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Socioeconomic Commentaries

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What's in their for us in the draft budget for 2005?
Iurie Gotisan, 3 November 2004

The recently approved draft budget, which was said to be socially-oriented and pursuing objectives outlined in the Government Action Plan, is yet another evidence to Governments' incapacity to translate Communist Party's ideological message and political preferences into a budgetary vision. As it is primarily a political document and given approaching elections, the spending for the budgetary sphere has rose insignificantly by 340 million Lei, in particular for education, healthcare, and social security.

Moreover, considerable funds are to be allotted next year to special state services, public order, national defence - 23% of the total budget spending. Excessive funding of the force structures speaks for itself - incumbent power seeks to improve social-economic conditions in a rather specific manner, rather than by passing and enforcing laws that would spot and prevent various forms of corruption and embezzlement.

On the last 100 metres, budget for this year might be further undercut by some unforeseen spending that the Government had to assume. On top of that, during last week Government session Minister of Finance announced that due to the failure to collect all forecasted taxes, there was a budget "whole" worth 1 billion Lei in the state budget for this year. Having said this, it is very likely the macroeconomic targets set for the next year would not be met.

The fact that Moldova doesn't have a functional market economy would make all the problems even worse in an electoral year and would likely undermine all the social-oriented "moves" envisaged in the draft budget for 2005. The mere mention of "elections" brings the draft budget in the centre of electorate and contestants' attention with both of them seeking to exploit it to their own advantage, i.e. the former to ask the latter to provide or promise.

If we are to look back at the developments since September, the first to claim their rights were teachers who threatened to go on strike. And the timing was perfect, beginning of the school year. Government yielded and raised wages by 20%. On top of that on the last 100 metres before draft budget approval, Government took over even more of a burden: indemnifying pensions; raising allocations, compensations and indemnities; all in all an estimated at 890 million Lei. What the Government didn't do was to take into account fluctuating prices on raw materials and oil on the international market.

All of the aforesaid would wield a heavy pressure on achieving the targets set for the next year, namely: a 6% economic growth and keeping inflation below 9%. It's difficult to asses the impact of the swelling budget spending, as nobody works seriously with economic modelling in Moldova and there is not enough statistics data.

Early this year, a part of the healthcare employees agreed to adjourn negotiations on wages for the next year, however they have changed their mind lately seizing the right moment. As one government official put it, one cannot go to the polling stations when people are rallying nearby. Therefore, Government would have again to dig deep into its pockets and come up with new amendments to the draft budget so as to ease the spirits.

Yet once again, ruling party's generous promises are confronted with economic realities. Previously, ruling party's generosity was tempered by financial isolation brought by worsening relations with international monetary organisations. Recent decisions of the International Monetary Fund, currently with a mission in Moldova, to adjourn discussions on our country spoiled any hopes for an aid from abroad, or at least for an aid in the first half of 2005. Moldova would find it difficult to service foreign debt as well as to finance foreign deficit, i.e. trade balance and current account deficit.

Draft budget for 2005 promises lowering fiscal burden for legal and natural entities alike. In particular it promises to cut by 2% the income tax for legal entities, from 20% in 2004 to 18% in 2005; and income tax quotas for natural entities from 10%, 15% and 22% in 2004 to 9%, 14% and 20% in 2005. Ministry of Finance estimated that the move would roughly cost 1 billion Lei. Potentially, the move would pay back by surging investments from Moldovan business.

Apparently, the state lets the fiscal burden loose. In reality, envisaged moves would not reform taxation system, while their impact remains unclear. Moldovan officials keep promising jobs and wage-raise. However, draft budget paints a less robust picture, social contribution would drop from 28% to 27%, healthcare insurance would go up by 2%, and most importantly the idea of a single taxation quota was abandoned.

Reinvesting profits, amidst lowering income tax from 20% to 18%, would rather be a constraint. An income tax as low as 18% might lure foreign investors. If this was the intention of the Government, then it fades when compared to 15% income tax in the region. On the contrary, ambiguous laws, bureaucracy, not to speak of the rule of law would scare any investor away.

Although it is said to be socially-oriented, the current draft budget follows fiscal and budgetary policies of the previous years. One of the rules of economic policies says that budget is a financial reflection of the state policies, but it seems this rule doesn't work in Moldova. Macroeconomic indicators used in drafting the budget for the next year, which Prime-Minister likes bragging about, have induced ecstasy among legislators. Unfortunately, Moldovan economy is not as healthy as Tarlev's Government wants to see it. Allegorically speaking, there is only one step to go from ecstasy to agony.






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