Optimistic budget scenario okayed amid concern over new tax hikes

“The theory of raising taxes in times of crisis is not productive. Policies should target and promote lending, consumption and foreign investments which bring more employment and are the only way leading to economic growth,” says Nikolin Jaka, the chairman of the Tirana Chamber of Commerce.
TIRANA, Nov. 18 – In a bid to bring the economy back to sustainable growth, the Socialist Party-led left wing majority has approved a rather overoptimistic budget for 2015, expecting a 3 percent growth and a slight reduction of public debt already hovering at 70 percent of the GDP at a time when the country’s economy continues suffering crisis impacts with the GDP having grown by only 0.56 percent in the first half of this year.
Government’s optimistic scenario is based on the increase of two key taxes and reforms in the energy and pension systems whose huge deficits take hundreds of millions of euros from the state budget. However, the heavy fiscal burden with the corporate income tax which will continue remaining at 15 percent, the rise in the withholding tax on non-wage income and the increase in the circulation tax on fuel has further angered the business community which claims such measures will have a negative impact on the country’s economy and its attractiveness of foreign direct investment.
Speaking in Parliament this week, when the majority approved the budget in principle as the opposition continues its boycott, Prime Minister Edi Rama said the 2015 budget and fiscal package supports economic growth without applying tight measures.
“This is a budget with well-defined standards and realistic solutions to achieve our minimum target of 4 percent growth target at the end of our mandate in 2017,” said Prime Minister Rama.
Reacting to accusations of tax hikes in times of crisis by the opposition Democratic Party and the business community, Rama said “this is not a budget which raises taxes but a reflection of a fiscal package which lifts 15 taxes and raises only three. It is directly related to the necessity to promote production, employment and support to those who are engaged in entrepreneurship.”
The opposition Democratic Party which has been boycotting Parliament over the past few months has warned it will stage a protest against the new tax hikes on Nov. 22, arguing that the new fiscal package would curb economic growth and affect every Albanian.
“This is a fiscal package which ruins economic growth, ruins hopes that SMEs and corporations can invest to increase their production capacities and open up new jobs,” says opposition Democratic Party leader Lulzim Basha. According to him, every Albanian household will be taxed an extra 67,000 lek (Euro 472) annually under the new fiscal package.
Democratic Party MP Jorida Tabaku says Albanians will pay an extra $460 million in taxes in 2015 from the increase in nine taxes. “The budget has been drafted in such a way that it places the heavier tax burden on consumers who the same as in 2014 will continue suffering the decline in consumption and the increase in prices,” she said.
According to the opposition, the lift of import duties on flour and wheat will damage domestic production while Albanians will also pay an extra 5 billion lek (Euro 35 million) from the increase by 5 percent to 15 percent in the non-wage income.
Business community concerned
With the new fiscal package ready to get the final okay in Parliament, the business community has reiterated its stance against the newly introduced taxes as harmful to the economy and damaging foreign direct investment.
In its 2015 fiscal package, government plans to increase by 5 percent to 15 percent the withholding tax on dividends, interest rates on loans and deposits, income from copyright or intellectual property, games of chance as well as other rewards. The fuel circulation tax will increase by another 10 lek (12 lek VAT included) (Euro 0.084) taking fuel prices to among the highest in Europe. The excise rate on cigarettes will also undergo a new hike.
“The new package mostly affects regular taxpayers. The fiscal burden is placed on regular taxpayers and this is a great concern to our members. Under conditions when the tax evasion continues remaining high, the increase in these taxes, apart from placing a new burden on businesses, gives another incentive to informality to continue remaining at high levels. We will strongly demand that the withholding tax and the tax on dividends is not affected,” say representatives of the American Chamber of Commerce.
The Tirana Chamber of Commerce has also expressed its concern over the impact the new taxes would have on the attraction of foreign direct investment, already in decline this year after the corporate income tax was raised to 15 percent affecting the competitiveness of the Albanian economy considering that most regional countries apply flat tax regimes of around 10 percent.
“The theory of raising taxes in times of crisis is not productive. Policies should target and promote lending, consumption and foreign investments which bring more employment and are the only way leading to economic growth,” says Nikolin Jaka, the chairman of the Tirana Chamber of Commerce.
The shift to progressive taxation, government’s freeze of its stimulating policy on investments on hydropower plants and lack of privatization revenue moderately affected foreign direct investment during the first half of this year. Foreign direct investment dropped to 183 million euros in the second quarter of 2014, down from 197 million euros in the final quarter of 2013 and 286 million euros in the second quarter of 2013, according to revised Bank of Albania data.
112 mln in tax hikes
Albanians will pay an extra 16 billion lek (around 112 million Euros) in higher taxes on non-wage income, fuel and tobacco in 2015, according to the 2015 fiscal package government has just announced.
While key taxes such as the personal and corporate income taxes will remain unchanged, defying businesses calls for a return to the flat tax regime after the corporate income tax was raised by 5 percent to 15 percent in 2014, the fiscal burden will further increase by raising the withholding tax on dividends and rents, increasing the circulation tax on fuel and imposing higher excise rates on tobacco.
Government says it has allocated 1.6 billion lek (Euro 11.3 million) in compensation to people in need for the expected increase in electricity prices in 2015 but has not announced the new unified rate yet after confirming it will lift the 300 kWh threshold charging lower tariffs. The reform would affect around three-quarters of Albanian households with a monthly consumption of 300 kWh.
Growth targets
The left-wing Socialist Party-led government expects economic growth to gradually recover to 3 percent in 2015 and accelerate to 4 percent in 2016 and 4.5 percent in 2017. For 2014, government and the IMF which is assisting with reforms to achieve sustainable growth, expect growth at 2.1 percent despite the economy having registered sluggish growth in the first half of this year. The slight shrink in the second quarter of the year means the Albanian economy has grown by only 0.56 percent in the first half of 2014, which is the worst performance in the past six crisis years, and that the road to recovery for the Albanian economy will be long and require key reforms.
The Albanian government expects a 12 percent increase in revenue in 2015 with total income at 414 billion lek (euro 2.92 billion), up 50 billion lek compared to the projected 2014 budget.
Government plans to spend 475 billion lek (Euro 3.35 billion) in 2015. The budget deficit is expected to drop to 4 percent of the GDP, down from 6.6 percent in 2014 while public debt will for the first time in the past global crisis years slightly drop to 70.6 percent down from 71 percent. Public investments estimated at 80 billion lek (Euro 564 million) or 5.4 percent of the GDP will focus on tap water, energy, innovation and ICT, tourism and road infrastructure.
Finance Minister Shkelqim Cani said the 2015 budget supports sustainable economic growth and employment and reduces risks by reducing public debt and reforming the energy sector.
“We have committed to reduce public debt from 71 percent of the GDP currently to 65 percent of the GDP in 2017. The debt reduction eases the burden of the state budget because of reducing its cost and risks to the economy,” said Cani.
Newly revised data also shows the Albanian economy grew by an average of 2.6 percent annually during the 2009-2013 crisis years compared to a pre-crisis decade of an average 6 percent, being one of the best performers in the region, according to INSTAT.