Ever since the Ministry of Finance published the draft budget for next year and the medium-term forecast in late October, critics and supporters of the government have been going back and forth on the pros and cons of the proposed shift from balanced fiscal policy to budget deficit. Amid anti-government protests, an economic and health crisis and declining popularity Boyko Borissov's third cabinet threw fiscal caution to the wind and set annual budget deficits for the period 2020-2023 topping 15 billion levs (7.7 billion euro) combined and a 67% increase in government debt by the end of 2023 compared to late 2019. Two-thirds of the budget deficits and the increase in government debt will be accumulated in 2020 and 2021, according to the government's projections. For GERB, the spending spree comes just in time for the parliamentary and presidential elections due in 2021.
Economists, analysts and politicians called the draft budget and the mid-term projections populist, irresponsible, dangerous, election-driven, the worst fiscal framework made in recent years. Government ministers and GERB supporters disagreed, arguing that the budget framework was made with the people's benefit in mind, in an effort to counter the negative effects of the coronavirus pandemic on the economy.
At first glance, the sharp criticism seems unwarranted - the response to the pandemic requires extraordinary expenses by all governments. Bulgaria even looks like one of the more cautious EU member states with an annual budget deficit projected at below 5% in the coming years. However, a closer look at the numbers shows that a very little part of the so-called anti-crisis measures - some 3 billion levs, will benefit households and businesses directly affected by the economic or the health crisis. Especially taking into account that the government's projections didn't foresee the possibility of a second wave of COVID-19 sweeping through the country in the fall. And that wave hit far more people and was much deadlier than the first one in the spring. Moreover, the lack of reforms in the pension, healthcare and education systems as well as in the public sector means that the extra expenses will have, at best, a one-off effect on the economy and zero on Bulgaria's long-term growth potential. Meanwhile, the increase in debt levels will shrink the government's room for manoeuvre in the future.
The parliament approved the 2021 budget in late November with few corrections compared to the draft, leaving most of the initial concerns unanswered. Businesses and experts have already pointed to the risk of increasing tax rates to fill the expected budget gap. Others predict a total dismantling of the tax system following the introduction of selective VAT breaks for restaurants, some baby foods, gyms, tour operators after the first lockdown in the spring. Support for a shift to progressive income taxation may rise after even IMF managing director Kristalina Georgieva called for tax hikes on the wealthy.
The law of large numbers
For 2021, the government set record-high expenditures of 52.5 billion levs and a budget deficit of 4.9 billion levs equivalent to 42.2% of estimated GDP. Moreover, the 2020 budget also received its second makeover, this time with a deficit of 5.25 billion levs equivalent to 4.4 % of GDP (it was 3.5 billion levs, or 3% of GDP after the first revision in April).
"One of the [budget's] main priorities is to take measures in 2021 in response to the spread of COVID-19. It sets aside over 3 billion levs, the equivalent of 2.5% of GDP, for measures against the spread," Finance Minister Kiril Ananiev said in defence of the budget.
In the 2021 budget, government spending increased by 7.8% compared to the updated outlook for 2020, partially due to the so-called anti-COVID measures. As most of them are one-off expenditures, in 2022 and 2023 the budget deficit will decrease but will remain around 2.5 billion levs a year. Some of the anti-crisis measures include:
- Expanding the scope of child benefits from the lower-income groups to every parent in the country. This idea in the draft was later scrapped in favor of a tax relief plan for working parents, the effect of which will be seen in the 2022 budget. The money intended for child benefits in the 2021 draft budget was ultimately allocated to a higher wage increase for the police force and bonuses for healthcare workers.
- The lower VAT rate for restaurants, gyms, tour operators and some baby goods introduced in the summer.
- In addition to the annual pension update under the Swiss formula retirees will also receive a monthly supplement of 50 levs until March (the month of the parliamentary election) and an increase of the minimum pension.
"The expanded scope of child benefits, the supplement of 50 levs to pensions, the lower VAT rate for restaurants - these are policies that will be very difficult to remove. I suspect that a large part, if not all, will remain in force beyond the crisis," said economist Peter Ganev of Sofia-based think-tank Institute for Market Economics (IME). Also, the 2021 budget is weighed down by a 10% rise in wages for public sector workers, the final round of wage hikes for teachers and an increase of the national minimum wage, with these three expenditure allocations topping 1 billion levs combined.
Experts question to what extent these measures can be justified by the pandemic or the economic crisis. "Assuming that all the measures described by the government in the draft budget are targeting the coronavirus, we can say that the budget is skating close to the edge of fiscal rules. But many of them cannot be linked to the fight against COVID-19 even indirectly," financial analyst Lyubomir Datsov believes.
Economic crisis, COVID-19 and elections
According to Bulgaria's Fiscal Council, an advisory body analyzing and monitoring the budgetary framework, some of the emergency measures coincide with the general priorities of the ruling coalition. The increase of the minimum pension to 300 levs (153 euro), for example, which will cost the 2021 budget 474 million levs and is now included in the anti-crisis measures, was part of the election program of the parties forming the United Patriots alliance, the junior partner of GERB in the government coalition. However, retirees are among the few groups that have not lost income in recent months compared to the thousands who lost their jobs.
In theory, a rise in social expenditures can stimulate consumption in the country (although, according to the government's forecast, the crisis will be already over in 2021), but then the question arises whether this is the most effective way to counter the negative effects of the pandemic on the economy.
"In many cases, [social expenditures] encourage imports and the current account deficit worsens," commented economist Prof. Dr. Daniela Bobeva. "And we already see signs of increased savings and people refraining from spending. Personally, I do not expect this will stimulate economic growth," added Bobeva.
According to the Ministry of Finance's economic forecast, GDP will surpass pre-crisis levels by 4% by the end of 2021. In the same period, social spending is set to increase by over 20%. Even if the ministry's projection comes true and the economy were to surpass pre-crisis levels, an increase of social expenditure of that scale seems unreasonable at this point in time. According to Lyubomir Datsov, if the goal is to stimulate consumption next year, the government can consider other methods such as reducing or postponing some tax payments instead of increasing pension costs.
Social expenditures account for close to half of the anti-crisis package in the 2021 budget, whereas businesses were set to receive about 18% of the draft package. However, the draft budget didn't foresee the possibility of a second wave of COVID-19 sweeping through Bulgaria. Once it became clear that restrictions on the economy will have to be reintroduced, the government decided to redirect 156 million levs in European funding to business support schemes. According to business organisations, the sum will hardly be enough and some are already forecasting a revision of the 2021 budget after the elections.
The people in the public sector in charge of the pandemic will receive an additional 750 million levs in remuneration next year. However, it should be noted that the healthcare system was as unprepared to meet the second wave of the coronavirus in Bulgaria as it had been for the first wave in the spring. No significant restructuring of the sector is in the works or has been undertaken in light of the pandemic.
At the same time, the next year's fiscal framework relies on record-high revenue streams of 47.6 billion levs resulting from the expected recovery of the economy and funding under the EU Recovery plan. The Ministry of Finance is betting on a moderate GDP decline of 3% this year and growth of 2.5% next year, which is the most optimistic official outlook for the economy so far published by national and international institutions. For comparison, the Bulgarian National Bank (BNB) projects a decline of 5.5% in 2021 in its economic forecast, without taking into account the effects of a second COVID-19 wave in Bulgaria and Europe.
Fiscal measures in response to the pandemic in 2021
- 1,257 million levs to support households - increase in pensions, vouchers for pensioners, tourist vouchers and employment programs (10 million levs each), support for parents lacking the options for remote work or paid leave (73 million levs).
- 576.9 million levs for business support measures - the price of reduced VAT rate for restaurants, books, baby food; employment support; support for people of arts (2.5 million levs), support for tour operators (40 million levs). An additional 156 million levs will be redirected from European funds to businesses through support schemes.
- 748.9 million levs for support of the part of the public sector in charge of limiting the spread of the pandemic - funds from the National Health Insurance Fund, expenditures for protective equipment, support of the first-line staff. Additionally, over 70 million levs were promised to employees at the Ministry of the Interior for a 5% wage increase on top of the already promised 10% hike.