DP1144 Government Subsidies to Enterprises in Central and Eastern Europe: Budgetary Subsidies and Tax Arrears

Author(s): Mark E Schaffer
Publication Date: March 1995
Keyword(s): Central and Eastern Europe, Financial Distress, Subsidies, Tax Arrears
JEL(s): E62, H29, H32, P43
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1144

This paper analyses the distribution and allocation of budgetary subsidies and tax arrears in Central and Eastern Europe. Budgetary subsidies are relatively small in aggregate, highly sector specific, and the manufacturing sector receives few of them. Tax arrears, by contrast, are a significant problem, and the paper argues they can be considered a form of government subsidy. Data for the various Visegrád countries suggest that the total stock of tax arrears is on the order of 5- 10% of GDP, the annual flow of tax arrears is around 2% of GDP, and the annual flow of tax arrears to the manufacturing sector is around 1% of GDP. Survey data from Hungary and Poland show that tax arrears are concentrated in a small number of low profitability firms; the main correlate of tax arrears is low profitability; and the flow of new tax arrears is the main financing that enables these very unprofitable firms to continue to operate.