Prof. Dr. Gancho Todorov Ganchev
The pre-election campaign as always in our country served us unexpected plots, causes for panic and apocalyptic expectations. Surprisingly, except the problem with prices of energy, gas and petrol, in the center of attention ended up the problem with the budget deficit and the state debt. There were estimates of overwhelming imbalances and a catastrophic increase in government debt that would lead to the collapse of government finances. The possibility of Bulgaria joining the Eurozone at the beginning of 2024 is also being questioned.
Of course, in times of a military conflict in Europe and a global energy crisis, combined with a possible recession in the US and the EU, the risks to the budget are significant. The internal problems, caused by the social payments ad energy compensations for the businesses and citizens are also obvious.
However, any analysis of the fiscal position should start with a review of the implementation of the budget program.
So far, according to official data, until the end of July this year, there seems to be no cause for serious concerns. Revenues and expenses generally rose in line with forecasts. A fiscal surplus was realized, the fiscal reserve is at a normal level. The interesting point is that government debt is decreasing, both in absolute terms and as a share of GDP. Of course, according to tradition, the main expenses and deficits in our country are realized at the end of the year, when the fiscal office abruptly switches from surplus to deficit. However, this largely depends on the attitudes of the government.
The main risks facing any budget are related to the extent to which the corresponding fiscal program correctly predicts the main parameters defining the national and world economy. In this regard, it is interesting to see what are the indicators on which the budget revenue and expenditure forecast is based.
What makes an impression is the significant discrepancy between the estimated parameters of the fiscal program, on which the state budget for 2022 was calculated, and the real development of the world economy.
First of all, it appears that the growth in the EU won’t be 4,4% as were the budget forecasts, but only about 2.7%, according to the summer economic forecast of the European Commission. The petrol price will not be around $79 per barrel but most probably will be around $90. The dollar-to-euro exchange rate also deviated significantly from the forecast of $1.13 per €1. The prognosis for the gas price does not appear in the official documents, but probably ti is lower than the quotes on the European gas market. Average annual consumer price inflation is estimated at 5.6% - almost 15% at the end of July, compared to the same period in 2021. In other words, we see significant deviations of the actual from the forecast parameters.
Another important stability factor of the fiscal sector is the right judgment of the risk factors. It seems that as a main risk factor for the Bulgarian economy is perceived the pandemic, caused by the spreading of Covid-19. The military conflict in Ukraine, the sanctions, imposed by the EU and Russia and the countermeasures against the European community do not appear among the risks, reported in the fiscal forecast at all. The slowdown of the global economy, the global energy crisis and the strengthening of the anti-inflationary policy of the world's leading central banks are practically not taken into account.
However, the budget takes into account the probability of some unclear negative development of the European and world economy, but the possible negative consequences for the Bulgarian economy and the budget are assessed as such, which could be overcome with measures in the field of fiscal policy.
The problem boils down to how specifically the deviation of the estimated from the real parameters will affect the revenue and expenditure part of the budget and, respectively, the fiscal deficit.
Some of the deviations definitely will lead to a relative contraction of tax and non-tax revenues. This, in particular, refers to lower GDP growth in the EU, which will inevitably be expressed in a relative slowdown in exports and economic growth.
However, at the same time the significantly higher inflation will definitely increase revenues from VAT and excise taxes, and possibly also revenues from direct taxes. The devaluation of the euro and leva in relation to the dollar will in turn stimulate the export to the countries outside the EU and will increase revenues related to the taxation of energy imports. In general it is quite possible the unreported factors to rather influence positively the revenue part of the budget. Increasing the maximum insurance income and the scope of the toll taxes will also have a positive effect on the revenue.
In the expenditure part, the problems are related to compensations for businesses and citizens in relation to the prices of electricity and other energy carriers, as well as social policy. Rising pension payments could pose a problem, but probably after 2022, given the applied "Swiss rule" providing for pensions to be updated to take account of price and insurance income growth. Given the increase in the minimum insurance income and the inflationary growth of budget revenues, pension costs should not create insurmountable problems. The costs incurred by compensating businesses can and should be focused and reduced.
In connection with the expected excess deficits and an increase in government debt, some economists foresee a postponement of the country's acceptance into the Eurozone. Exceeding the three percent threshold of the budget deficit in relation to GDP, fixed in the so-called Maastricht convergence criteria, is seen as the main obstacle.
It should be noted, however, that the inflationary growth of nominal GDP and the increase in tax revenues may allow the budget to be adjusted to European requirements. Moreover, both European Central Bank and the European Commission are aware that in times of a military conflict on Europe’s territory, compliance with the standard requirement for financial discipline is neither possible, nor desirable. It should also be noted that with regard to the most important Maastricht criteria – the state debt – Bulgaria is in extremely advantageous position that cannot be violated even with a significant increase of the dept. The last one is practically impossible.
In this connection we would like to emphasize that Croatia, which has overtaken us in the competition for acceptance in the Eurozone, does not fulfill the most important criteria in which Bulgaria performs well, namely the criterion of the need for the state debt not to exceed 60% of GDP. This shows that the European institutions show an understanding of the temporary financial difficulties faced by the EU member states.
In practice, the desire and readiness of the Bulgarian institutions in the face of the central bank and the government to prepare the economy and public opinion for the extremely important for the country joining the Eurozone.
In conclusion we will note that so far there are no objective data on serious problems with the stability of the fiscal sector in a short-term perspective.
And yet, there is one concerning event. This is the last issue of Bulgarian government debt on the international financial market. The interest rates on this issue are too high, in fact higher than the similar indicators of countries with times higher indebtedness than that of Bulgaria. There are several reasons for this – the unjustified delay of the issue, the uncertainty, caused by the war in Ukraine, the impossibility of coordination between monetary and fiscal policy at the currency board, and most importantly – the fact that Bulgaria is still outside the Eurozone and does not benefit from the protection of the European Stability Mechanism.
