Expensive and unaffordable cost of tax of inflation

Contractionary monetary policy (contraction economic policy) is now the most popular method of controlling inflation. The purpose of a contractionary policy is to reduce the money supply within an economy by raising interest rates. This helps slow economic growth by making credit more expensive, which reduces consumer and business spending.

The last decision of the Supervisory Council of the Bank of Albania, at the beginning of November 2023 for the continuous increase of the interest rate to fight inflation, seems to be an expensive and unaffordable cure to recover from the inflation tax.

BoA raised its interest rates to the highest level in more than 10 years this month, taking the base rate to 3.25 percent, the highest since 2013, and another hike could be approved. to come next month, based on the ECB’s forecasts for the euro zone, with a direct impact on the Albanian monetary market.

Higher interest rates on government securities also slow growth by incentivizing banks and investors to buy financial instruments for an abbreviated time or in other markets, which will guarantee a certain rate of return, instead of riskier investments. of capital that benefits from low rates.

Inflation is accepted by all that must be fought with determination, but the financial cost for increasing the rates undertaken by BSH does not seem to be the most correct way, as it is extremely affecting the monthly cost for businesses that have received loans in the last two years. Individuals have an even greater impact on the diverse types of loans they have received from commercial banks.

They cannot ignore the danger that the continued rise in interest rates is a more harmful cure than the disease.”

Who loses from these decisions of the Bank of Albania?

The continuation of the increase in interest rates does not lead us in the direction of economic growth, as it will inhibit the consumption of various goods, will affect the cost of businesses, and will give another new wave of price increases also considering policy decisions fiscal for increasing taxes for most professions and free activities.
But in the case of the decision to increase public sector salaries, as a political promise of the current government, but also from the forced increase in private sector salaries due to low supply in the labor market and increasing pressure on employees, the fight against inflation has entered a moment of paradox.

When public and private sector workers are receiving higher wages, they will want to afford the number of purchases for goods and services, which increases demand, which then increases prices, which can lead to a potential spiral wage price.

While the decision to increase the interest rate takes up to 2 years to affect the economy, at the same time this moment should influence the government’s decision-making to reduce expenses and collect taxes better than until now, to effective in helping to reduce inflation.

In this month, which also coincides with the public consultation of the 2024 draft budget, as well as a willingness of the government to increase public sector salaries, it does not coincide with the situation we describe for reducing some expenses.

On the other hand, the high budget costs for the “political bet” of infrastructure reconstruction is also a forced expense initiated by the process that is being financed from budget taxes. Payment of concessions, bills of international arbitrations and domestic trials, bills of expropriations and expenses related to infrastructure works are another moment that the tax-financed budget does not help the fight against inflation.

Meanwhile, much more investment should be shifted to immigration prevention by increasing spending on education at all chain levels, as well as increasing financial support for low pensions by declaring a national target for narrowing the gap between high and low pensions.

Although we mentioned many elements to be considered, based on the culture of the past years, we believe that all the expenses of the draft budget 2024 proposed by the government will be approved to be carried out during the year 2024.

Then it remains that they must first be reviewed through in-depth studies:
– welfare taxation policy, which includes the largest taxation of Albanian capitalists.
– a tax policy for the progressive taxation of profit tax can be reviewed to exhaust it as a concern for all interested parties and freelancers.
– intervention through the formalization of the informal rental market, as a priority focus for 2024
– gradual breaking the dependence of transport from fuels aiming at another transport that is even less polluting should be another forced direction of budget dependence by designing a substitute fiscal package for electric and hydrogen vehicles, etc.

Although we left it for the end, the greatest emphasis is needed on changing the fiscal administration by changing its direction. This approach should try to change the objectives of tax administration, but also to increase its impact on limiting tax evasion and better distribution of the fiscal burden by increasing the tracking of tax revenues where they are generated, inside and outside the country.

However, starting from the weak fight against informality, as well as the little focus on fiscal administration, due to the management of important institutions from the model of political cronyism, the income will not increase more than the forecast, even likely even less.
The government can do truly little to stop inflation, having squandered opportunities with policies that have exceeded the costs of profitability.

It does not have many options to set a price ceiling or create new boards, since the failure of the management of the previous boards revealed the low performance of the institutions, as well as negatively affecting competition and freedom in the market.

Now, after the entanglement of all these elements, the monopolies in the market have strengthened even more, affecting the growth of economic polarization and, on the other hand, it is directly affecting a crooked model of the redistribution of available resources.

But the government can start to organize as a common front by finding each of the members of this front his task, with the aim of fighting informality, reducing corruption, and reducing the possibility of market speculation by oligopolies by starting controls coordinated and extensive pricing.

Otherwise, if it continues only with the pursuit of a restrictive monetary policy without being accompanied by all the necessary fiscal and regulatory measures, according to the consultation with local expertise and business and social organizations, the so-called soft reductions in inflation will be difficult to achieve. was reached in 2024.