The big spending spree

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The big spending spree

Government expenditures are set to reach record heights in next year’s budget but distribution of the money is expected to be as inefficient a process as ever.

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© Shutterstock


Economic growth and revival of the labor market have boosted government revenues for several years now. As a result, the government has decided on a record budget of 39.3 billions levs for 2018, more than 4.5 billion levs above this year's expected implementation. A portion of the budget increase will go for higher wages for teachers, armed forces personnel, police, and other public sector employees. Another portion is reserved for social expenditure and health care. The largest share, however, will go to infrastructure projects under allocations for the new EU programming period, which were planned for 2017 but postponed to 2018.

For now, the government is fulfilling is campaign pledges but without extreme expenditure increases. With few exceptions that next year's government outlays will hardly be used more efficiently, nor will they improve the quality of public services. For example the healthcare sector continues to suck money without delivering better services.

Today, with the economy growing above its potential, may be the best possible time for serious reforms.

Five highlights from the 2018 budget

1. A curtsy to teachers and the Army

The government tried to focus the 2018 budget on increasing wages of public employees - a promise set in GERB's election campaign. Such hikes would cost an additional 700 mn levs in comparison with 2017, half of that will go to 89,000 teachers and to new programs targeting the needs of children from vulnerable groups.

Another chunk of the additional outlays, 100 mln levs, would go to 20,000 armed forces personnel. Here the bow is more to GERB's coalition partner, the United Patriots, as the military was not among PM Boyko Borissov's priorities. The Ministry of the Interior will also benefit from an additional 55 mn levs for increased salaries for police officers.

Beyond these beneficiaries, the Ministry of Social and Labor Policies will also receive additional funding for employees' salaries, as will the Emergency Health Service (an extra 19.5 mn levs) and municipalities. The healthcare sector will receive an additional 3.8 bn levs, an increase of 402 mn levs over t 2017. Social expenditures will also be increased, mainly to cover pension expenditures.

2. This year's projects will be postponed to 2018. The deficit as well.

The biggest hike in costs in 2018 is in investment, mainly because projects that were planned for but did not commence in 2017 are being shifted to the next year. According to Georgi Angelov of the Open Society Institute - Sofia: "The absorption of EU funds is set to rise significantly, by over 4.2 bn levs, but achievement of these figures will depend on the ministries themselves,"

The delay in EU projects may also explain why the 2018 budget will produce an expected deficit of 1% of GDP by year-end. According to Lyubomir Datsov, a financial analyst and former Deputy Minister of Finance, a balanced budget is expected set for 2020, when it is likely that economic growth will begin to slow down. 2020 is also the year in which the current EU programming period (the seven years EU's financial framework) will end, thus more budget resources will be required to co-financing delayed EU projects that usually pile up. The expected future budgetary expenditures make the 12.8% increase in expenditure relative to expected implementation this year an unwise move that will result in future deficits.

However, some experts believe that the budget is conservative, with reserves in both revenue and expenses, which makes finishing 2018 with a smaller-than-planned deficit very likely. It could allow for smaller than the projected next year's deficit as most probably will happen in 2017

3. An increase in business costs

The government is keeping its promise not to change the corporate and income tax rates but, nevertheless, the burden on businesses will grow. In 2018, pension insurance contributions will rise by one percentage point once again, in addition to an increase of the minimum wage and the minimum social insurance thresholds (administratively set income levels used for the calculation of social security contributions). The resulting sum for next year is 360 mn levs in additional levies on taxpayers and businesses.

4. A small decrease in debt.

With a budget deficit projected for the next two years, the apparent conclusion would that debt will rise. The Ministry of Finance, however, is betting on a decline in debt, as part of the payments will be financed from the fiscal reserve (i.e. without roll over of new debt). In 2019 and 2020, the nominal value of the debt will increase a little, but , with the economy projected to post stable growth, the debt-to-GDP ratio is expected to fall to 20% in 2020. According to the budget report, during the next three years the government will raise financing from the domestic debt market into the amount of some 1.0 - 1.2 bn levs per year.

5. More expenditures = better public services?

When it comes to a rise in government expenditures, the question is whether or not this will lead to a corresponding improvement in public services.

Take education, for example.

"It's been a long time since so much money was focused on one sector. The question is what will change with all those resources - not just in relation to teachers' well-being, but with regard to improving the quality of education and access to it", comments Lachezar Bogdanov, an economist with Industry Watch, a Sofia-based think-tank, "now is the time to implement significant changes, because we have a fiscal buffer: to build a road toll collection system, to reform education, to change ID cards." According to him, it all comes down to political will, or lack thereof.

For now, it looks as if GERB will fulfill its recent campaign promises to increase spending. Unfortunately the first budget of the current GERB led government signals that even if the cabinet had ambition for reforms, it has died. With the start of the Bulgarian presidency of the Council of the EU drawing closer the cabinet will not risk angering any recipient of budget funds who is able to organize protests in the Bulgarian capital.

Economic growth and revival of the labor market have boosted government revenues for several years now. As a result, the government has decided on a record budget of 39.3 billions levs for 2018, more than 4.5 billion levs above this year's expected implementation. A portion of the budget increase will go for higher wages for teachers, armed forces personnel, police, and other public sector employees. Another portion is reserved for social expenditure and health care. The largest share, however, will go to infrastructure projects under allocations for the new EU programming period, which were planned for 2017 but postponed to 2018.

For now, the government is fulfilling is campaign pledges but without extreme expenditure increases. With few exceptions that next year's government outlays will hardly be used more efficiently, nor will they improve the quality of public services. For example the healthcare sector continues to suck money without delivering better services.

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