The GDP growth rate declined from 3.6 percent in 2017 to 3.1 percent in 2018. This is stated in the Annual Report 2019 “Economic Development and Policy in Bulgaria: Assessments and Expectations.” Focus topic: Structural imbalances and risks for the economy “by the Institute of Economic Research at the Bulgarian Academy of Sciences. The report was presented today, May 7, at the National Press Club of BTA.
Despite the slowdown, growth remains above the EU average but is among the lowest among the new member states.
Notwithstanding generally positive economic prospects, maintaining current economic growth rates means that convergence with the EU average per capita income remains far away in the future. Wage increases and improved household expectations have a positive impact on private consumption – household consumption increases by 6.3 percent, supported by continued income growth, employment growth and consumer confidence. Growth in public sector consumption is also stronger than in previous years, mainly reflecting increases in staffing and subsistence costs, the report said.
Investments are gradually recovering – after falling by 6.6 per cent in 2016, gross fixed capital formation increased by 3.2 per cent in 2017 and accelerated to 6.5 per cent in 2018. Net exports, which until a few years ago were a major driver of growth, have already contributed negatively to overall growth. This is due both to the slowdown in export growth and the stronger domestic demand, reflecting import volumes, and consumer goods.
The tendency of recent years to erase the gap between actual and potential GDP is confirmed. An unfavorable finding is that the growth achieved can not yet be described as inclusive and has no appreciable impact on poverty reduction and economic and social inequalities.
Poverty and income inequality rates are the highest in the EU. The tax system based on proportional income taxation not only does not help to reduce inequality in market incomes, it even helps to deepen it. This is due both to the lack of redistributive effect of the proportional income tax and to the relatively low level of social protection expenditure and the lack of a mechanism for better targeting and updating social transfers to the needy, BAS.
The report also states that the structure of tax revenues remains broadly unchanged – there are only minor changes in the relative shares of the individual groups. Economic theory postulates that the taxation of profits and individual earnings has a more pronounced negative effect on economic growth compared to consumption taxes (indirect taxes). This can be interpreted as an argument in favor of indirect taxes.
At the same time, it should be recalled that the major disadvantage of indirect taxes is their potential regression, which does not allow for greater fairness in the distribution of the tax burden. From this point of view, it is increasingly necessary to discuss possible reforms in the direction of increasing the share of direct taxes at the expense of indirect taxes and rethinking proportional taxation.
The comparison with the structure of tax revenues in the EU countries is a strong argument in this direction – it is clear that the structure between the direct and indirect costs in Bulgaria seriously differs from that in the EU countries. While the average EU tax burden is evenly distributed between direct and indirect taxes, indirect taxes in Bulgaria have a strong lead. Insofar as the insurance contributions are regressive (given the maximum insurable income) and the income tax is proportional, the prevalence of indirect taxes further enhances the regression of the entire tax system.
The annual report by the Institute for Economic Research at BAS points out that the effective tax rate in Bulgaria is the lowest in the EU and one of the lowest in the world. This policy was taken ten years ago in the hope that the tax benefits will attract foreign investors, which will accelerate economic growth, create new jobs and broaden the tax base, and this will offset (at least in part) the low rates. Unfortunately, nothing or very little of the intentions was accomplished. Economic growth may well look good against a stagnant Europe, but it is far from what is needed for so-called. catch-up development that will bring us closer to the average GDP per capita in the EU in the foreseeable future.
Foreign direct investment has not only increased but has even declined in recent years.