From the perspective of fiscal adjustment, year 2012 was lost. In an attempt to collect more revenues, government increased general VAT rate, excises on tobacco, personal income from capital gains…. Government has also prepared the draft of the Law on Corporate income tax proposing an increase in the rate from 10% to 15%. Simultaneously, government abolished dozens of quasi-fiscal charges (communal taxes, different fees) in an attempt to improve business environment. Despite the tax measures that helped increase the revenues, government’s budget actually ended with higher deficit for the simple reason that additional expenditures were higher than additional revenues. The recently adopted general fiscal rules are not likely to be honoured in the medium term. Getting priorities right is difficult, dispensing with populist policies even harder. Risks of fiscal unsustainability are elevated.
Fiscal adjustment continued during 2012 despite the fact that real GDP fell by 0.7%. The rates of major taxes remained unchanged. Fiscal cooperation between different levels of governments substantially improved during 2012, resulting in an early December 2012 adoption of the state (Institutions of BiH) and two entities central government budgets for 2013. Actions by Council of Ministers (CoM) of Bosnia and Herzegovina (BiH), formed at the beginning of the year 2012 after long delay following October 2010 elections, signaled strong determination to reverse the trend in quality of public expenditures. Faced with substantial increase in debt servicing in 2013 and 2014, authorities adopted unpopular measures such as nominal wage and allowance reduction, already in 2012. The adjustment measures are expected to bring fiscal system in primary surplus territory in 2013 and first stabilize, and subsequently, reverse the increasing trend in debt to GDP ratio. IMF program approved in September 2012 provided needed financing and focused policy making to the actions that target structural weaknesses.
2012 was rather good fiscal year for Bulgaria – while the economy is still underperforming, tax revenues almost fully recovered to their pre-crisis (2008) record high levels and the budget position was close to balanced, with deficit being far less than 1% for 2012. There were no big moves in tax policy, except for the introduction of 10% tax on interest payments from bank deposits – thus widening the base of the flat tax.
2013 already proved to be a challenging year for Bulgaria, with protests throughout the country and a caretaker government being appointed by the president. The social unrest in Bulgaria was fundamentally driven by the depressed labour market and the high electricity bills in the winter. While there are serious challenges ahead and a political uncertainty prior to the elections, one should note that there is no “fiscal fire” in Bulgaria. There are of course long term fiscal challenges – pressure of social systems (pensions, health), low fiscal reserve, the quality of public spending – but there are no immediate pitfalls that should be addressed in an urgent manner.
From the accounting viewpoint, the Czech government is relatively efficient in taming deficits. The chosen strategy for the whole period 2010–2014 is to raise approximately one extra Czech koruna in taxes for every two korunas saved from previously planned expenditures. On the other hand, the latest Convergence Program update reveals that over the period 2013–2015 only 43% of discretionary measures will be carried out on the expenditure side of the budget. It seems that further expenditure cuts will be increasingly difficult and we can expect increasing tax burden in the near future. But still, given that there is no clear consensus about the optimal solution of the interlinked problem of low economic growth, government revenue, expenditure, and debt, the approach of the Czech government seems to be relatively appropriate.
Winning the September 2011-election on a promise of higher taxes, the centreleft government made good on election promises in the 2012-budget by increasing taxes by half a percent of total tax revenue. In the spring of 2012 further tax increases followed on cars and energy consumption. Increasingly, however, the tax hikes (implemented and promised) became unpopular with large parts of the population as well as the governments supporters in labour unions; and in the summer of 2012 the government and the right wing opposition agreed on an income tax reform which for the first time in many years actually lowered the overall tax burden. In many ways, the tax reform marked a turning point in the tax debate, and the 2013-budget surprisingly included a cancellation of a number of unpopular taxes.
While Estonia has rebounded well from the crisis and is still an attractive destination for Nordic companies there needs to be a political thrive towards keeping Estonia’s competitive advantage. In the time were our close neighbours are discussing possibilities for making their economic environment more friendly to entrepreneurs, the local government has to react accordingly. Although being known for progressive and bold economic reforms, Estonia has become to a halt over the recent years. To battle the rising taxes and the growing public sector significant changes must be enacted. Unless necessary steps are made the current 10% public debt is only the beginning of a race to catch up with the Western Europe.
In the spring of 2013, the Finnish government held its half-way assessment, in which it reviewed and revised the government policy program for the remaining two years of its mandate, until the next general election in 2015. The main focus was again on the taxation of dividends. However, the proposal put forth by the government was met with so much criticism that even the leader of the Leftist party, one of the governing parties, turned against it. The government quickly published a revised proposal, but at the time of this writing, it is still unclear what the final rules will look like. It seems clear, however, that excise taxes such as taxes on alcohol, sweets and tobacco will be raised. The government is still trying to shrink the deficit and improve employment, but it is doubtful if it will be successful.
France fiscal and budget policy: The only thing really new in 2012 was the President
2012 has been an election year: President Sarkozy left office last May and President Hollande took over. As explained in our previous report, from a fiscal and budgetary standpoint, the programs of the two candidates were rather similar: to bring deficit down essentially through tax increases. As further detailed below, the new President added a layer of new taxes and did not significantly reduce public spending nor introduced structural reforms. Public expenditures have actually increased by 2.9%. The results were as expected: a deficit above the target, zero growth and a gloomy prospect for 2013.
The big picture
German fiscal policy is at present conducted under very favorable conditions. Capital flight into Germany during the Euro crisis has led to historically low interest rates on newly issued German public debt. Despite a not very low debt-to- GDP ratio of more than 80%, the absolute level of interest payments remains very low, and the share of interest payments in total public spending is not triggering any worries in the short or medium term. There are, however, also some risks in the seemingly very robust German fiscal situation. First and foremost, it is far from certain that low interest rates will remain on their historically low levels in the longer run. The emerging risk-sharing mechanisms within the Eurozone imply that fiscal problems of periphery countries could quickly translate into higher debt burdens for Germany itself. If on the other hand the troubles in the Eurozone are finally resolved, then the role of Germany as a safe haven for bondholders will also decline, and interest rates will rise to more conventional levels again. One way or the other, the country needs to prepare itself for the future by reducing public debt.
Germany’s fiscal policymakers are already preparing for the constitutional debt brake, which will come into full effect from 2016, and aims at reducing the scope for public deficits on the federal level to 0.35% p.a. (structural deficit), and at completely eliminating structural budget deficits on the sub-central level. While preparations for the debt brake are slow and behind schedule in some sub-central states, like the largest state Northrhine-Westphalia, the federal government is expecting budget surpluses in the near future. This is both due to a strong increase in tax revenue, as Germany is one of the few Eurozone economies not hit by a recession recently, but also due to a decline of public spending relative to GDP. This share, which had reached levels below 44% before the financial crisis and increased to more than 48% in 2009, is expected to return to 44% by 2016.
Meanwhile, the German tax system still suffers from a number of serious problems. The income tax schedule is generally considered to be too progressive for middle-income earners, and therefore associated with adverse incentive effects on labor supply. The problem of cold progression (see previous issue of the Yearbook), which could technically be solved by simple inflation-indexing of the income tax schedule, is still unresolved. Sub-central jurisdictions, both states and municipalities, suffer from structural underfinancing that could be resolved with an increase in sub-central fiscal autonomy. These are only some representative issues that wait to be tackled; more will be discussed in the following paragraphs.
The Greek governments had followed expansionary fiscal policies for many years. The government spending remained at high levels, chronic budget deficits continued, tax collection weakened, and public debt exceeded the size of the economy. The global economic crisis that started to take hold in 2008 exposed the structural weaknesses of the Greek economy. After the eruption of the debt crisis, Greece has embarked on an adjustment program, aimed at tackling the fiscal imbalances. As a result of this effort, Greece has experienced the largest fiscal consolidation among all countries of the Euro area. Given the state of the real economy, the fiscal consolidation, required to restore sustainable public finances, should rely on curtailing public expenditures and strengthening the tax collection, instead of further increasing taxes.