For a year or two, there has been a tradition in election campaigns that the race is only about promises to compensate everyone for everything. This makes it impossible to draw up economic programs and review the means of “compensation” – budget, revenue and expenditure of the government. The result of all this is an increase in costs.
Unlike most previous such governments, the caretaker prime minister’s office Dove Donev so far he has not secured income and has not spared spending. His main business is “Russian” gas, and the result is that he stopped “non-Russian”. This was predictable and repeatedly explained.
Creating problems for subsequent governments is a deliberately sought after effect
The direct consequences of these actions will mean additional budget costs and compensations. It is obvious that creating problems for subsequent governments is a deliberately sought after effect of the work of this government.
Beyond thinly veiled support for pro-Kremlin parties, however, there is little the current and subsequent governments can do to reduce the impact of inflation as well as the adverse effects of Russia’s war on Ukraine.
The state of the budget
Revenues in the state budget are growing and the surplus at the end of the year is expected to be 1% of the estimated gross domestic product (GDP) for this year (just over 1.5 billion BGN). The fiscal reserve at the end of July was BGN 9.8 billion or over 6.5% of GDP.
Judging by the latest data on the state of public finances of the EU countries, where the average deficit is 2.3% of GDP, the situation here looks good, and the fiscal arguments for the vote of no confidence in the previous government proved to be untenable. However, the forecasts for the welfare of Bulgarians are far from problem-free.
The Ministry of Finance’s preliminary medium-term forecast for the period 2023-2025 is realistic, as the acting finance minister Rositsa Velkova emphasizes that it includes “only the effects of the policies in place”.
As the deputy from the 47th National Assembly, Georgi Ganev, warned when drawing up the first budget for the year, the surplus in the budget is the result of inflation and the recovery from the economic downturn of 2020.
In absolute terms, it is practically equal to the sum of revenues from indirect taxes and payroll taxes. There are no positive developments from the planned curbing of corruption and there could not be – they require more time and a more radical approach.
At the same time, again in absolute value, the deficit of the budget will pass the 10 billion threshold or almost 7% of GDP in 2022. For the year 2023, an increase in expenses of 9.7 billion and a deficit of 11.3 billion (6.8% of GDP) is foreseen.
This deficit exceeds the annual average in the budgets from 1991 to 1996 – a period of severe financial crisis in the country. As a share of GDP, its value exceeds that of the 1996 deficit loan.
On the positive side, the economy is much stronger this year, there are no bank failures and non-performing loans are under control, whereas in 1996 they were 58% of the banks’ loan portfolio. But despite this, the deficit values are record high.
Another record from the period after 2009 is the contraction of investments in 2021 by about 11%. In 2022, the trend is maintained, although it is less pronounced.
The share of pension costs in GDP is also a record – 10.4% last year and this year, with a projected growth of up to 11.6% of GDP in 2023. The upcoming elections this year and possibly next year could lead to further increases in these and other costs.
It is clear that with such macro-indicators, the euro will hardly become the currency of Bulgaria in the foreseeable future. More importantly, however, instead of focusing on reducing government spending and increasing revenue, the current and subsequent governments have fallen into the merry-go-round of promising more spending.
To get out of it, they can choose between a number of policies to stabilize the economy, most of which don’t even require a functioning parliament. Here are some of them.
Bulgaria is currently presiding The Central European Initiative – an international organization whose priority goals are the development of cooperation between the countries of Central, South-Eastern and Eastern Europe, the support of European integration and the preparation of the member states for joining the EU.
The work of the government here is short-sighted, to say the least. But it has a unique chance to unite several countries to come up with an opinion on two topics: preserving the right of veto in decision-making in the EU and taxing the coercive policies of the so-called “Green Deal”.
Most important in the first topic is the preservation of tax competition within the Union. Bulgarian citizens can only benefit from it, but the benefits are also obvious for all other member countries. The second is already happening. Both nationalists and anti-Westerners, including the “California minister” (serving energy minister Rosen Hristov, b.r.) will agree to both.
The growth of budget expenditures and the impossibility of even thinking about spending cuts are fueling intentions to raise income taxes.
Gradually, everyone comes to terms with these sentiments. BNB Governor Dimitar Radev warned of such a danger back in June. The problems that would arise from this are mainly three: an additional budget deficit, a reduction in the disposable income of the productive classes, and a further deterioration of the business environment.
To freeze non-investment spending and not increase the minimum wage
Instead of increasing direct taxes, it is wise to, if not cut, at least freeze non-investment spending and not increase the minimum wage. The latter would increase labor costs for employers, including the government, and limit productivity growth, government support and other costs.
From 2020, the abolition of the zero threshold for reinvestment, or at least the moratorium on income tax payments for legal entities, is also on the agenda.
From 2016-2018, calculations show that the effect of such an action in a one-year perspective would be tolerable, and in the long term – positive. The same applies to other direct taxes. It is extremely important that one fifth of income taxes remain in the municipalities where they are produced. For this to happen, there may be legislative finesse, but it is realistic to do so without a change in the relevant laws or a temporary parliament.
Some excise taxes slated for an increase during the budget procedures from the beginning of the year could make up about 10% of the projected deficit under several conditions – if the reform is gradual, time-bound and predictable, the increase is lower than inflation per year and the change is affordable for household budgets.
Additional budget revenues can also be provided by changes in economic policy and government services.
Health care and social policy
In health care, after a long period of trial and error, which led to the highest death rate in the history of Bulgaria after 1918, the situation seems to be improving. Without a permanent parliament significant improvements cannot be made, and agreement among legislators on such occasions is practically impossible at a time when they await elections.
However, any government can change the distribution scheme of available NHIF resources and pay for health services provided during the pandemic.
The current Prime Minister is familiar with policies to limit hardship for the financially disadvantaged. Among them, the largest groups are those of pensioners, Roma and those receiving social benefits. The policies have been developed, the positive effects calculated and basically discussed in the middle of last year.
Instead of manipulating the minimum wage, it would be extremely useful to liberalize the labor market. One way to do this is to simplify reporting for all types of temporary employment. They can be supported by some minor and probably easy to agree changes in the way the NHRIs, NHIFs and private pension and health funds operate.
The side effect would be to increase the share of those insured for pension and health (and, accordingly, the income in these funds).
Economics and Administration
According to the calculations of the Ministry of Finance, some floor is needed to control the deficit 6 billion BGN. At least half of this amount can be secured in the medium term by the policy changes already listed.
However, the reserves in the economy are in the areas of investment, resources and quasi-taxes, that is, the costs of working with the government at the central and local levels.
Investments, for example, require predictability. It can be reached by extending the terms of various types of concessions. The only problematic contracts would be those for aggregate concessions, as they relate to the “in-house” procedures of road construction and repair.
All other concessions, especially those for minerals, can be extended without changing the terms of the contracts. For some, an agreement has already been reached with the concessionaires. Many concessions have been suspended by administrative and legislative measures. Also on the agenda is the lifting of the moratorium on the exploration of the deposits of shale natural gas. However, there are at least five other similar ventures that have been administratively suspended.
Mineral water bottling concessions are less than 10% of certified springs. In the case of water supply, the losses from state and municipal companies are an average of 58% per year of water for the last ten years. If the companies are responsible for the water network, they can easily be privatized through concession contracts. The same also applies to heating.
It is high time to privatize Bulgargaz as well
It is high time to privatize Bulgargaz as well, and to sell government shares in state-owned companies (eg NEK) through the stock exchange. The concept of this has been gathering dust in the archives of the Council of Ministers for ten years.
In 2020, the government services, which are in fact the duty of companies and citizens, multiplied to about 2,100. The loss of working time for their receipt is about BGN 600 million per year. At least half of this expense can be saved.
It is possible that even in the area of energy and the Green Deal, new approaches and technologies are being tried. There are already developed ones for the Black Sea, for district heating, for energy independence, and they do not require a constantly working parliament.
* The views expressed in the “Opinion” column may not reflect the position of Free Europe.