion share of that military increase. The money really is been earmarked towards financing the defence. The politicians are playing games.
First, you don't have a clear budget and as a result something that should have been taken care of, the planning for these 2.6 % for the military should have been factored in the whole budget. And you shouldn't need a surprise tax increase at the last hour to accommodate the expenditure required for the military.
This shows the budget process isn't ray clear or maybe somebody is not very competent planning the budget. Both things probably. At the end not the politicians need more money in the budget. And what if they did? They're blaming the IMF on one hand and then they're using this military excuse on the other hand. The bottom line is that they just want more money in the budget. They want more revenue. It could be collected from a number of sources. They just happened to do the excise tax on gasoline it's easy. That was probably one factor that was in the decision.
My big complaint is that the public sector in Bulgaria very inefficient. Actually they are only obtaining half of the output in the public sector, as they should for each lev of input, each unit of tax they get. Bulgaria has huge possibility for increasing the efficiency of the public sector, the government, the civil service, the education system, everything connected with the public sector.
They could improve the efficiency quite easily to get up the standards of the countries you could compare Bulgaria to. And they wouldn't have to even increase taxes because what you could get is 50% more output for every lev of tax you're getting now. If you improve the efficiency of the government the standard will rise also.
My argument is the best thing to do is to make the government more efficient, streamline it, and modernize it. Right now two of the worst countries in terms of government efficiency are Turkey and Bulgaria.
Q: What must we do to make the government more efficient?
A: If you look at the IMF recommendations, one of the first things you should do is improve fiscal transparency. Reform the education and health system, as they are the two big things that have to be modernized.
You could actually get a lot better education and health services for less money. I would recommend making the whole budget process ray transparent so people know what they can anticipate what is happening in the budget and there will be no last minute surprises.
Q: Say a word about inflation for the next year.
A: Inflation is in fact coming down or stabilized, so there's not much they can do. But with increased taxes there will be temporary increase in inflation numbers.
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