The coronavirus pandemic forced a revision of Bulgaria's government budget for the year, so altering it significantly from the original.
Now the Ministry of Finance is betting on a consolidated budget deficit of 3.5 billion levs (1.79 billion euro) equivalent to 2.9% of projected gross domestic product (GDP), compared to a balanced budget previously; a higher ceiling for the new domestic and foreign debt it can raise this year (10 billion levs instead of 2.2 billion levs); and a 3% decline in GDP rather than 3.3% growth. Inflation of around zero, the unemployment rate of 6.2% (up 2 percentage points on the original projection), and tax revenue 8% lower than 25 billion levs planned previously are also part of the fiscal revamp approved by parliament in April.
Against the backdrop of increasingly apocalyptic forecasts for double-digit downturns in some of the world's biggest economies, the Bulgarian government's expectations seem almost optimistic. Especially considering the relatively modest emergency spending in support of local businesses and the labour force. Throw in a surprising cut in the VAT rate for restaurants from prime minister Boyko Borissov - from 20% down to 9%, and things look even more uncertain.
The good news is that Bulgaria entered the coronavirus crisis with stable fiscal indicators. Even if the new higher levels of government debt and budget deficit set in the revised budget materialize by the end of the year, the country will remain within the Maastricht criteria for convergence to the euro area. This would set a good image, given Bulgaria's push to join the Exchange Rate Mechanism II (ERM II) - the training ground for eurozone membership.
The big numbers
The updated budget slashes the revenue side of the budget by 2.44 billion levs to 44.38 billion, while increasing expenditure from the original 46.83 billion levs by over a billion.
The National Revenue Agency (NRA) will collect 2 billion levs less in taxes compared to the previous version of the budget, with the largest contraction expected in corporate tax revenue (by 11.7%) and VAT (by 9.3%). The latter is the most significant component of the decrease in nominal terms and amounts to 1.1 billion levs.
The state-run social insurance system is projected to receive 430 million levs less in revenue compared to the initial target of 8 billion. The downgrades are understandable, given that the previous budget was made under the assumption of economic growth in 2020, a continued decline in unemployment and growing average wages.
It should be noted that government spending is set to make a positive contribution to GDP as no proposition to decrease it was made. In fact, the update sets an increase by a little over one billion levs for emergency measures to prop up employment.
The numbers show no change in capital expenditures. However, a large part of them could simply be used as a buffer in the event of further economic deterioration which has traditionally been the case.
The Ministry of Finance has also said that "additional changes in the fiscal parameters for the year may be required", signalling that another revision of the budget is possible by the end of the year.
The emergency measures
So far, the government has announced several emergency spending measures to mitigate the impact of the coronavirus crisis on businesses and households.
The first one, dubbed '60/40 measure', is worth 1 billion levs and is meant to subsidize employment, meaning that the government will pay 60% of employees' insured salary if the employer agrees not to fire them, and pay the remaining 40%. Initially, the scheme was supposed to be active for three months but it has since been extended by a further three until the end of September.
Employers were able to start applying on March 31, but so far interest has been minimal. Close to 13,500 companies had applied for compensation for a total of 220,000 employees by mid-May, according to data from the Ministry of Labor and Social Affairs. That seems a lot but it isn't - according to the National Statistical Institute, over 413,000 companies were operating in Bulgaria in 2018, employing over 2.2 million people. The amount paid out by mid-May is also insignificant compared to the billion-lev budget of the scheme - just over 28 million levs. If interest in the scheme remains at that level, it is unlikely that more than a tenth of the projected billion will be spent. However, the number of companies covered is expected to increase after the deadline was extended.
Another large spending measure takes 700 million levs from the government's fiscal reserve and allocates the money to the state-run Bulgarian Development Bank for credit guarantees (which it should channel to commercial banks) and interest-free consumer loans for those left with no income as a result of the implemented lockdown measures. The launch of the credit guarantee lines has been delayed and is expected to begin mid-year.
There was also a procedure for providing micro and small businesses with grants of between 3,000 and 10,000 levs that was initiated on May 14. According to sources of Capital, the entire budget of 173 million levs was distributed by May 18. In order to continue the procedure, the government transferred 70 million levs from the EU Operational Program Environment to Operational Programme Competitiveness soon afterwards to provide funding to companies struggling with the impact of the coronavirus crisis.
Also, several measures in support of businesses had to do with extending corporate tax payment deadlines from end-March to the middle of the year.
And then came an unexpected shift in one of the pillars of the country's tax policy - a cut in the flat Value Added Tax (VAT) rate of 20% for some businesses (see next page).