The New Cabinet Takes Its First Steps

Eight Measures that Are Supposed to Change Bulgaria

AIM Sofia, August 21, 2001

Now that assistant cabinet ministers and the heads of government agencies have been appointed and the cabinet has taken the reigns of the state administration, the new Bulgarian cabinet is expected to make its first major decisions. Prime Minister Simeon of Sax-Cobourg has announced eight measures that are supposed to mark a new beginning for the Bulgarian economy. Simeon II has kept his campaign promises about reforms of tax policy, privatization, and partly in the domain of salaries. By doing so he has, at least temporarily, silenced his critics, who have accused him of inactivity and lack of strategy.

The economic recovery measures focus on taxes. One of their main features is exemption from profit tax, if the profit is to be reinvested. This is effective as of Jan. 1, 2002. The purpose of the measure is to encourage investment in new production capacities and technology. Companies trading in securities will also be exempt from paying the tax. This idea, suggested by Deputy Prime Minister Nikolai Vasilev, the chief player on Simeon II's economic team, immediately upon his return from London was to incite interest in the capital market. Before this, however, the stock market will have to be revived. As an additional measure the Economic Ministry plans to put up for sale parts of companies that will be privatized on the stock market.

The income tax rates will be reduced to 18-29 percent, from the current 20-38 percent. Income of up to 110 leva (German marks), will be untaxed, as opposed to the previous 100-leva limit. Tax reform are envisaged to increase the population's income and its purchasing power. Because of this, budget revenues will be reduced by 500 million leva. From the reduction of income tax rates alone the budget will lose 80 million leva, and changes to the profit tax rates will deprive it of an additional 400 million leva. Finance Minister Milen Veleev, however, believes the deficit will be covered by import duties. It is believed that, due to poor performance by the customs service, the state was losing up to one million leva in customs duties and excise taxes each year.

To change this, Premier Simeon II has announced the entire customs service will be restructured with assistance from foreign experts. A controversial former finance inspector, Emil Durev, fired several years ago after going public with data showing that a large quantity of duty revenues were being channeled to certain political parties, has been selected to head the service. Briton Maurice Campbell has been appointed to head the foreign committee in charge of reforming the customs service. A national computer system is expected to begin operating soon and it will show every attempt to break the law. "We will gradually increase excise tax on certain products such as alcoholic beverages and cigarettes," says Finance Minister Veleev.

Another idea that could indeed revive the economy is changing the privatization system. Regardless of the fact that many state-run companies have been privatized, the measures aim to establish clear and precise rules for privatization of the remaining firms. All preference for the so-called worker-manager partnerships, which have discredited the privatization process, will be repealed. These partnerships were better known as "robber-manager" partnerships, and were known to sell companies to relatives and friends. They had privileges no one else could hope for and were winners in all of the privatization tenders.

Simeon of Sax-Cobourg has announced an end to all the partnerships' benefits, among which were payment with compensation coupons or delayed payment with a grace period. Sale based on "negotiations with a potential buyer" will also be cancelled. The Privatization Agency will have to approve all privatization deals, meaning that privatization committees in certain ministries will cease to exist. "Don't expect partnerships offering a white card with two yellow edges; practices that caused every such deal to end in a scandal or a trial should cease," Nikolai Vasilev said recently, alluding to a possibility that the imperial movement could begin to profit from privatization. So far, the statistics have been devastating – of 2,600 deals in the past four years, over 1,250 were made through the partnerships. It turned out that in most cases the partnerships did not have the money necessary to invest in companies and that many of them are as good as bankrupt.

As it usually happens, however, one can't have it all. The increased income of the population due to the reduction of income tax, will go to cover other expenses -- higher heating and electricity bills. Prices are due to go up as of Oct. 1 and will affect primarily the poorest strata of the population -- pensioners, the unemployed, etc. According to the government economic team, the previous cabinet kept prices down artificially. Now hikes are unavoidable because energy prices have gone up.

Salaries of state officials will be increased by 10 percent, but, according to the prime minister, jobs in the state administration will be cut by 10 percent as well. At this point there are 30,000 civil servants. The initial job reduction will affect so-called "dead jobs" -- jobs that have already been vacated and whose holders exist only on paper. Another measure increasing the minimum wage from 85 to 100 leva would hardly bring major changes since very few people are actually paid that wage. Employers, however, will be affected because they will have to pay higher contributions to the state. The cabinet has promised that the way in which dues to the state are paid will also change and that it will not be linked to the minimum wage.

Young families are unlikely to benefit much from a two-fold increase in child support benefits -- as of next year, mothers will receive 14 leva per month per child instead of 7. There is hope, however, that if the new measures begin to bear fruit, maybe one day Bulgarians will actually feel that their standard of living is indeed headed for the better.

Georgi Filipov

(AIM)