EKIP– Expert Club for Economics and Politics A Different Opinion
Today, Prime Minister Borissov announced a new package of economic measures to combat the crisis worth 2 billion leva, with a strong emphasis on higher healthcare and social spending for pensioners and the unemployed. Although these social measures are not particularly large-scale in themselves, they signal an extremely flawed approach by the government to the selection of measures to stimulate the economy's recovery from the crisis. Therefore, they are worth specifically criticizing. If these measures are followed by more similar ones, the state will not only waste money, but will even delay the recovery from the current crisis.
1. 50 BGN supplement to pensions for the next 3 months
The first question that should immediately arise in the mind of every sane person is - what is the point of this? Pensioners cannot have suffered from the crisis, because they receive fixed payments from the state, which are not dependent on the economic cycle. Pensioners' incomes cannot fall during a crisis, because they, by definition, do not work. They can only fall if the state decides. The state has not decided to reduce pensions, ergo, pensioners cannot have lost income.
Why then are they given a supplement? What exactly is the function of a supplement that is paid to a group of the population that has no way of losing income due to the crisis? Obviously, this measure cannot have an anti-crisis function. Perhaps someone would say that this will stimulate consumption, which is important for recovering from a crisis. Such an argument would be wrong for two reasons. First, yes, consumption must recover, but this must be done in a sustainable way. If the "recovery" in consumption comes only through government spending, there will be no recovery in the private sector and, accordingly, no engine for the economy.
Restoring consumption is the last link in the chain. First, investments must be restored, then jobs, and from there - consumption. Therefore, the state's focus should be on measures that stimulate investment. This actually means less government spending (and tax cuts), not more. In addition, the pension supplement will last only 3 months. That is, this measure cannot lead to long-term growth in consumption and have any effect on economic recovery, simply because of its short duration. The only explanation is that this is a pre-election measure with which Prime Minister Borisov is trying to win over the sympathies of the elderly population immediately before the next elections.
2. The minimum unemployment benefit is increased from 9 to 12 BGN.
In addition, the period of payment of these benefits is extended by 3 months to 7. This is the most harmful measure because it will delay the recovery of the labor market. Any increase in unemployment benefits and the payment period means a lower incentive to look for work and a corresponding increase in the cost of labor. Unemployment benefits are a replacement income. They replace the income that an unemployed person could receive if they took a job. The higher this benefit is and the longer it lasts, the higher the replacement rate. Accordingly, the higher the salary (and at the later stage) the unemployed person will seek to take a job.
Simply put, such a measure increases the labor costs that companies have to incur in order to attract workers. This is especially detrimental in a period of crisis, when company revenues are shrinking and the capacity to pay higher wages does not exist. Imagine the situation in which the average company in Bulgaria finds itself. First, in most sectors, companies suffer a collapse in demand within a few months in the spring. External demand is only now, in the summer, starting to recover. This means that revenues are shrinking tremendously, which necessitates optimizations and, alas, layoffs.
However, even if a company survives this most severe period of the crisis, the government gives it an unpleasant surprise - an increase in unemployment benefits. Now finding workers during the recovery period is becoming significantly more difficult, because first, companies lose an enormous amount of revenue and are at a loss, and then the state blunts the incentives to look for work, and accordingly finding workers becomes more difficult and expensive. This is exactly how short-term "crisis" unemployment can turn into longer-term and "structural" unemployment. The government's efforts should be in a completely different direction. As I have already noted - stimulating investment and creating jobs. By increasing unemployment benefits, it is turning in a different, and wrong, direction.
3. Other measures
Beyond these two key measures, the others are relatively less important and some seem relatively adequate, especially when it comes to the removal of VAT and spending on the health sector in particular. Given the increased workload there, an increase in spending seems inevitable. Of course, how well the additional money will be spent in the health system is another question, given the chronic financial problems and abuses within it. But we are currently in a stalemate and there is clearly no way to reform the functioning of health care to ensure better spending of funds.
Another measure worth mentioning is the subsidy of 35 euros per seat for a foreign tourist on an airplane. This is simply unlikely to have much effect. There is no point in a subsidy when there are no tourists, specifically foreign ones. It is better to think about additional tax cuts such as removing VAT for the sector. This way, at least it will certainly have a financial effect, because there is still some domestic tourism in Bulgaria.
What should the measures be?
It is disappointing that the government continues to not consider more serious tax cuts. Removing corporate tax or VAT (or raising the registration threshold) would stimulate investment, which is the most important thing in a period of crisis. It is especially disappointing that there is no discussion of raising the VAT registration threshold from 50 thousand to 250 thousand leva, given that this was even proposed by the coalition partners VMRO in April. This measure would be especially useful for the smallest businesses in the country and would certainly save many of them from bankruptcy.
Why not consider significantly reducing and even eliminating the tax on retained earnings, the so-called "corporate tax"? With an amount of 2 billion leva, as spent on the above-mentioned measures, it can be eliminated without affecting the budget. Revenues from corporate tax are only about 2 billion leva anyway. Its elimination would stimulate investment in the country, because retained earnings are the profits that remain in enterprises and do not go into the pockets of the owners. That is, this is the profit that is either reinvested or retained as a financial buffer.
We proposed these measures back in March, at the very beginning of the crisis. Alas, the government still does not seem to realize that the surest way to help the economy recover is by reducing government spending and cutting taxes. In a period of crisis, businesses need more space to "breathe" financially. The state sector functions by draining private financial resources. As Hayek said, the more the state plans, the less other people can plan. The economy can recover on its own. As long as politicians are wise enough to give it the opportunity to do so.
