The hike in the value-added tax (VAT) in Bulgaria should be a last-ditch measure that should only be introduced in lockstep with an overhaul in government expenditure, macroeconomists and business people told finance minister Simeon Djankov yesterday.

Djankov, accompanied by his deputy Vladislav Goranov and Menda Stoyanova, who chairs the parliamentary budget committee, got together behind closed door with representatives of the business community, experts and MPs to discuss the government’s final set of measures to tackle the yawning budget deficit and shore up the economy.

Reporters were only allowed at the finance minister’s opening speech.

Djankov estimated the fiscal effect of the overall package -- in the form of extra revenue or cost savings -- at BGN 1.5 billion, or 2.3% of the projected GDP for 2010.

In the worst-case scenario, Bulgaria will run up a deficit of 5%, or BGN 3 billion.

Participants at the meeting said criticism was mostly aimed at the absence of a clear vision on how to rein in government spending.

If Parliament and the government approve an increase in the sales tax to 22% from the current 20%, this measures should be implemented for a single year and be combined with reforms designed to shave costs in the healthcare system, the pension system, the Ministry of the Interior, and the defense to enhance efficiency of the money spent by the state.

Unless these sweeping reforms are implemented, Bulgaria will fail to dodge a deficit next year, while the higher VAT will persist, participants in the meeting cautioned.

This opinion was echoed by Ivo Prokopiev, chairman of the Confederation of Employers and Industrialists in Bulgaria (CEIBG), who is also a co-publisher of Dnevnik.

“Generally speaking, no tax increases could do any good in a time of crisis but the VAT hike is the lesser evil,” said Prokopiev, who did not attend the meeting.

However, the measure must be coupled with pumping liquidity into the economy such as cost payment, new loans, and European financing as well as public cost cutting and privatisation, he pointed out.

At the meeting at the Sheraton Hotel, the alarm was sounded that unless the reforms are put into practice immediately, the ruling party GERB would lose next year’s local elections.