The elections are a threat to public debt

The elections are a threat to public debt
This article has been written for Albanian Free Press newspaper and www.afp.al

By Eduard Zaloshnja

When IMF allocated to the Albanian government a low interest loan of 400 million USD (three years ago), the condition was that it should gradually decrease public debt (as percentage of GDP), because debt was becoming dangerously high. Along with the government, experts of IMF made a projected public debt in the years to come, but as you can see from chart 1, the actual performance of public debt (as a percentage of GDP) has never been in line with the forecast of IMF and government.

According to the government’s and IMF’s projections, the level of public debt at the end of 2016 should have been 69,2%, while current debt is 71% of GDP. This level is considered to be dangerous for a country like Albania, because its ability to pay debts is weak.

Thus, if budget incomes were spent on the payment of the accumulated debt, instead of normal government expenses (salaries, pensions, investments, etc), it would take 2,6 years for Albania to pay back its debts. Meanwhile, Greece (which has been recently rescued three times by the EU and IMF), would need 3,6 years, while Montenegro would need 1,6 years (IMF suggests that developing countries should keep this indicator under 2,5).

The reason why public debt has not gone down to the figure projected by IMF,  is that budget revenues are not any closer to expenses (chart 2). The closer revenues are to expenses, the less need there is to borrow. But the problem relates to the fact  that debt is decided through a special law when the budget is approved at the beginning of the year (with the IMF’s oversight), while revenues can only be projected. And as you can see in chart 2, the growth of revenues has not been at the pace required to catch up with expenses.

In fact, at the start of 2016, revenues (27% of GDP) came very close to expenses (28.7% of GDP). If this trend continues, then Albania can deliver its long term objective: to reduce public debt to 60% of GDP until 2019.

But the elections and the finalization of the three year program with IMF are likely to mount pressure and increase expenses and reduce revenues. And when there are fewer available incomes to afford the great expenses, then there’s a need to borrow more.

Thus, the DP promises a 15% VAT and a flat tax of 9% on personal earnings and profits for businesses. In 2008, the best fiscal year for DP, budget revenues amounted to 27% of GDP, while VAT was still high at that time (20% and not 15%) and the flat tax was 10% and not 9%. (Let us not forget that the DP ended its term in office with revenues amounting to 24% of GDP). In other words, the reduction of VAT to 15% and a flat tax of 9% would take budget revenues lower than the current level, which is 27% of GDP.

On the other hand, the DP promises extra expenses for every social group from which it is expected to win votes (increase of salaries, pensions, etc) and investments similar to the ones in 2008. But however the management of expenses is improved (through the reduction of corruption), we must not forget that in 2008, the level of budget expenses was 32% of GDP.

This means that even if DP performs the same as in 2008, a democratic government would increase public debt by 5% of GDP since the very first year of its term in office (32% expenses minus 27% of revenues).

Given that the DP is promising tax reduction and increase of expenses and investments (regardless of what may happen to public debt), ahead of the elections, the government, on the other hand is offering/will offer tax amnesties, increase of salaries and pensions and is increasing/will increase budget investments.

This may increase public debt as a percentage of GDP, instead of reducing it…

The republication of this article is strictly forbidden without a written permission from the Albanian Free Press newsroom

Note: The views expressed in this article are the author's own and do not necessarily reflect Albanian Free Press’ editorial policy.

Shpërndajeni me miqtë tuaj: