With the electoral campaign already underway after the overcome of a 3-month political deadlock, all three major parties, including the Socialist Party and the Socialist Movement for Integration which led the country for the past four years are offering lower taxes for the upcoming June 25 general elections. The move of the two left parties has been apparently triggered by a sharp cut in taxes that the main opposition center right Democratic Party is offering.
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.
The main ruling Socialist Party of Prime Minister Edi Rama which led the country for the past four years when Albania’s tax burden became one of the region’s highest, after keeping the tax policy unchanged for 2017 has recently come up with some changes that would slightly ease the tax burden and trigger employment. In its electoral program, the ruling Socialists seeking a second consecutive term, promise 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.
Critics believe that the 183,000 jobs the ruling Socialists opened up were mainly a result of a nationwide campaign against informality formalizing jobs that already existed. They also blame Prime Minister Rama for the massive outflow of about 100,000 people, about 3.5 percent of the country’s resident population, leaving Albania in the past three years to seek asylum in EU member countries, mainly Germany.
In its 2017-2021 electoral program, the Socialist Party brings back its 2013 promise of free healthcare although a series of controversial concessions the government has awarded for the next ten years are expected to cost taxpayers hundreds of millions of euros under which the government will either pay the cost of the investment in installments or guarantee the revenue of concessionaires.
“The acceleration of sustainable economic growth, the implementation of the justice reform, the further consolidation of state institutions, the strengthening of rule of law, increased investments, the application of incentives in priority sectors as well as interventions to ensure a more qualitative labour market supply will be the key factors enabling the creation of some 220,000 jobs,” says the Socialist Party.
The Socialists are also promising incentives for the IT sector with a differentiated 5 percent corporate income tax, down from a current 15 percent and a lower tax burden for high income earners with monthly wages of more than 130,000 lek (€958) whose progressive tax rate will drop to 18 percent down from a current 23 percent, which is estimated to have triggered informality by discouraging the declaration of real income with tax authorities.
Prime Minister Edi Rama says the Socialist Party needs to win the minimum 71 out of the 140-seat MPs alone in order to steer reforms, especially the much-rumored vetting of judges and prosecutors as part of a justice reform.
“The same as we fought and won the vetting, we will fight and win to make the economy and employment grow like never before. We achieved a lot, but much more remains to be done. But there is still much to lose if the Socialist Party doesn’t steer reforms on its own without others on its back,” Prime Minister Rama has been writing on these first days of campaigning.
The Socialist Party is also promising a lower dividend tax.
“We will continue applying the current corporate income tax, but will lower the dividend tax to 6 percent,” said former Socialist Party Finance Minister Arben Ahmetaj. Last May, Ahmetaj was one of the incumbent ministers replaced with six caretaker ministers proposed by the opposition Democratic Party to pave the way for the June 25 elections after the opposition had threatened to boycott elections unless a caretaker government was formed to guarantee free and fair elections.
The government also recently cut the value added tax applied on accommodation units to 6 percent, down from a previous 20 percent, making the country’s tourism more competitive in terms of the tax burden compared to regional countries already applying differentiated tax rates.
The ruling Socialists undertook several reforms in the energy and pension systems, cut the number of local government units under an administrative and territorial reform and fought informality under a rather aggressive nationwide campaign accompanied by a sharp increase in penalties later turned down by the country’s Constitutional Court as “disproportionate” to income and offences committed.
Public finances also recovered thanks to an IMF supported program and accumulated unpaid bills to the business community were cleared, but public debt at about 70 percent of the GDP and credit struggling to return to positive growth due to high level of NPLs remain key barriers for the Albanian economy which has been growing by 1 to 3 percent in the past eight years compared to a pre-crisis decade of 6 percent annually. Last year, the Albanian economy recovered to 3.5 percent but that was mainly thanks to some major energy-related investment such as the Trans Adriatic Pipeline.
Experts say the Albanian economy, one of Europe’s poorest, needs to grow by at least 6 percent annually in order to produce welfare for the country’s households.
The opposition Democrats who ended their three-month protest following a last-minute foreign-mediated deal leading to a government led by Prime Minister Edi Rama but with some caretaker ministers are focusing their campaign on a so-called New Republic that pledges to return the country to rule of law, uproot massive cannabis cultivation, cancel some controversial concessions in the health sector and a controversial higher education law and offer lower taxes.
The tax policy, a key concern for business representatives after Albania’s tax burden became one of the region’s highest after abandoning its 10 percent flat tax in 2013, is one of the key pillars of the main opposition Democratic Party’s electoral platform which is offering a 9 percent flat tax.
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.
Democratic Party leader Lulzim Basha says the opposition’s electoral program offers a 9 percent flat tax on personal and corporate income and a reduction in the key value added tax by 5 percent to 15 percent.
“There is no and there can be no strong government without a strong economy. But how did Edi Rama destroy the economy? It was with high taxes and violence and Europe’s highest fuel and electricity prices,” says opposition leader Lulzim Basha.
“The New Republic will represent the 9 percent flat tax, the 15 percent value added tax, a 1.5 percent turnover tax in central and local government taxes on small businesses and no inspections, a zero dividend tax so that 1 billion euro that is currently abused, robbed or lost because of informality and the bankruptcy of businesses each year is injected into the Albanian economy and triggers positive energy, the employment of Albanians and higher wages,” Basha said at the opening of the electoral campaign last weekend.
At 36.5 percent of profit, Albania’s total tax rate is slightly lower only compared to Serbia’s 39.7 percent among EU aspirant Western Balkans countries, according to the latest World Bank’s Doing Business report.
The opposition Democrats says their ambitious and realistic program brings economic recovery, establishes the appropriate business climate and boosts confidence among consumers, citizens and youth.
“We will offer fiscal incentives on priority development sectors, businesses that create jobs with decent salaries in key economy sectors such as tourism, technology and innovation,” Basha has said.
A former foreign, interior and transport minister as well as Tirana Mayor, Basha is a 42-year-old politician who in 2013 succeeded Sali Berisha as Democratic Party leader following his resignation from the party he founded in the early 1990s as the communist regime was collapsing.
The opposition Democratic Party leader has also pledged a review of what he has called “clientelistic and monopoly concession contracts” that the Socialist Party-led government has signed in the past four years, putting a huge burden on taxpayers and an end to “luxury spending on facades, cars, furniture and travel allowances.” The opposition is also offering benefits for households receiving social assistance who will also have a monthly 200 kV of electricity, their water supply bill and children’s textbooks covered through the state budget.
The opposition takes to the upcoming mid-2017 elections after two consecutive heavy defeats in the 2013 general elections and 2015 locals and most recently in the by-elections for the Dibra and Kolonja municipalities.
The center right opposition Democrats, who have ruled the country from 1992 to 1997, soon after the country’s communist regime collapsed and from 2015 to 2013, occupied only about a third of the 140 seat Parliament dominated by the Socialist Party and its junior ally, the Socialist Movement for Integration (SMI) during the past four years.
Socialist Movement for Integration
Having emerged as a kingmaker since the 2009 elections, the center left Socialist Movement for Integration (SMI), established in 2004 as a splinter of the then-ruling Socialist Party, has been constantly growing over the past 13 years of its existence. The SMI is heading to the upcoming general elections with a new leader, former health and justice minister Petrit Vasili, after its historical leader, former Prime Minister and Parliament Speaker Ilir Meta was elected as the country’s president in late April and resigned as party head before he takes over as new president next July.
With all parties running outside coalitions for the upcoming elections, the SMI has also unveiled its electoral promises focused on lower taxes and creating new jobs.
“The SMI with its economic and social transformation platform will unleash the full potential of the Albanian economy to create 170,000 new jobs in the next four years in the most vital sectors of the economy such as agriculture, tourism, infrastructure, industry and services, of which 100,000 new and well-paid jobs will be available for young Albanians,” says the SMI program.
The SMI is also offering progressive taxation of 5 to 10 percent for SMEs and big businesses as well as reduced 8 to 10 percent personal income tax, a 10 percent VAT on basic goods and higher support for the tourism, road infrastructure, the IT and the education and healthcare sectors.
“This platform brings back optimism and gives youngsters big reasons to build their future here. With this clear and concrete program, economic growth potential is for a 7 to 10 percent growth rate which will be tangible for every Albanian,” says the new SMI head Petrit Vasili.
Former SMI leader, incoming president Ilir Meta is optimistic the SMI will get at least 34 MPS in the upcoming elections, which is a quarter of the current MP, strengthening its position as a kingmaker in Albanian politics.
“Based on the 2015 local elections results, the SMI gets 34 MPs nationwide. Two years on, it is understandable that growth could be at a maybe unpredictable progression,” Meta has said.
Election result, tax uncertainties
Albania’s business climate got a real boost from the overcome of a tense political deadlock that undermined business and consumer confidence for several months, but uncertainties over the result of next June’s general elections until a new government takes over next September are expected to continue holding back new foreign and domestic investment.
The uncertainties are related to the new government that will take over after the June 25 general elections and the tax policies it will apply.
Albania’s FDI hit a record of about 1 billion euros in 2016, mainly because of some major energy-related projects such as the TAP pipeline and two big hydropower plants by Norway’s Statkraft, raising concerns about the progress of FDI in the post-2020 period when these projects are completed.
The ruling Socialists have unveiled an ambitious pre-electoral program of injecting 1 billion euros in key sectors of the economy through public-private partnerships, but experts have warned the project risks creating new arrears and hidden public debt at a time when the country’s economy already faces high debt levels and the economy is slowly recovering.
Public-private partnerships have become a hot topic in Albanian politics after some risky concessions and warnings by international financial institutions that some 55 public-private partnerships the Albanian governments have signed during the past decade, have created commitments with a present value of about 7 percent of the GDP or €700 million in which the government will either pay the cost of the investment in installments or guarantee the revenue of concessionaires.