“We will act quickly to apply the new taxation project by shifting into fair taxation which will reduce taxes for 95 percent of Albanians and lift taxes for small businesses,” says expected Prime Minister Edi Rama
TIRANA, June 25 – After eight years in opposition, the Socialist Party is back in power this time with a coalition which has claimed a landslide victory over the Democratic Party of outgoing Prime Minister Sali Berisha. The left are back in power this time under the lead of opposition Socialist Party head Edi Rama, a former Tirana Mayor for three consecutive terms until 2011, and the Socialist Movement for Integration led by former Prime Minister Ilir Meta who in the past four years was in coalition with the ruling coalition.
The switch of power next September when the new government is formed will also be accompanied by changes in taxes which have been on top of the agenda by both major parties during the campaign of the June 23 general elections at a time when the Albanian economy is more and more suffering the consequences of global crisis impacts from top trade partners Italy and Greece and problems at home with sluggish consumption and lending, public debt at around 62 percent of the GDP and bad loans at a record 24 percent.
The opposition Socialists have announced they intend to apply progressive taxation when coming to power while the outgoing Democrats insisted on the 10 percent flat tax introduced in 2008.
Speaking to reporters on Monday, just when the opposition coalition had consolidated its victory, expected Prime Minister Edi Rama said one of the first things the Socialists will do is analyzing the real situation, the finances, the economy and the whole state structure. “For several years in a row there has been a criminal effort to manipulate statistics in order to cheat citizens through make-up of the real situation which in our opinion is much graver compared to what is made public by official data,” said Rama.
The new progressive taxation project and the transparency over privatization and concession contracts will be the first targets for the opposition Socialist Party.
“We will act quickly to apply the new taxation project by shifting into fair taxation which will reduce taxes for 95 percent of Albanians and lift taxes for small businesses. We will act fast with a facilitating package on farmers to reduce their production costs and remove VAT on basic products and medicines and reduce household electricity prices. We will also launch a transparency process on concessions and privatizations suspected of favours at the expense of Albanians,” Rama told Deutsche Welle in the local Albanian service.
The Socialist Party has promised to create 300,000 jobs in the next four years focusing on the manufacturing, agriculture and tourism sectors.
10% flat tax to be preserved only for company profits
At the start of the electoral campaign in late May 2013, opposition Socialist Party leader Edi Rama clarified that the Socialist Party intends to apply progressive taxation only on personal income tax and dividends but not on company’s profits. Rama said only the 10 percent profit tax would be preserved from the current 10 percent flat tax on personal income and corporate taxes introduced in 2008 by the ruling Democratic Party.
“We are not in favour of progressive taxation when it comes to company’s profits,” said Rama adding that profit tax will be cut for small businesses and remain at 10 percent for big businesses.
The Socialist Party says 95 percent of Albanians will save money from progressive taxation and has also made available an electronic calculator on its website where citizens can calculate how much they currently pay in personal income tax and how much they will pay under the Socialists. The new system the Socialist Party has proposed foresees progressive taxation of up to 10 percent for monthly wages of up 140,000 (Euro 978) and 13 to 22 percent for wages from140,000 lek to more than 300,000 lek (Euro 2,095).
The Socialist Party also says it will lift the 20 percent value added tax on a series of basic products and reduce VAT on agricultural inputs. The Socialist Party leader says he intends to resume cooperation with the IMF to draft a new growth model based on production, services and rural development which he says will create 300,000 jobs.
Ahead of the June 23 general elections, the ruling Democratic Party lifted the 10 personal income tax only for people receiving monthly wages of up to 30,000 lek (Euro 210) and said it will continue applying the 10 percent flat tax on personal income and corporate taxes as a successful reform increasing the country’s competitiveness.
Under a recent law, private sector employers who hire young men and women aged from 16 to 30 years old have had compulsory monthly social security and health insurance contributions covered by government in case they employ them under six-year contracts. Social security contributions currently stand at 24.5 percent, of which 15 percent is paid by employers and 9.5 percent by employees. Meanwhile, health insurance contributions are at 3.4 percent, shared by 1.7 percent between employers and employees. Ahead of the elections, the ruling majority also halved annual car taxes and lifted the 20 percent VAT on imported machinery and equipment for investments of Lek 50 mln (Euro 351,000) or more.
Fiscal consolidation to curb
public debt
With one of the highest public debt levels in the region, economy experts warn Albania faces tough times ahead and will have to embark on a fiscal consolidation reform in order to preserve macroeconomic stability and maintain market confidence.
Currently hovering at around 62 percent of the GDP, the Albanian public debt is among the highest in the Central and Eastern Europe, second only to EU member Hungary, posing a heavy burden on public finances, according to the World Bank.
Erjon Luci, an Economist at the World Bank Country Office in Tirana, says that this situation leaves little space to maneuver and respond to crisis shocks and increases the debt service cost. “Albanian spends around 3.3 percent each year on public debt interest rates, which could be used for more productive goals such as public investments. If the pace of public debt growth exceeds the GDP growth rates, financial markets could decide that it is too dangerous to finance this debt if it fails to produce economic growth,” warns Luci.
“A credible debt target and sustained but gradual fiscal consolidation over the medium-term, would provide a good signal of the government’s commitment to debt sustainability, thereby improving confidence, lowering public sector borrowing costs, and at least partly offsetting any adverse short-term demand effects from fiscal consolidation,” says Nadeem Ilahi, Mission Chief for Albania, IMF.
Foreign business communities
More than half of companies represented by the American Chamber of Commerce in Albania consider the current business climate in Albania as unfavorable and two-thirds of them expect it to deteriorate, according to results of the first AmCham Business Index.
Last April, a survey published by the German-Albanian Chamber of Commerce (DIHA) showed 64 percent of surveyed companies perceived the economic situation negatively for 2013, a sharp increase compared to last year. However, a majority 87 percent of companies which invested in Albania said they would invest again in the country. Albania received the lowest ranking among 20 countries in the survey regarding the attractiveness as business location – elected by 1,600 companies in Middle and Eastern Europe.
Albania lost three places in the Doing Business 2013 report although making it easier to start a business and pay taxes, according to a new report released this week by the World Bank and IFC. The report ranked Albania 85th among 185 economies, three places worse than in 2012, sandwiched between Croatia and Serbia but far worse compared to neighboring Macedonia and Montenegro which rank 23rd and 51st respectively.
Economic prospects
The Albanian government expects the economy to grow by 3 percent in 2013, twice higher compared to what international financial institutions have forecast. Poor performance in the first quarter of this year indicates government will make budget cuts and revise its GDP growth forecast downward for the fourth year in a row.
At 1.6 percent in 2012, Albania registered its lowest annual GDP growth rate since the collapse of the notorious pyramid schemes in 1997, and almost half of the average growth rate during the global crisis year from 2009 to 2011. International financial institutions expect the Albanian economy to grow between 1.8 percent to 3 percent in the next three years, citing high public debts and spillover impacts from Euro area.
Public debt at 62 percent of the GDP, sluggish domestic consumption affected by less remittances from top trade partners Italy and Greece, bad loans at 24 percent and lending striving to maintain growth rates are some of the key worries of the Albanian economy. Both business and consumer confidence stand a low level affected by a decrease in purchasing power. Unpaid bills to private companies contracted for public works estimated at around Euro 200 million is another barrier.
