The draft budget 2014 essentially continues the fiscal policy followed by the previous several governments, with the main priority remaining the preservation of the stability of public finances. The draft does not foresee an increase in growth through further loosening of fiscal policy, so this budget cannot be expected to make any particular contribution to economic growth in the short term, i.e. in 2014. At this stage, it is not possible to expect much more in terms of expenditure restructuring, in the direction of increasing the share of investment expenditure at the expense of a lower share of subsistence expenditure, which could also contribute to accelerating growth, as with the fiscal multiplier for investment spending being higher than that for living expenses.
The contribution of this budget to growth in the medium to long term is likely to be modest, as there is no reason to believe that we will see any significant acceleration of measures aimed at reducing existing structural weaknesses. This means that the recovery of economic activity and jobs will continue to be slow. It will be led by the recovery in exports, which will slowly trickle down to the rest of the economy and help stabilize expectations and, through the labor market, ultimately household spending. The recovery of investments seems to need more time, as the levels of indebtedness in some sectors of the economy remain elevated and the financial restructuring processes of troubled companies are proceeding slowly. In addition to this, continued political instability and concerns that interest rate normalization in advanced economies may adversely affect monetary conditions in emerging economies are likely to continue to weigh on private sector investment.
Forecasts for GDP growth and especially inflation are rather in the upper range of expectations, but this does not create particular risks for the implementation of revenues, as laid down in the 2014 draft budget. According to the updated budget forecast of the Ministry of Finance, the projected real growth of GDP and inflation for 2013 (of 0.6% for both indicators) are significantly lower than those assumed during the initial preparation of the budget (respectively 1.9% and 3.4%). ). However, the implementation of tax-insurance revenues is expected to mark a relatively modest deviation from the original plan. Current estimates are that tax and social security revenues will grow nominally by 6.2% on an annual basis, against an initial plan for growth of 8.2%. At the same time, the growth of tax-insurance revenues (6.2%) outstrips that of the real growth of GDP plus inflation (1.2%). In 2012, tax and social security revenues again grew by a percentage (4.5%) greater than the sum of real GDP growth and inflation (3.2%), but the difference was significantly smaller. These results indicate that in the last year the pace of lightening of the economy has accelerated and had a significant contribution to the reported growth of fiscal revenues. Thus, focusing too much on inflation forecasts and real GDP growth, as indicators of the macro framework allowing to assess the expected level of fiscal revenues, may not make much sense, as it would ignore the effect that the continued lightening of the economy can expect to have. In this regard, the proposals to increase the minimum wage for the country to BGN 340 and the maximum insurance income to BGN 2400 would change the trend and even lead to regression. The increase in the MOD will make business more difficult and lead to an outflow of highly qualified specialists from the IT sector to countries that offer good terms. That's why KRIB does not support the increase of MRZ and MOD.
The main risk to fiscal revenues is not so much that forecasts of economic growth and inflation will turn out to be inflated, but rather that continued political instability could lead to increased incentives for tax evasion. Whether this risk will materialize next year, and if so to what extent it will affect revenue, remains unclear. In a worst-case scenario, there could be a resurgence of VAT fraud as well as channels for the smuggling of excise goods, undermining fiscal revenues and jeopardizing the government's efforts to preserve the stability of public finances.
The specific measures to improve the collection of VAT and excise duties are limited to the reverse charging of VAT for grain traders, which was to a large extent prepared by the previous administration. Growth in social security contributions and especially in health contributions is expected, but there is a lack of clarity about the measures to improve collections that are relied upon in order to achieve the goals thus set. This is a weakness of this draft budget, as it misses for another year the opportunity within the budget preparation procedure to provoke a serious public discussion and work to build a consensus around what are the measures to improve tax collection and especially on health insurance contributions, where the non-payment rate remains unacceptably high.
An increase in payments to the lowest income groups is foreseen, which deserves support given the deterioration of socio-economic indicators, including indicators of poverty and social exclusion over the past few years. The pension increase is scheduled to take effect from the middle of the year, for which the finance minister, Mr Chobanov, deserves admiration as he seems to have resisted the temptation to introduce the measure just before the European Parliament elections scheduled for April. Of course, there is a risk that in the weeks remaining until the final adoption of the budget, we may see the proponents or the parliamentary group of the governing coalition take a step back on this commitment.
A step in the right direction seems to be the effort for a wider application of program budgeting. The introduction of this principle at the level of policies, instead of at the level of sectors, will help to more easily achieve the goals set by the government in the areas defined as priorities - economic growth, regional development, education, social policy. Compliance with the criteria for program budgeting will allow the entire process of application, selection and implementation of individual initiatives to become more efficient and transparent thanks to the introduction of competition between the expanded list of budget allocators - municipalities, ministries, higher education institutions, etc. In this way, it is expected to improve the relationship between the expenditure part of the budget and the specific programs that will be financed by the government.
The creation of the "Growth and Sustainable Development of Regions" fund is good news, which should support the efficient use of resources and transparency in capital expenditures financed from the budget. It will be key that the stated intentions for transparency in the distribution of funds from the fund are fulfilled to the maximum extent, so that this fund does not degenerate into another mechanism for trading political influence - a practice towards which the society treats with increasing intransigence.
Increasing the state's financial commitment to the field of "Education and Science" is another good step in the draft budget for 2014. This step definitely lacks determination, however. The additional BGN 100 million for the education and science sector represents an increase of only 3.4%, with a total increase in non-interest expenses of 1.9% per year. All this seems to point once again that solving the problems of systemic underfunding of the health and education sectors will first require decisive measures to improve the collection of existing taxes, which should be accompanied by a clear commitment that if these measures do not produce the desired result (within some reasonable pre-defined time frame) there will be some modest increase in the tax burden.
The proposed amendment to the Law on Local Taxes and Fees to reduce the tax discount on vehicles that cover EURO 3 and 4 exhaust emission standard. This will allow a new step to be taken in the direction of introducing the "polluter pays" principle in one, considered by the general Bulgarian public to be a delicate sphere, as the interests of a large number of taxpayers, including those with relatively low incomes, will be affected. Against this background, the government's courage deserves to be celebrated and supported by business representatives. This is one of the most positive examples in this budget of taking painful structural measures that may even negatively affect support for the authorities in the short term, but at the same time solve a real problem. What worries us is the seeming lack of a sufficiently convincing communication campaign, with which the importers defend the need for such a measure and explain why and how such a measure will protect the public interest. The need to tax polluting and inefficient means of transport, production and services is indisputable and is one of the important budget instruments that can positively influence the state of the environment in our country. This topic is even more relevant in light of the latest report on air quality by the European Environmental Protection Agency. The results of the study show that 100% of the urban population in our country is systematically exposed to high concentrations of fine dust particles, and Bulgaria is also the country with the highest concentrations of the two main types of dust particles in Europe. Therefore, all working measures promoting the limitation of air pollution, which, of course, have an acceptable price for the society must be stimulated considering the efforts to improve the quality of health and the standard of living of the Bulgarian population.
The idea to introduce a 95% limit on the current expenses of ministries and departments is another step in the right direction. Traditionally, the real buffer in the Bulgarian budgets is the investment costs, which are reduced at the end of the year, in case of a risk of reaching the set goals regarding the budget deficit. However, this gives priority to current spending, which has a smaller contribution to accelerating growth than investment spending (because the fiscal multiplier values for investment spending is smaller). Thus, the balancing of income and expenses at the end of the year comes at the expense of investment expenses, which, other things being equal, means lower growth. With the proposed measure, the current expenses of the ministries and departments become, in practice, the first buffer for balancing revenues and expenses. Only in the event that this buffer is exhausted will it be possible to reduce investment costs, with the resulting negative consequences for growth.
The government's intentions to optimize public administration also deserve support, especially considering the apparently bloated staff of some departments, such as that of the Ministry of the Interior. Concerns remain, however, that the government's efforts will be limited to a mechanical reduction in staff numbers in order to quickly achieve the desired fiscal effect, rather than analyzing the performance of individual units and their corresponding costs to ensure that there will be no deterioration in the quality and volume of services that the administration provides to society and business.
The draft would freeze the previous government's increase in retirement age and length of service by four months each year and drop the minimum retirement age requirement for the military, which came into effect at the start of this year. It is important to note that the fiscal costs resulting from these changes will be small in the short term, but increase significantly in the medium and especially the long term. According to some estimates, the fiscal costs of this measure in 2014 were estimated at only 0.1% of GDP, increasing, however, to 0.5% of GDP in 2016 and as much as 1.8% in 2030. In essence, this is a populist move to avoid the difficult and unpopular decisions that will have to be made anyway. Instead, it shifts the responsibility and political cost of continuing painful budget-funded pension reform measures to the next government, which will most likely be made up of the political opponents of the current one. This fact once again emphasizes the need to define national priorities, including regarding the necessary reforms of the pension system, which will be supported by the leading political forces and represent a basis on which to proceed with the necessary structural measures.
The 2014 budget project once again signals the government's intention to demonopolize health insurance. The positive news here is that some attempt is being made to solve the problem of underfunding of health care, which is ultimately the deep, essential reason for the dissatisfaction of those receiving health services in Bulgaria. The bad thing, however, is that instead of developing steps to improve the collection of health contributions, in practice (through the prepared additional mandatory health insurance in private funds) an additional financial burden will be transferred to those who are currently making contributions to the budget of the NHIF. The government claims that this will not happen because these will be private health insurance lots, but this will not change the fact that through the control mechanisms in the sector that the state has in place, those who pay for the health care they receive themselves can be made to pay out of their personal contributions to private pension funds, so that more money can be left in the NHIF, which (behind the principle of solidarity to which the NHIF operates) can go towards covering the health care costs of the uninsured. All of this will increase the incentives for non-payment of contributions, especially given the low cost of restoring temporarily interrupted health insurance rights. At the moment, about 3 people are insured at the expense of the state budget, and the number of persons with interrupted health insurance rights is 900 according to the data of the NRA. Nearly 000 people are working Bulgarians who do not have health insurance. This is bordering on disaster and requires immediate corrective action. However, in order to support confidence in the system and begin to address the problems of underfunding the sector, the number one priority should be to reduce the number of uninsured and limit the state's ability to expand the circle of individuals who are insured for it account. Another potential source of risk in the event of moving towards the abolition of the monopoly of the NHIF in compulsory health insurance is whether the state is able to impose effective regulations that guarantee the financial stability of future private health insurance funds, but this is a side issue for the purposes of this opinion.
The danger of an increase in fiscal deficits is growing, as the source of the greatest risk is the implemented sectoral policies in the energy sector and BDZ. The decision from August of the current year to reduce the price of electricity for households by 5% is unsustainable and will lead to a deepening of the cash deficit in NEK's balance sheet. In a similar, albeit less dramatic way, the issue seems to be with the management of state railways. The sooner it is recognized that the problems in these sectors are primarily the result of wrong policy and an attempt is made to form a national (and therefore cross-party) consensus on the way in which these problems should be solved, the less will be the price society will ultimately have to pay, and the lower the risks to public finances caused by the refusal to seek sustainable solutions and policies.
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