IME

The Ministry of Finance published data on the execution of the government budget for the first two months of 2006. The data is quite interesting and deserve detailed analysis.

In the first two months of 2006 the revenues in the consolidated government budget exceeded 2.7 billion leva – an increase of 6.6% compared to the same period of the previous year. The budget expenditures increase by almost the same rate – 6.5% and reach 2.56 billion leva. The budget surplus is also greater than last year – till the end of February it is 146.5 million leva, 9% higher than the corresponding level in 2005.

Table 1: State budget – execution to February

*thousand leva*	2005	2006	Change
Revenues	2,536,060	2,704,680	6.6%
Expenditures	2,401,677	2,558,217	6.5%
Surplus	134,383	146,463	9.0%

Source: Ministry of Finance

If we look at the budget expenditures, we can see that some expenditure rise a lot – wages, social security contributions, and other decrease considerably – subsidies, maintenance. As the state employees have not received 60% increase of their wages, we can explain the rise of the wage expenditures (and the decrease in other items) only with shift in the accounting of the expenditures. Because of this reason the comparison of the data is difficult and details are difficult to be analyzed.

In respect to the total spending, it is clear that its growth is higher than in the previous year, which is not a good sign. In order to have stability of the public finance, it would be better to have slower increase of expenditures.

Table 2: Expenditures of the state budget - execution to February

*thousand leva*	2005	2006	Change
Wages	243,825	390,792	60.3%
Social security contributions	87,778	125,211	42.6%
Maintenance	557,387	453,447	-18.6%
Interest	336,713	318,142	-5.5%
Social expenditures	947,714	1,076,113	13.5%
Subsidies	77,179	56,660	-26.6%
Capital expenditures	151,081	137,852	-8.8%

Source: Ministry of Finance

In the first two months of the year the revenues of all taxes are rising, with the exception of the excise duties. It is ironic, as excises are taxes that were increased significantly in the beginning of the year. The dividend tax revenues continue to rise by a tremendous rate – more than 50%. VAT receipt increase by almost 25% and the corporate and income taxes – by a little more than 10%. Even the social security tax revenues are increasing although their rate was decreased in the beginning of 2006 by 6 percentage points (from 42.7% to 36.7%).

Table 3: Tax revenues – execution to February

	2005	2006	Change
Social security tax	648,552	651,890	0.5%
Corporate tax	89,992	100,498	11.7%
Dividend tax	14,358	21,823	52.0%
Income tax	196,419	216,555	10.3%
VAT	695,181	867,600	24.8%
Excises	323,832	290,446	-10.3%
Customs duties	52,191	56,570	8.4%
Other	39,585	41,057	3.7%

Source: Ministry of Finance

There are several tendencies that can be seen in the data on the execution of the state budget for the first two months of 2006:

Social security tax revenues increase despite the lower tax rate. This is a sign for positive dynamic effects of the tax cut.
Dividend tax revenues continue to rise by enormous rates. Probably, the reason is the decrease by half of the tax rate in 2005 that stimulates the business.
The high rate of excises has a negative effect on the budget revenues – probably because of built reserves in 2005, decrease of consumption and buying cigarettes without excise label.

As a whole, the conclusion is that the tax reform brings results – tax revenues from decreased tax rates increase. This can encourage additional tax cuts in the beginning of 2007. If there is enough determination for reforms, a flat rate of 10 percent can be introduced for the corporate tax, income tax and social security tax.

Change

Change