In 2004 the Institute for Market Economics (IME) presented its first Alternative Budget. Each year since that we have suggested an annual budgetary frame with lower taxes, more effective spending, bold reforms, and lower state interference.
At the beginning of 2023, Bulgaria will not have a state budget drafted by a regular government and voted on by a parliamentary majority. In October, the Ministry of Finance presented a macroeconomic forecast alongside a warning for alarmingly large deficits from 2023 to 2025.
The caretaker government did not submit regular budgets for 2023 but the parliament can still pass measures with fiscal repercussions. Parliamentarians recently made numerous proposals which additionally worsened the budget balance by nearly or possibly even more than 5% of GDP according to some preliminary estimates.
This behavior creates a series of risks in a global environment that is challenging enough. On the one hand, fiscal responsibility is put into question. On the other hand, in the context of global monetary tightening and rising interest rates, allowing a deficit of 6% of GDP and having to incur more than 45 billion leva of public debt in 2025 would be a step toward ruining the solid confidence in Bulgarian public finances built up over the past 25 years.
Seeking an exit from this situation, IME suggests some steps back to a prudent fiscal policy that supports investment and growth through predictable low taxes and effective spending. Without a detailed budget drafted by the government, we could not present thorough estimates of specific sectors and policies. Therefore we will simply be suggesting a couple of guidelines.
Adherence to Fiscal Rules
In periods of political instability like this one, we must rely on the fiscal rules written in the Public Finance Act. Currently, it is appropriate to pursue a structural deficit of 0,5% of GDP, spending on the consolidated program of 40% of GDP, a fiscal deficit of no more than 2% of GDP, and expenses growing at most as much as GDP.
Responsible Budgetary Planning
We understand the difficulty of predicting the economic dynamics of 2023 and the cash streams in the budget. Nevertheless, experience shows that macroeconomic predictions are almost always imprecise, with errors in the hundreds of millions in the case of some taxes. The solution is not to politicize forecasting but rather to conduct budgetary planning according to baseline policies, leaving large fiscal buffers which would allow for flexibility in various scenarios for growth, investments, employment, and inflation.
Hard Budget Ceiling
Despite the uncertainty and the expectation of a major economic downturn in the countries that are our largest trade partners, Bulgaria is far from being in a crisis. The adapting of the industry to the new market conditions abroad, export dynamics, and low unemployment all give us reasons to believe that even with a slowdown in 2023, one could expect a rise in public revenues next year. These additional resources would allow for achieving spending goals with a low deficit per the aforementioned fiscal rules.
Social Help Only for Ones in Need
Given the budgetary context, the government and a potential ruling majority will have to seek efficiency in spending. When it comes to welfare expenditures, the most crucial thing is focus – if the spending programs are not well-aimed, they cost hundreds of millions without successfully supporting the ones most in need (an issue that we have addressed on many occasions).
Moreover, with unpredictable future inflation (it may remain high or drop drastically due to monetary tightening), one should not foresee large increases in spending for wages in the public sector, pensions, and welfare payments. The alternative is one-time focused payments for the ones most in need, like people struggling with energy bills. Potential rises in social spending are better left for next year when hopefully there will be better macroeconomic clarity.
Removal of Tax Preferences that Undermine Tax System
Populist measures that hinder the predictability and sustainability of the tax system must end. Since the pandemic, but especially in the last month, various tax preferences and differentiated rates for “special” goods, services, and businesses have been proposed. Not only do these have a debatable impact on the economy and the living standards of the poorest, but they also undermine tax revenues significantly.
Ending Mass Energy Subsidies
Fiscal stability depends also on the rational and just creation and execution of policies with great macroeconomic importance. The state of European energy markets has heavily affected macroeconomic and budgetary parameters. For example, distributing energy subsidies to all businesses, regardless of the damage they incurred during the crisis, costs 1 billion leva per month.
Furthermore, due to the derogation of the use of Russian petrol, the Lukoil refinery in Burgas has been generating additional profits of 200 million leva per month. Both issues present opportunities for higher cash streams that could help balance the budget significantly.
Speeding up Reforms
In conclusion, revenues depend on economic growth – everything that leads to higher investment, production, employment, and wages boosts potential cashflows toward the budget and reduces the deficit. In other words, tried and tested policies would yield good results despite the political state of the country. Therefore, we will once again remind you that reforms upholding the rule of law are crucial for establishing trust and a healthy investment environment. A clear commitment to joining the Eurozone is another marker of predictability.
Moreover, many other structural reforms, most of which are part of the National Recovery and Resilience Plan, could improve specific aspects of the business environment and the work of state institutions, while the leaving of 2% of income tax in local budgets could boost living quality throughout the whole country.