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UPDATE 2-Bulgaria plans 10 pct tax on income on bank deposits

* Tax should raise 120 mln levs next year

* Govt approves budget targeting 1.3 pct/GDP fiscal gap

* New tax will not hurt banking system as a whole-Central Bank

(Add central bank comment)

SOFIA, Oct 10 (Reuters) - Bulgaria plans to tax people's income on their bank deposits from next year as part of a budget aimed at keeping the fiscal deficit down, Finance Minister Simeon Djankov said.

Economists slammed the government's decision to introduce a 10 percent tax on bank deposit income from next January, which could raise 120 million levs ($79 million), saying it would only hurt people's savings.

The centre-right cabinet plans to keep income and corporate tax rates unchanged at 10 percent, one of the lowest levels in the European Union.

It aims for a budget gap of 1.3 percent of gross domestic product, unchanged from this year, but expects economic growth of 1.9 percent in 2013, which would support its plans to raise state pensions before a summer election.

In a bid to shield against an economic downturn, many Bulgarians have been stashing money in banks. Household deposits grew by 13.8 percent in the year to the end of August to 33 billion levs, central bank data showed.

"Bulgaria is the only country in the EU that does not tax that income. The key is to improve equality. At present, richer people with bank deposits do not pay tax on that income," Djankov told reporters.

The decision came as a surprise, however, as the finance ministry denied in September that it was considering such a move. On Wednesday, the central bank said it had not been informed about the plan.

The new tax will not have a direct negative impact on the stability of the banking system as a whole, the central bank said in a statement. But it noted that bank deposits are the best option for household's savings.

Analysts attacked the new tax saying it would reduce incentives to save and limit banks' ability to fund the economy and would likely increase the cost of lending, much needed to boost growth, while its fiscal effect would be limited.

They welcomed the fiscal targets but criticised the cabinet for failing to reform the inefficient pension and healthcare systems, that could have improved spending and helped restart the struggling economy.

"The government is likely to waste a lot of political energy with that idea for a new tax that will have a limited fiscal effect at its best, instead of focusing on much-needed reforms," said Georgi Angelov, economist at Sofia-based Open Society Institute.

The budget plan and new tax still have to be approved by parliament, where the government has a working majority thanks to support from smaller parties. Bulgaria's economy is expected to expand about 1.0 percent this year. ($1 = 1.5167 Bulgarian levs)

(Reporting by Tsvetelia Tsolova; Editing by Sam Cage and Hugh Lawson)

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Keywords: BULGARIA BUDGET/