What’s in the Basis of Economic Prosperity?

This analysis will compare 30 European member states in terms of certain macroeconomical indicators, as shown in the enclosed table, for finding out a dependency regarding their tax systems and the level of their economic development. As I hope the analysis will show, economic prosperity is not based by all means on the type of tax systems and on the share of state participation in economy. I’d rather say that economic prosperity is much more a social phenomenon than a simply economic one. From this point of view, some of the essential indicators are the structure and the level of solidarity in society, not only the purely rational policies for pursuit of certain economic models and theories. Anyone, who relies on changing the flow of development of Bulgarian economy based only on tax laws and economic policies, will surely fail to achieve his goals. Social cohesion in society, national identity and individual solidarity are much more important characteristics. This is what lies in the basis of economic prosperity of different states, although this dependency is not explicitly stated in the analysis.

I. Result Analysis

The table presents seven states in Europe, where social security contributions, as a percentage of GDP, are much greater than the average for EU. These are France, Germany, Belgium, Austria, Czech Republic, Netherlands and Slovenia. We should bear in mind, however, that although Denmark, Iceland and Sweden are also included as states with relatively low social security contributions as a percentage of GDP, the specifics of their tax systems should also be taken into account. Unlike the other states in Europe, social security contributions are a part of the income tax in these states. Thereupon, it is only proper to include these three states in the group of the states with higher social security contributions. The confirmation of this is the fact that Denmark is on the first place in state expenditures as a percentage of GDP among all discussed states, Sweden takes the fourth place, and Iceland takes the ninth place.

A comparison between the states with high social security contributions and the ones with high state expenditures as a percentage of GDP will show that they are almost identical, with some minor exceptions, of course. The exceptions are Slovenia, Germany and Czech Republic, and only the Czech Republic is much different from the others, with much less share of state expenditures in GDP. The explanation can be found in the fact that Slovenia is a small country with relatively small population, which does not require much expenditure to support the state structures, such as administration, army and police forces. Germany, on the other hand, is the fourth biggest economy in the world, with enormous GDP, and in terms of share from this GDP, state expenditures are relatively low. As shown above, the Czech Republic is the only exception in the group. This state supports neoliberal ideas for economic development, and to some extent, it may be identified as approximating the Anglo-Saxon model for development. This proximity is also consolidated by the Czech Euro-skepticism, expressed in serious resistance to the institutional pressure on the part of Brussels for harmonization of the legislation and the conducted policies. In this respect, the Czech Republic is very close in its ideas to Great Britain – the arrant Euro-skeptic state and resister of any kind of sovereignty concession in favor of EU.

The general picture implies that the states with high social security contributions also have a high share of state expenditures as a percentage of GDP and vice versa. In this respect, Bulgaria takes the 25^th place in terms of size of social security contributions and the 28^th place in terms of state expenditures as a percentage of GDP among all 30 compared states. Thus, it falls in the group of the ten states, among the compared ones, with lowest taxes and tax burden, measured through state expenditures as a percentage of GDP, most of them being former socialist states, except Switzerland, Luxemburg and Malta. In terms of social security contributions, the group of the ten states with lowest contributions is more various, since it includes also states such as Ireland, Cyprus and Great Britain.

In terms of the total expenditures for research and technology as a percentage of the total state expenditures, the states with expenditures above the average European ones are eight: Switzerland, Finland, Germany, Denmark, Belgium, Sweden, Slovenia and Luxemburg. Four of the states in this group are also in the group with highest state expenditures as a percentage of GDP, i.e. Finland, Denmark, Sweden and Belgium. The specifics of Germany and Sweden were already discussed above, while Luxemburg is also a very special case due to its extremely small size, special bank and business legislation, and the headquarters of quite a lot of international institutions, being seated in this city-state, which raises the level of the produced GDP and reduces the share of state expenditures as a percentage of it. The only more significant exception in this group is Switzerland, which, as already mentioned above, is the state with the lowest redistribution role in terms of state expenditures and one of the states with lowest social security contributions. At the same time, it appears to be on the first place among the compared states in terms of its expenditures for research and technology.

Regarding expenditures for research and technology, a comparison can be drawn between another three states outside Europe, i.e. Japan, South Korea and USA. Actually, the first two states outrun Switzerland in this respect, while USA lines right behind Germany. Bulgaria, unfortunately, is at the bottom of this ranking, accompanied by other former socialist states, as well as almost all of the states in southern Europe, except Portugal.

Regarding the data concerning the share of renewable energy in the end energy consumption, the picture is even more various. In this case, there are 14 states with indicators much better than the average for EU. Actually, what is more interesting here is which of the states are in the leading positions in the previous three comparative tables but show relatively poor indicators in this one. There are four such states: Germany, Czech Republic, Belgium and Netherlands. Excluding the Czech Republic, which has a higher ranking position only in the table regarding the size of social security contributions, the other three states are among the best developed states in Europe. It is only logical to ask why do these states fall behind in orienting their economies towards using RES and what is the reason for this. One of the explanations is that it is their heavy industrialization exactly that stands a holdback to their reorientation to using renewable sources. They have developed great energy generation capacities, relying on conventional energy and therefore, despite their serious investments in RES, they fall behind the average level in Europe. Nevertheless, taking a look at the Belgium growth in the sector, we can notice that for four years, the share of RES in the energy mix in the country has increased with a total of 75%, which is really impressive. In Germany, the growth is considerably lower, but as mentioned above, this is the fourth most developed economy in the world, with extremely well-functioning energy sector, and transformation from conventional energy to RES would not be such an easy task. By the way, USA also has a similar problem.

At the same time, all Scandinavian states are heading the table and the explanation is that they pay special attention to the development of renewable energy. These states, along with Austria and France, also take lead in the other tables. On the other hand, Southern European states with extremely favorable conditions for RES development also joint this group, such as Spain and Portugal. At the end of this group also come the relatively poorer and small economies of the three Baltic States, along with Slovenia, Romania and Bulgaria. For this last sub-group of six states, it should be noted, on one hand, that they have begun to develop and upgrade their energy systems from a relatively low initial status, which automatically increases the share of the upgraded new power capacities as a percentage of the total energy mix, and on the other hand, specific mostly for the last three states, the nature is particularly favorable for the development of such energy projects, which has also oriented significant investments in this field. EU policy for assisting investments in RES should also be taken into account for these six states, to which billions of Euros from European funds began to flow.

The last table provides information about the employment for the age group between 20 and 64 years in the discussed states. The groups of states with indicators better than the average for Europe includes 18 states, the first 12 positions being occupied by states from Northern Europe and the Scandinavian Peninsula, except only Cyprus. The group also includes other northern states, such as Latvia, Estonia, Czech Republic, Luxembourg and France, but there are also some states from Southern Europe, such as Slovenia, Portugal and, as already mentioned, Cyprus. The only state that holds upper positions in the first three tables but fall behind in this one is Belgium. Bulgaria holds the 22^nd place in this table out of 30 compared states, being ahead of the states mainly in Southern Europe.

II. Conclusions

Based on the above facts, the following conclusions can be drawn:

1. The presented data definitely outlines the group of Scandinavian states – Denmark, Switzerland, Finland, Norway and Iceland, which have occupied the top of the tables, whether they concern high state expenditures as a percentage of GDP, investments in RES or in research and technology, or employment. Regarding Denmark, Iceland and Switzerland, it was already explained why they formally stand at more rear positions in terms of social security contributions. In this respect, only Finland is rated a little bit behind, while Norway is not performing so well in terms of total expenditures for research and technology. For Norway, it should be noted that the lower share of state expenditures is due to the high revenues, which the state receives from its petroleum export and from the management of the state pension fund in Norway, where these revenues are allotted. At the end of 2012, this fund has accumulated reserves for USD 611 billion. In this connection, the state could indulge in keeping the tax level relatively low.

2. The second group is formed by the developed economies in Northern and Continental Europe, including France, Germany, Belgium and Austria, as well as the Czech Republic, Netherlands and Slovenia. Italy may also be added to this group, although it is rating right behind the leaders only in the first two tables, while dropping in the other tables far behind, so it would be more appropriate to include it in the next group.

3. The third group of states to be outlined, is the one of the Southern European states, including Spain, Portugal, Cyprus, Malta and Greece (for the latter no data is given in all of the tables). This group should also include Italy. These states are specific for their relatively high share of state expenditures as a percentage of GDP, although, with the exception of Greece, they are not in the lead of this rating. The relatively high share of social security contributions is also specific for this group, while exceptions are also found here, represented by Malta and Cyprus. One of the explanations for these exceptions could be found in the sizes of these two economies, as well as in the specifics of their economies related to tourism and for Cyprus also the specifics of the offshore business.

4. The next group to be identified is the one of the Anglo-Saxon states, such as Great Britain and Ireland, which are specific for their relatively high redistribution role of the state and at the same time low social security contributions. Nevertheless, employment is relatively high, although Ireland shows a bit poorer results. In terms of expenditures for research and technology, as well as with regard of the RES energy share, both states are in the middle of the respective scales.

5. The fifth place may be set for the new economies of the former socialist republics, although they might be additionally divided in certain indicators. This group should, of course, exclude the Czech Republic and most of all Slovenia, which in terms of most analyzed indicators, as mentioned above, is showing ratings such as the group of Continental and Northern European states. Actually, Slovenia holds leading positions in all comparative tables, which clearly outlines its ambitions with regard to its own economic development. All other former socialist states are, in general, at the bottom of this ranking, constantly shifting places, but in certain cases they perform better than the states in the previous groups. To some extent, this group could distinguish Hungary, which in terms of the first three indicators is very close to the states in the first two groups but considerably falls behind in terms of employment and to some extent in terms of using RES in end consumption.

In almost all comparative tables, Bulgaria holds the rear back of the rating, performing well only in terms of the share of RES in end consumption. The reason was explained above. This, to some extents, is an indicator of a mistake in the priorities that the state has identified. The analyzed data shows that the low tax burden and low social security contributions are not a premise for a dynamic economic development related to high investments in research and technologies, as well as to high employment. Of course, this does not mean that increase in taxes and social security contributions would lead to higher economic prosperity.

6. Finally, I would like to stress on the performance of Switzerland in the analyzed data. This state is so much different from all other – merely amazing. For example, Switzerland is at the last 30^th place in terms of share of state expenditures as a percentage of GDP with average value of 33.2%. At the same time, it holds the 28^th place in terms of size of social security contributions as a percentage of GDP. These two indicators make Switzerland much resemble USA, which is included in the Anglo-Saxon group of states, although Great Britain and Ireland have significantly higher indicators for the mentioned parameters.  Simultaneously, Switzerland holds the first place in Europe and the third place in the world in terms of expenditures for research and technology. It also holds the second place in terms of employment, outrun only by Iceland. The amazement comes from the fact that Switzerland is one of the smallest states in Europe, even smaller than Bulgaria. Its population is comparable to the population of Bulgaria. Obviously, there are other, much more important parameters, which make one economy a working one, and these are definitely not pursuit of certain ready economic models.

Note: I would like to ask all who will use this article for consecutive own research and expression of public opinions and positions to cite correctly the source. This is a part of the social culture and a base of the public debate.