TIRANA, June 14 – The electoral platforms of Albania’s three largest parties, the ruling Socialist Party, the opposition Democratic Party and the third largest Socialist Movement for Integration do not provide the necessary instruments to support sufficient economic growth and make unjustified promises, a study has shown.
“There are no clear priorities on well-financed reforms on education and health as two sectors with priority importance for the country’s development,” says a study conducted by the newly launched Pashko European Institute, a Tirana-based think tank named after Gramoz Pashko, a late Albanian economist and politician who led the country’s shock therapy in the early 1990s when the communist regime and its planned economy collapsed. The Institute is led by Selami Xhepa, a renowned economist who also previously served as an MP.
“The electoral programs make unjustified promises when it comes to financial resources which is dangerous from the point of view of financial stability. The positive thing in the electoral programs is the trend among the three parties to offer lower taxes unveiling the need for a return to the flat tax,” adds the report.
The report comes as campaigning for the June 25 general elections is already in full gear following a late May deal between the two largest parties paving the way for a caretaker government to handle the upcoming elections. The long-awaited deal also put an end to a three-month political deadlock and possible boycott of elections by the opposition, which would have increased political and economic uncertainties in the country.
The ruling Socialist Party has promised to create some 220,000 jobs for the next four years, admitting that they missed their 300,000 new jobs target for the past four years when they claim to have opened up 183,000 jobs.
Meanwhile, the opposition Democratic Party is offering a sharp cut in taxes in a bid to trigger investment and consumption. The opposition’s electoral program offers a 9 percent flat tax on personal and corporate income, a reduction in the key value added tax by 5 percent to 15 percent and a zero dividend tax.
The smaller Socialist Movement for Integration, a kingmaker in the past two general elections, is also promising to create some 170,000 new jobs and offer lower taxes.
Since 2014, when Albania abandoned its 10 percent flat tax regime, the corporate income tax and the withholding tax on dividends, rents and capital gains have increased by 5 percent to 15 percent, making the tax burden in the country one of the region’s highest.
Experts have earlier warned fulfilling the promises would require an economic growth at least twice higher compared to current 3.5 percent growth rate for several years in a row and reforms strengthening rule of law in order to boost investor confidence and attract FDI in key sectors. Mid-term prospects show Albania’s GDP growth will not be higher than 4.3 percent until 2020, making the delivery on these promises within the next four years an unlikely scenario.
Unlike previous elections, no pre-electoral coalitions have been formed ahead of the elections, and all major three parties, the ruling Socialist Party, the opposition Democratic Party and the Socialist Movement for Integration, the third largest Party which has emerged as a kingmaker since 2009, will be running alone, making the winning coalition a bid difficult to predict, at a time when a grand coalition between the two biggest parties is also possible following the recent last minute deal between the two main political forces over a caretaker government to handle elections and a series of major reforms.
Below are the findings and suggestions of the Pashko European Institute for the June 25 elections:
1. The Pashko European Institute appreciates the positive climate the general elections are being held thanks to the political agreement between the country’s main two political forces, the ruling Socialist Party and the opposition Democratic Party. That brings a political and social context that promotes the country’s stability, creates necessary space for public debate on important issues facing the country’s economic and social life and gives way to positive future expectations.
2. In order for the main governing parties to communicate transparently with the public and be held accountable to public opinion, the electoral programs should be published and the public have online access to them. Unfortunately, not all parties have fulfilled such an obligation, even though they could have programs drafted by their political teams which are referred to by political leaders in their speeches.
3. The Pashko European Institute considers it a right approach the assessment that the three largest parties have regarding to taxation policies, especially on the income and capital tax. The increase in income and capital tax has had a negative impact both on the promoting employment and failure to make use of the capacities the economy has to attract more private, domestic and foreign investment. Expressing our preference for the revised return of the flat tax, we also support the initiatives of the two other political forces that preserve progressive taxation, but producing a considerable reduction in the tax burden. More specifically, the reduction of the profit tax and other sources of income to not more than 10 to 12 percent would be a significant ease in the businesses’ tax burden. This maximum level of taxation should be unified even for personal income for high income earners, as this is the only way to prevent tax evasion practices in reporting personal income. On the other hand, tax reductions or exemptions on consumption (VAT), have proved to be inefficient in stimulating consumption or cutting prices as an incentive for people in need. We believe people in need can be assisted more efficiently through higher government spending or earned income tax credit for low income earners. On the other hand, cuts in all kinds of taxes and strong cuts, would have a destabilizing effect on public finances and should therefore be avoided.
4. The Pashko European Institute estimates that the most serious concern facing the country’s economy is the explicit commitment of political forces to preserve unaffordable public debt levels. We think that public debt could by the end of 2021 possibly drop to 65 percent of the GDP and to 60 percent of the GDP by 2025. Every policy of tax maneuver putting this target at risk, would pose an eminent risk to the country’s economic and financial stability and be a danger for budgetary crisis with serious economic and social consequences. On the other hand, the debt reduction under this softer trajectory allows for sufficient space for active economic activity and strong supportive public policies.
5. Regarding the public investment priorities, the Institute thinks that education and health should be absolute priorities and intervention through policies and financing should be considered as emergencies. Unfortunately, the liberalization of these two sectors has not managed to produce competitive markets among service providers, at a time when public education and health services remain problematic. The policymaking and monitoring capacities remain weak and the services provided strongly underfinanced. The populist stances that are often publicly articulated, do not offer solutions that the society needs, but on the other contrary, further deteriorate the situation in the education and health sectors. There is a global initiative in developing countries that spending on education should increase to 6 percent of the GDP by 2020 and Albania should by all means get closer to this target. On the other hand, creating incentives for private operators offering public services should also be given space in the parties’ political programs. Reforms in these sectors should be oriented toward service and infrastructure quality and not quantitative indicators. That’s why the reforms should be qualitative when it comes to the content changes.
6. Structural domestic business climate reforms, which in most cases have no cost but unfreeze funds currently used in inefficient projects or agencies, should be specific, well-targeted and with measurable targets of the results they will produce. Thus, the programs should shift from input measures and indicators to output indicators. For example, reforms on improving competitiveness will improve the country’s ranking in the categories Albania lags behind other competitors.This way of drafting programs would be clearer and more transparent to monitor the targets that the country intends to achieve after the next four years. To date, electoral speeches mainly focus on tax incentives while neglecting (de)regulatory reforms and other measures of structural character.
7. Considering that employment is a major concern for the society, especially the younger generation, the Pashko European Institute recommends that employment promotion policies should be accompanied with concrete targets of increasing private sector wages. Employment that leaves people in poverty cannot be considered efficient employment, especially when it leaves the Albanian society at an underdevelopment stage.
8. Lastly, a small government with a small number of policy-making ministries and enforcement, controlling, monitoring and supervisory agencies, well-financed and well-equipped with the necessary resources to fulfill its mission, is in the public’s best interest. Even this important concern has not been duly reflected in the parties’ programs. The Institute suggests that political forces should mull over concrete alternatives and solutions.
