IME: Bulgarian Government Chose the Easiest Way for Budget Relaxation
Bulgaria: This week the draft budget 2021 has been discussed at first reading in the parliamentary committees. The debate was focused not so much on concrete policies as on the risks before the fiscal policy of Bulgaria and the trajectory of the budget in mid- and long-term perspective.
The main accent was on the volatile economic environment and the need for larger budget buffers, as well as on the process of fiscal consolidation, which should shape the fiscal policy in the coming years. Namely, these were the two key remarks in the stand of the Bulgarian National Bank (BNB) which sounded sharper than usual as compared with the routine discussions in such pubic format.
Currently the main budget 2021 buffer is described in Art. 106 of the draft bill, which envisions budget expenditures of the ministries and government departments to account for 95% as the remaining 5% to be a buffer of a sort for coping with the pandemic. In the estimation of the Finance Minister, these are about BGN 640m that can be used under circumstances of insuperable force. With a view to the development of the pandemic, however, and high degree of economic insecurity the size of this buffer seems to be rather modest, as it is highly probable that the fiscal balance will again be negative in case we confront with the worst case scenario in healthcare.
As the negative fiscal balance in times of the pandemic and unprecedented economic crisis is expectable than the crucial issue will inevitably be the coming period of fiscal consolidation.
No matter how heavy the blow to the budget will be, the way for the reduction of budget deficit in the period of economic recovery will be essential for the financial stability and the future framework of the Bulgarian budgetary policy.
In recent days the Finance Minister has voiced the opinion that criticisms concerning fiscal relaxing and high budget deficit in the coming year are not grounded because the larger part of the deficit is due to the one-off measures in response to the crisis which won’t be a burden in the long-term perspective.
At first sight, the minister is right – around BGN 3bn in the Budget 2021 is allocated for the so-called one-off measures, which are supposed to be lifted in the coming years. Having that in mind, the budget deficit would come back to normal and it seems that there is no big problem with the fiscal trajectory. However, this is true only on paper. In reality a large part of these measures are not one-off and will burden the budget for a long time.
It would be needless to specify in details all reasons for that. The increased pensions, cancellation of the income-based criterion for payment of child allowances, lower VAT rates for certain sectors of economy – these all are measures that cannot possibly be one-off. These processes are clear-cut, but it is important to explain how and why such budget policies become possible.
The pending elections for sure play their role, but this is a simplified explanation. It seems that the main reason is the unwillingness/or inability of the government to construct new or “extraordinary” budget mechanisms in reaction to Covid-19 spread that will be clearly targeted and really one-off. Such new mechanisms, extraordinary and temporary, pose certain risks, political risks including. The new policy asks for spurring public debate, withstanding any pressure from different groups and social partners, wandering around TV studios, briefings, etc.
As the government is reluctant to opt for this way it has chosen the easiest way to relax the budget. How can households in Bulgaria get hold of the money most quickly? The way is to increase payments to the elderly (pensions), give up the income-based criterion for child allowance payments, which is the largest-scale social program, and raise salaries in the public sector.
In practice, there is no specific targeting – all pensioners, all households with children and all employed in the public sector are the beneficiaries. However, when you use the existing instruments all these payments become long-term ones. On paper, measures against Covid-19 are subject to consolidation after the end of the pandemic, but in reality they are not one-off and will be a burden on any subsequent fiscal policy of the future governments./Analysis of Institute of Market Economy
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