Bulgaria's projected 2011 budget deficit could lead to grim scenarios such as political instability and an intervention by the International Monetary Fund, according to the Sofia-based Institute for Market Economy (IME).

The IME Chair Krasen Stanchev, CEO Svetla Kostadinova, and economist Petar Ganev presented Monday for the eighth consecutive year its "alternative budget", a project of its own for next year's state budget seeking to identify issues with the draft budget of the Cabinet.

"The Borisov government came with promises for reform but at the present moment we witness its abdication from implementing them, which could lead to early parliamentary elections," said economist Petar Ganev.

He did point out that the international economic environment will be more favorable to Bulgaria in 2011, and that it is even possible to see the volume of foreign direct investment rise.

The Institute for Market Economy recommends, however that the government should reduce the budget of the state administration by BGN 2 B, or by about 20%.

"If the present draft budget is adopted, the government will be spending BGN 881.75 per second in 2011. According to our estimates, the optimum scenario is spending BGN 742.35 per second," said the institute chair Krasen Stanchev.

He warned that having budget deficits over several years, i.e. a "chronic deficit" could send a bad signal to international investors and could affect negatively the sale of Bulgarian state bonds.

"The only way of that situation would be the arrival of the International Monetary Fund, which is going to come over with a big ax and will force the government to do the reforms the hard way," said the IME economists.

"Our institute has been crafting alternative budgets for eight years based on assumptions of low taxes, fiscal discipline, and preservation of growth and prosperity opportunities. If Bulgaria's state finances are not put in order, the international bond markets will not trust the state. The government must take into account our recommendations because otherwise the IMF might have to intervene as it did in Romania where the salaries and retirement pensions saw a sharp decrease. The main thing in our proposals is allowing the economy to generate growth, which can bring more revenue to the budget," Stanchev declared.

The IME alternative budget calls for having civil servants, police and military officers pay their social security and health insurance from their own pockets, and providing a greater financial independence to municipal authorities, universities, the Bulgarian Academy of Sciences, the Bulgarian National Radio and the Bulgarian National Television (including complete opening of the last two for advertising).

One of the more radically different proposals is the introduction of personal retirement accounts similar to deposits and abolishing the monopoly of the National Health Insurance Fund.

In tax policy, the IME proposes the abolition of the 5% tax on dividends, reducing the tax on single member traders from 15% to 10%, and removing tax reductions for tourism and agriculture.