At the start of the transition process, the economies of Central and Eastern Europe displayed large budgetary subsidies to firms, of up to 25 per cent of GDP. What is the situation today? In Discussion Paper No. 1144, Mark Schaffer analyses the distribution and allocation of budgetary subsidies and tax arrears, finding that budgetary subsidies are relatively small in aggregate and highly sector-specific, and that 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 around 5– 10 per cent of GDP, the annual flow of tax arrears is around 2 per cent of GDP, and the annual flow of tax arrears to the manufacturing sector is around 1 per cent 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.

The paper suggests several reasons why government tax collectors do not vigorously pursue these firms into bankruptcy, and concludes with a number of policy suggestions. A full analysis of state aids to industry should include tax arrears as a possible form of state aid. As for government policy, a sensible two-part strategy to deal with the tax arrears problem may be first, to maintain existing tax collection efforts and possibly introduce new measures to keep the tax arrears flow problem under control; and second,&nbspto introduce and promote effective debt workout schemes and bankruptcy and liquidation procedures.

Government Subsidies to Enterprises in Central and Eastern Europe: Budgetary Subsidies and Tax Arrears
Mark E Schaffer

Discussion Paper No. 1144, March 1995 (FE)