## _20_ **_PoUsh Feal Chists_**

points higher than forecast. Unit labor costs were, however, forecast fairly accurately. The forecast error for 1990 therefore amounts to an underestimate of the inflation bias. It is difficult to criticize this error, however; not only is the inflation bias difficult to estimate even ex post, but inflation in 1990 was in fact higher than forecast.

The 1991 budget ft recasted HCA profitability as the same as actual profitability the previous year (23.5% vs. 23.79%); the reality was quite different, as we have seen. The first point to note is that HCA profit gross of amortization allo% ances was actually predicted to increase in 1991 by about 3%, thus offsetting the increase in amortization allowances. Part of the forecasted increase was to come from a predicted decrease in unit labor costs, but most of it (about 2%) was to come from elsewhere.

Say that the forecast of 1991 unit labor costs had been correct (i.e. 16.8% instead of 22.6%). Then, ceteris paribus, actual profitability in 1991 would have been 12-13%, i.e. about 10-11% below the forecast. Also recall that above we estimnated the fall in the inflation bias in 1991 as about 8-10% of sales. Thus most of the misforecast for profitability amounts to a failure to allow for a fall in the inflation bias.

Unlike the forecast error t. previous .ar, the 1991 profit forecast can, in my view, be justifiably criticized as excessively optirmistic. It asumed implicitly that the inflation bias would not fall, but at the same time inflation was prt'dicved to fall. It also should have been clear from the past history of the enterprise sector that 20% + pioflt rates were an inflation-related anomaly. Profit rates prior to 1989 were a better guide to predicting erterprise profitability as high inflation rates moved into the past.

# **VIII.** THE CURRENT FIsCAL CRISIS: POLICY **OPTIONS** FOR INCREASING **TAx REVENUES**

Tle planned govermnent balance for 1992, based on the 1992 budget, was a deficit amounting to 5% of GDP. It now appears that this target will be overshot, and the cumulative deficit for 1992 will be 8% of GDP or more. In this section I want to discuss some of the policy options available on the revenue side.

# A. VAT and turnover tax

VAT will probably be introduced in mid-1993. It will replace the existing turnover tax. It seem clear that VAT should be aimed at raising more revenue that the turnover tax it replaces. Currently, the turnover tax labilities (excluding taxes on alcohol, tobacco and petroleum products) of the enterprise sector amount to about 10% of enterprise sector surplus." That is, VAT (excluding excise taxes on alcohol etc.) levelled at an average rate of 10% would raise about the same amount of revenue as the existing turnover tax. If we allow for zero-rating of VAT on exports (say 1/3 of value added), this would put VAT that simply replaced turnover tax revenues at an average rate of something like 15%.

> **18.** Calculated from 1991 data **as** follows (see **also** Figurs 2-3). Total turnover tax revenues * 60% = > **appi.** revenues excluding alcohol, tobacco, **petroleum** products. Enterprise sector surplus - basic wage bill + **bonuses** + **payol** taxes + profit **tax** + dividend + TIP tax + retained profit + turnover tax + **real estate tax.**