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Hanke Praises Bulgaria for Saying No to VAT Hike

Date: 02.07.2010

Steve Hanke, a renowned economist, known best in Bulgaria as the architect of its currency board system, has said the country took the right decision by refusing to increase its VAT.

"Unlike neighboring Bulgaria, which did exactly the right thing by refusing to increase its VAT, Greece has increased its VAT twice since the crisis,“ Hanke writes in his latest article in the Wall Street Journal Europe, entitled “A Big Bang for Greece”.

The article points out that the Greek government has not started with what they should be doing, but with a standard IMF-type austerity program.

“The government has promised to cut public expenditures. It has also raised taxes,” Hanke says.

According to the economist Greece should have started with a Big Bang, doing a number of things simultaneously a la New Zealand, as well as reschedule its debt.

After a series of U-turns Bulgaria's government decided at the end of May to scrap plans for a VAT increase in a bid to plug a budget gap that has thwarted the new EU member's efforts to join the euro in the near future.

The VAT increase has been a thorny issue in Bulgaria in the last few months with the cabinet changing their mind numerous times and several versions tossed around, ranging from 22 to 24 %.

The VAT hike was proposed as part of a package of new austerity measures, which also include the introduction of a luxury tax, floating minority stakes in state-owned companies and a possible bond issue.

Politicians, analysts and trade unions took a firm stand against the hike, citing a long line of negative repercussions – an increase in the inflation rate, an expansion of the grey sector, a slow-down in the economic growth, in short a boost for the impact of the crisis.

Representatives from all business sectors cautioned that the hike in the value-added tax in Bulgaria should be a last-ditch measure, introduced only together with an overhaul in government expenditure and structural reforms.

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