The bill on the state budget of the Republic of Bulgaria for 2013 is a logical continuation of the government's fiscal policy of the last four years. The project is based on a credible macro framework (a growth rate close to the consensus forecasts and to those of international financial institutions such as the IMF and the EBRD), and conservative revenue planning (fiscal revenue is calculated at a real economic growth of 1.2% compared to real assumed 1.9%, which is a continuation of the positive trend from last year, when revenues were calculated at a growth of 1%, while the real growth assumed in the macroeconomic scenario was respectively 1.4%). In our opinion, in the absence of new large-scale external shocks for the Bulgarian economy, the risks for the implementation of the budget next year remain insignificant.
A major potential threat to the implementation of the forecasted revenues, in our opinion, is the forecasted high contribution of domestic consumption to the growth of the economy.This trend, outlined by the Ministry of Finance, contains a certain amount of uncertainty, for two reasons. First, indications of a recovery in individual consumption so far in 2012 appear shaky. The sharp increase in personal consumption of 2.4% in the second quarter of the current year compared to the previous quarter came as a positive surprise, with growth in three of the last four quarters. This is the strongest quarterly result since the second quarter of 2001, which, however, was reported against a background of persistent weakness in the labor market and household credit data (employment fell by 2.8% year-on-year in the second quarter of 2012, while credit for households continued to report growth in negative territory of 1.4% annually at the end of August). Some role in this result is probably played by the stronger nominal growth of the average salary, which increased by 8.4% annually in the second quarter of 2012, but this was more or less the situation in the last two and a half years, in which the growth of the individual consumption remained negative. All this implies that the reported growth of individual consumption for the second quarter of 2012 most likely overestimates the reality and therefore there is a risk of negative revisions in the following quarters.
Secondly, the budget's macro framework contains a forecast for a very slow recovery in the labor market next year: "In 2012, the unemployment rate will remain at 12.4% and the number of employed will stabilize around its 2012 level, with the process of employment recovery will be limited by the deteriorating external environment in the first half of the year, and therefore a slight increase in the total number of employed can be expected only at the end of 2013". The indexation of the lowest-income groups of the population planned in the 2013 Budget can hardly be the necessary engine to accelerate individual consumption to the levels required in the macro framework. Against this background, in our view, it seems unlikely that individual consumption will grow at the pace needed to reach a contribution of 2.4 percentage points to growth in 2013 (corresponding to around 3% real growth). So if in the course of the next year it turns out that revenues are lower than budgeted, the most likely reason for this will be the incorrect forecasting of individual consumption.
In order to address this risk, in our opinion, the budget should contain a new set of measures to improve collections. For us, the absence of such measures in the draft budget for 2013 comes as a surprise, especially given the strong performance achieved so far this year, where measures taken by the government to improve collections have led to a noticeable over-delivery of fiscal revenues. We understand that the connection of the fiscal devices of commercial establishments with the control systems of the National Revenue Agency has not yet been completed in all sectors. Therefore, the positive effect of these measures has not yet been realized in full, and although, without a doubt, most of it is already there (or will be consumed by the end of this year), some residual effect will be able to to be observed in the next year as well. However, if one relies only on the remaining, incompletely materialized effect of the above-mentioned measures, it is possible that the fiscal revenues in the next year will not reach those laid down in the draft budget. This leads us to believe that it is also necessary to identify new initiatives to improve collections, possibly in combination with cost reduction measures in certain areas, to strengthen the government's fiscal position, paying particular attention to the revenues of the NSI and NHIF from insurance, which will allow to reduce transfers from the state budget for these institutions.
As far as expenses are concerned, KRIB does not object to the proposed increase in pensions included in the budget of the State Social Insurance and an increase in the minimum wage, but opposes the proposal to increase the maximum insurance income. Our reasons for not accepting the increase in the maximum insurance income basically boil down to the fact that, in conditions of economic crisis, the planned increase will put additional financial pressure on honest employers and their employees, since the percentage of non-paying insurance contributions is still too high. In addition, we note that the adopted temporary anti-crisis measure for taking over the three days of sick leave by the employer is proposed to be kept and from a temporary one it becomes a basic legal norm. Despite the distribution of social security contributions between the employer and the employees provided for in the law, the ratio for the sixth year in a row remains 60:40 at the expense of the employer, as well as the interest on late payments of social security contributions in the amount of the basic interest rate plus 20 point.
KRIB supports the increase in the minimum wage from January 1, 2013, referring to a EUROSTAT report for 2011, where Bulgaria ranks last in the EU in terms of purchasing power. As a member state of the European Union, Bulgaria must strive to increase the MRZ in order to reach the European levels or at least approach them.
Proceeding from the recommendation of the European Union to review the system for determining the minimum insurance incomes, KRIB confirms its position that the main mechanism for determining the thresholds is based on the agreement between the social partners at the sectoral/branch level, as for the economic activities for which no agreement has been reached an agreement that the state will not apply an administrative increase in the thresholds.
However, the government's claim that this fully compensates for the accumulated inflation in pensioners' budgets for the period from July 2009 until now does not seem entirely correct, since the inflation estimate is based on harmonized inflation, which implies a structure of consumer spending much more different from that of Bulgarian pensioners. At the same time, the difference is probably significant, given that a large part of inflation during the four years in question is related to food prices, which have a significantly greater weight in the structure of expenses of Bulgarian pensioners, in contrast to those of the average household in EU. The explanation that the same methodology for determining inflation was used by the previous government is unacceptable.
We welcome the increase in spending in the areas of education, health, culture and the environment. At the same time, the increase in expenses in the power ministries by a real 70 million BGN seems difficult to defend, given the bloated state and unfinished reforms in these departments. In this regard, we recommend that the government not only resist the populist pressure to increase spending in the Ministry of Interior and Ministry of Defense, but also undertake the necessary long-delayed reforms, which, among other goals, should focus on optimizing the state and using savings as a result to selectively increase staff wages.
As for the situation on the labor market, more important for us are the measures aimed at improving employment, and not so much to the systematic increase in the level of the MRZ with the planned BGN 20 per year, which rather makes sense as a measure to lighten the economy and reduce unfair competition. We do not see progress in terms of defining specific active measures on the labor market, with an estimate of their expected effect on employment and the budget. This leads us to remain pessimistic about the high level of youth unemployment (26% or the sixth highest in the EU in 2011); significant levels of long-term unemployment (over 1 year) reaching 54% of all unemployed; as well as the high level of regional disparities within the country, where unemployment levels of over 20% are observed in areas such as Shumen, Smolyan, Vidin and Razgrad, while in the capital Sofia this level is several times lower.
The government's efforts to ease the regulatory burden on businesses, increase the absorption of European funds and actively attract new investors should be recognized as steps in the right direction. But labor market policy seems bereft of ideas, relying entirely on the fact that the economic recovery will not slow down and the acceleration of economic activity will reduce unemployment to painless levels. However, this is unlikely to happen so quickly, as the natural level of underemployment (the level of underemployment that is healthy to tolerate) in the period after the end of the crisis will exceed, perhaps even significantly, the levels of the period 2000-2009.
Financing investments requires savings. In the boom years, investment was predominantly financed by inflows of foreign savings, with domestic savings accounting for about two-thirds of total financing. After the end of the current crisis, it is believed that it will neither be possible nor healthy for the volume of foreign savings to exceed 5-6% of GDP. The difference will have to be covered by national savings, which should therefore be sustainably established at levels of the order of 25% of GDP. Considering the low level of national savings in the country's recent economic history (an average of 15.3% for the period 2000 – 2010) this seems a challenging task. Achieving it will require a special policy aimed at stimulating national savings. From today's perspective, things look even more complicated, because although national savings are already close to the desired level of around 25% of GDP in the long term (23.9% in 2010), there is a problem with the structure of savings, as the sector of households continues to report a negative savings rate (meaning that households spend more of existing savings than set aside new ones), while savings come mostly from the corporate sector.
Therefore, Bulgaria will need not just a policy to encourage savings, but one oriented towards encouraging household savings. Currently, the dominant form of household savings is bank deposits. Therefore, the introduction of a tax on the income from interest on bank deposits will discourage savings, which will also lead to a delay in investment, since in the new conditions the inflow of foreign savings will be limited to about 5-6% of GDP. This will eventually lead to a delay in the process of income convergence, since taxing deposit interest will have roughly the same effect on investment incentives as an increase in any other tax on business income.
Prudent fiscal policy in recent years and active public debt management allow the government to easily meet its financing needs for 2013. Debt markets, both abroad and in our country, are paying off with falling interest rates and increased demand for Bulgarian debt for the government's efforts in the direction of fiscal consolidation and stable fundamental indicators. Thus, the coming maturity of a global bond issue denominated in euros in January 2013 does not pose a threat to public finances, and the funds needed to finance the deficit, both in this year and in the following years, will be able to be raised without any problems. Efforts to increase tax collection and brighten the economy have contributed significantly to this success.
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