Unlike previous years, this year the proposed draft Law on the State Budget of the Republic of Bulgaria for 2009 contains some points that are dictated by the challenges of the global financial crisis. In it an attempt is made to analysis of the impact of the global financial crisis on Bulgaria's economy, three packages of policies and measures to counter the crisis are proposed. Unfortunately, this part is not developed in detail and is not well enough linked to the rest of the draft budget 2009, which starts from a much more optimistic scenario.
Positive moments in the 2009 draft budget are the priorities, related to education, increasing the amount of public investments and increasing the efficiency of their spending, brightening the economy, creating better opportunities for young families, etc., but unfortunately the priorities of the draft budget 2009 are priorities that would be appropriate in the absence of the threat of a financial crisis. Counteracting the negative effects of the global financial crisis is not an immediate and main priority in the 2009 draft budget, and the emphasis on some of the priorities listed above is disproportionately strong, clearly proceeding from pre-election goals and underestimating the realities of the economy in the conditions of a global financial crisis. We believe that all the priorities of the 2009 draft budget should be reformulated through the prism of the priority for countering the crisis. Otherwise, the stated priorities are just wishful thinking, but have no basis for implementation. At the moment, it is not clear to what extent the social priorities and promises in the draft budget 2009 are realizable when the global crisis deepens.
Some of the priorities listed in the 2009 draft budget are in clear contradiction with the means of their realization. An example of this is the desire to increase public investments and increase the efficiency of their spending. The latter is possible if the increase in public investments is accompanied by reforms in the sectors to which they are directed, but in the draft budget 2009 there are no guarantees for such reforms. Moreover, if public investments are spent in sectors and in a way that was strongly criticized by the European Commission, neither the priority of increasing the efficiency of their spending nor the priority of brightening the economy will be achieved.
Positive moments in the draft Law on the State Budget of the Republic of Bulgaria for 2009, which KRIB supports are:
– the preservation of the tax burden for businesses and the aspiration to increase tax collection and social security obligations;
- the attempt to maintain a tax-insurance policy aimed at stimulating economic activity and brightening the economy;
- the preservation of the current policy of simplifying taxation and facilitating the application of tax laws, as well as the stated intentions to make efforts to improve the administrative service of businesses, including and speeding up VAT refunds;
– the planned increase of BAEZ's credit limit in order to support the competitiveness and export potential of Bulgarian business;
– the aspiration to improve the business environment by simplifying and easing the regulatory regimes;
– the increase in the amount of expenses for education and scientific research and development activity;
– the continuation of financial decentralization and budget reform aimed at achieving effective and efficient program-oriented multi-year budgeting.
A major shortcoming of the 2009 draft budget is the lack of close connection of the analysis of the impact of the global financial crisis on the Bulgarian economy and the three packages of policies and measures to counter the crisis with the rest of the 2009 budget report. In particular, there is no concrete link between the risk assessments, the fiscal program/part II. Consolidated fiscal programme, sustainability of the fiscal position and key aspects of budgetary policy for 2009/ and the predictions of the macro frame /t. 1.3.2. Economic assumptions and macro framework for 2009/ The main drawback of the draft budget 2009 is that it is built on the relatively optimistic assumptions of the macro framework for 2009 from item 1.3.2., and the policies and measures to counter the crisis suggest a more pessimistic scenario, which is only hinted at , but has not been explicitly developed with the necessary specific parameters and quantifiers. Accordingly, a large part of the measures and policies for countering the crisis are devoid of the necessary concreteness and have a general and wishful character. It is noteworthy that in very few cases they are accompanied by quantitative assessments, and this is probably a direct consequence of the fact that the macro-framework was prepared only in a relatively optimistic version. Such an approach is not only frivolous, but also dangerous for the economy and business in the conditions of a deepening global crisis.
The macro framework for 2009 should be developed in at least one more version, reflecting a more pessimistic forecast for GDP, FDI, the current account deficit, inflation, etc., on the basis of which they should be reformulated, already very more specifically, and with clear quantitative parameters, the intended measures and policies to mitigate the impact of the crisis. Comparisons with forecasts from previous years show serious discrepancies between actual data and forecasts for inflation, FDI, current account deficit, etc. This inevitably affects the projections of budget revenue, expenditure and surplus. We will point out only some of the discrepancies between the forecasts for the macroeconomic indicators on the basis of which the 2008 budget was built and the currently expected indicators for 2008. According to the macro-forecasts of the 2008 budget, inflation at the end of the year and on average for the year should have been 2.8%. According to the macro-forecasts and indicators of the 2009 draft budget, inflation at the end of 2008. will be 9.9% and the average for the period will be 12.4%. The discrepancies between the predicted /-10.4% of GDP/ and the expected /-24% of GDP/ current account deficit indicators for this year are also drastic. If the discrepancies between forecast and reality are so large for 2008, then what will they be for 2009! This discrepancy means that the measures and policies for countering the crisis provided for in the 2009 draft budget may turn out to be critically insufficient and unfeasible. Even the fallback option for reducing the positive budget balance is not tied to a sufficiently specific macroeconomic scenario to give clear quantitative indications of when it will be triggered.
Most of the measures and policies in the three packages are aligned with a softer risk assessment. Accordingly, the main part of them /items 1-12/ has a medium-term nature and implies a longer period of implementation and lag effect. For example, the planned increase in the amount of public investment could not provide a quick and immediate response to the crisis. Unlike the policies and measures in items 1-12, the measures in item 13 are of an urgent nature, but their quick implementation is problematic, which is evident from the slow progress in our country of the European directive on increasing the threshold of guaranteed deposits. Measures such as "providing, if necessary, capital support to banks" /p.15/ require accurate calculations when such an event can be expected, within what limits and in what form the provision of capital support is possible. Unfortunately, the exact parameters of the scenario in which the need for capital support should be expected have not been foreseen, and it can be observed in the deepening of the risks for the banking system, accompanied by a drastic drop in production and income, difficult servicing of loans, deterioration of the quality of banks' credit portfolios, followed by a fall in their capital adequacy.
In item 4. of the policies and measures to limit the crisis in the draft budget 2009, a backup option for reducing the positive budget balance under the consolidated fiscal program by the Ministry of Finance by up to 1% of GDP or up to BGN 700 million is laid down. is a "criterion" for the realization of such a reduction, namely, in case of "substantial stagnation of economic activity and prospects for shrinking foreign economic deficits". Such wording is so vague that it can be assumed that a real criterion for triggering the backup scenario is de facto absent. Specific thresholds for stagnation and for the reduction of external economic deficits, below which the backup option starts, are not specified. It is not specified what is meant by "substantial stagnation". We find similar uncertainty when mentioning the "fiscal buffers" included in the budget. Generally, general and streamlined formulations are dangerous because they allow for prolonged inaction.
We believe that the following measures and policies to limit the impact of the global crisis should be further developed, specified and supplemented:
1. In relation to deposit guarantee compliance with the "European deposit guarantee legislation" is declared /p. 15/, and in fact the latter is interpreted in a heavily cut, limited version. The document refers to "increasing the degree of protection of citizens' bank deposits" /p. 15/. In the Law on Amendments and Supplements to the Deposit Guarantee Law, adopted at the end of last month, it is written: "The fund guarantees full payment of the sums of the deposits of 1 person in one bank, regardless of their number and size, up to BGN 100." This record does not correspond to the record accepted in the European Directive for guaranteeing deposits "up to minimum 50 euros", which is clear, unambiguous and does not allow for ambiguous interpretation. In addition, the European Directive requires that the guaranteed sums be paid within a period of three days– something that is omitted in the Bulgarian law. Such an omission in no way contributes to strengthening confidence in the banking system, which is the intention of the Directive. Increasing the degree of protection of bank deposits implies carrying out a quantitative analysis and assessment of the costs associated with the increase in the guarantee, as well as testing different scenarios for bank bankruptcies and comparing them with the available resource, and in case of shortage, identifying the sources of additional resource. This approach is recommended by the European Commission.
2. Again, on page 15, the statement about "use offunds from the fiscal reserve for the redemption, if necessary, of government securities hand improving the liquidity in the banking system and the economy". In this case, it is not clear what part of the fiscal reserve can be used for such operations, whether there is enough availability of government securities in the banks to be repurchased, what will be the mechanism of receipt of information from the BNB about the banks' liquidity needs and how quickly and efficiently it will work. A possible issue of new government debt is foreseen. It is very important when such an operation will be carried out, as it implies a withdrawal of liquidity from the banks and accordingly would not should have coincided with periods of liquidity difficulties for them.
3. With regard to the policies and measures laid down in the 2009 draft budget to limit the impact of the global financial crisis on the real economy, there are not sufficiently strong concrete measures aimed at increasing efficiency, eliminating corruption and achieving full use of funds from European funds. This is a serious resource, for the utilization of which the Government should undertake a complex of measures, which would eventually lead to the saving of a part of the budget resource in the conditions of crisis. On the other hand, investing budget funds in infrastructure projects for which funding from European funds was suspended due to deficiencies and corrupt practices means that budget funds will be directed to sectors and in ways that have been criticized by the European Commission. Such an approach is unlikely to help mitigate the impact of the financial crisis on the real economy. An additional problem is the fact that some of the sectors in which budget funds will be invested still remain unreformed and the result of such investments will be very doubtful. In addition to infrastructure projects, similar problems in the investment of budget funds will certainly arise in health care.
4. KRIB insists to foresee in the 2009 draft budget and a series of measures and policies that are aimed at increasing the flexibility and sustainability of companies, such as:
- reduction of social insurance by 5 percentage points;
– abolition of dividend tax;
- specification of the stated intention to speed up the VAT refund;
– postponement of the 1 percent increase in the price of natural gas, scheduled for January 2009, 20, until the drop in oil prices, which will compensate for the increase in the price of gas;
- clearing the arrears of budget administrators;
- capitalization of BAEZ and creation of an instrument for insurance of intercompany liabilities in Bulgaria.
In the implementation of the measures and policies for countering the crisis, special attention should be paid to speed and efficiency, with which the Government coordinates and implements its joint actions with the BNB. It should be borne in mind that during the financial crisis both the adequacy of the measures and the speed with which they are implemented are of decisive importance. At the moment, the slowness with which the Government takes decisions regarding the crisis is impressive. An example in this regard is the decision to "immediately" raise the ceiling on guaranteed deposits. The decision was made late, and its vote in Parliament was further delayed - something that in a time of crisis would have been fatal. The creation of high-level coordination mechanisms between the Ministry of Finance and the BNB for participation in the European crisis response mechanism is a positive fact, but the speed and quality of the coordination and the taking of the necessary actions should be improved. Such an aspiration is not evident in the measures to overcome the risks of the crisis contained in the 2009 draft budget.
In order to achieve efficient and effective countermeasures against the negative effects of the global financial crisis, the 2009 draft budget should be further developed and supplemented with:
- Pessimistic scenario for the development of macroeconomic and financial indicators
Comprehensive an action plan in the event of an emergency crisis situation, which must be agreed in advance between the Government, the BNB, the Financial Supervisory Service, the European Commission and the IMF, and which:- – to be made up of concrete measures and policies with clear quantitative parameters,
– to be activated immediately after reaching the values of predetermined quantitative and qualitative criteria and indicators for the depth of the crisis,
- to be implemented through the implementation of an efficient and fast-acting mechanism of joint action between the Government and the BNB, and if necessary, the EC, the ECB and the IMF.
- – to be made up of concrete measures and policies with clear quantitative parameters,
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