Mixed reactions of social partners to 2007 budget

The 2007 budget is Bulgaria’s first budget as a fully-fledged EU Member State. The consolidated fiscal programme for 2007 incorporates the European funds into the common budget framework, to consolidate macroeconomic stability and implement the government’s priorities. However, to become a more competitive economy, further technical and technological innovation is required, as well as essential improvements in workforce quality and increased exports.

Global support for social and macroeconomic priorities

Bulgaria’s accession to the EU on 1 January 2007 and the access to European funds will provide the Bulgarian economy with an unprecedented opportunity to expand. This includes access to resources that will help speed-up the convergence process, continue reforms and increase the investments in the modernisation of the economy.

With a view to maintaining macroeconomic stability and economic growth, the representative employer organisations and trade unions supported all of the macroeconomic targets set out in the national budget for 2007. These targets include:

• 5.8% growth in gross domestic product (GDP);

• a low annual average inflation rate of 4.4% for 2007;

• a high rate of investments, amounting to 30% of GDP;

• up to 24.6% growth in capital expenditure;

• foreign direct investment reaching €2.7 billion;

• a gradual, although slow, reduction of the current account deficit – from 12.4% of GDP in 2006 to 11.8% in 2007.

Bulgaria’s contribution to the EU budget totals BGN 634.4 million (about €324 million as at 6 July 2007) which represents 1.2% of GDP. In 2007, the surplus foreseen from the consolidated fiscal programme should amount to about BGN 385.6 million (€197 million) or 0.8% of GDP.

Furthermore, pensions will be raised by 8.5% in 2007. The minimum monthly pension for length of service and old age will increase from BGN 85 (€43) to BGN 92 (€47), while the maximum monthly pension will increase from BGN 455 (€232) to BGN 490 (€250). Moreover, workers in organisations receiving financial support will see their wages raised by 10%. Additionally, the tax-free minimum monthly income will increase from BGN 180 (€92) to BGN 200 (€102), and the amounts and ratio of social insurance contributions due by employers and workers remain unchanged at a rate of 65:35.

Tax and social insurance policy changes

The amendments of the tax and social insurance legislation for 2007 provide for the following changes:

• a reduced corporate tax rate from 15% to 10%. The Ministry of Finance (Министерство На Финансите, Minfin) has estimated that this will result in a loss for the state budget of about BGN 290 million (€148 million), which will remain at the disposal of employers;

• transferred tax on cash social expenses in line with the Corporate Income Tax Law on the Personal Income Tax, thus saving employers an extra BGN 70 million (€35) while putting the additional tax burden on the population;

• lifting the tax on food vouchers under the Personal Income Tax Law. As a result, the use of food vouchers is expected to increase, which will result in higher expenses for employers, amounting from BGN 5 million (€2.5 million) to BGN 15 million (€7.6 million) (on average, about BGN 10 million (€5.1 million)), and an increased disposable income of hired workers from BGN 5 million to BGN 15 million.

Employer demands

Certain requests from employer organisations have been taken on board. Following a request from the Bulgarian Industrial Association (Българска стопанска камара, BIA), the budget stipulates that, from 1 July 2007, social insurance contributions will be reduced by another three percentage points – in 2006, these contributions were reduced by six percentage points. Employers also requested a cutback on the insurance contribution to the Workers’ Claims Guarantee Fund from 0.5% to 0.1%. They argued that the fund had already accumulated BGN 53 million (€27 million), while only BGN 94,000 (€48,080) has been paid out to date.

From 2008 onwards, the corporate income tax rate will be reduced from 15% to 10%, which will reflect the lowest rate among the EU Member States. This will leave about BGN 290 million (€148 million) at employers’ disposal. The purpose is to raise corporate investments, improve competitiveness of local manufacturing and increase the overall wage level.

Trade unions’ views

The general conclusion of representative trade unions about the planned tax and social insurance policies is that the balance of interests of capital and labour is in favour of capital. The changes planned for 2007, for direct tax and social insurance obligations of employers and hired workers and employees, will allow businesses to save up to BGN 350 million (€179 million) and will provide additional income of about BGN 65 million (€33 million) for workers, which reflects more than five times less the amount available for employers.

Nevertheless, as a result of these changes, workers will have the following additional income at their disposal:

• BGN 120 million (€61 million) worth of disposable income due to the planned increase of the tax-free minimum allowance from BGN 180 (€92) in 2006 to BGN 200 (€102) in 2007;

• BGN 5 million (€2.5 million) of planned increases of tax allowances for families with one, two and three young children: from BGN 360 (€184) to BGN 420 (€214) in the case of one child; from BGN 780 (€398) to BGN 840 (€429) in the case of two children; and from BGN 1,140 (€583) to BGN 1,260 (€644) in the case of three children.

• food vouchers to the value of about BGN 10 million (€5.1 million).

These concessions mean that the BGN 70 million (€35.8 million) in tax liabilities transferred from employers to workers in 2006 should be taken away (BG0512203F).

Commentary

The trade unions are of the opinion that the income, tax and social insurance policies set forth in the 2007 budget will not result in a fairer distribution of the benefits of economic growth and increased social homogeneity of society. In fact, in 2005, real GDP per head of population recovered fully to the level it was in the base year 1989, while real wages and pensions reached a mere 50% of their 1989 levels.

During the years ahead, the trade unions believe that the country will experience great difficulties in reaching acceptable levels of current account deficit, while the main factor causing this deficit is the negative balance on foreign trade. Bulgaria is still far from having a competitive economy, which would shift consumer interests towards Bulgarian products. Once again, this places high on the policy agenda the need for more comprehensive technical and technological innovation and development, essential improvements in workforce quality and the promotion of exports.

Nelly Shtonova, Balkan Institute for Labour and Social Policy (BILSP)