Transition and the Fiscal Crisis in Central Europe

Abstract

This paper argues that traditional explanations of the fiscal crisis in transition economies overlook the crucial interconnection between the reduction in subsidies expenditure and the decrease in profit tax revenues. It thus contends that the impact on the fiscal budget of the crisis of state-owned enterprises profitability has been largely overestimated in the literature. The net contribution to the government budget from the enterprise sector - defined as profit taxes net of cross-subsidization - has increased during the transition in Poland and Czechoslovakia, and has remained constant in Hungary. After reexamining the data, it is argued that - while it is undoubtable that the prospects for fiscal revenues are worrisome - the main determinant of the fiscal crisis is to the explosion of social security expenditures. The paper also assesses the applicability of these results to other former socialist economies.