It was supposed to be a carnage. Early on - in March 2020 - then Finance Minister Vladislav Goranov said that he expects a 3 billion levs (1.5 billion euro) deficit in the state budget because of the pandemic. A month later the budget was revised with a prognosis of a 3.5 billion levs deficit. In October, authorities were already betting on a gap of 5.2 billion levs.
Yet despite the crisis, government finances concluded last year with a smaller-than-anticipated deficit. According to finance ministry data, budget revenues reached 44.3 billion levs, whereas expenditures came close to 48 billion. Thus, the deficit was around 3.6 billion levs, equivalent to 3% of estimated GDP - higher than the gap of 1.15 billion levs (1% of GDP) in 2019 but far less than the last predictions and despite the massive spending spree the government went on.
Revenues exceeded the amount reached in 2019 by 100 million levs on the back of a rise in tax revenue and inflow of European funds. Expenditures topped the 2019 level by 2.6 billion levs, with the mfinance ministry saying the increase was due to the costs of anti-COVID measures like the so-called 60/40 job retention scheme and the monthly pension supplement for retirees.
According to the data, the funds in the government's fiscal reserve reached 8.6 billion levs at the end of 2020. By law, the fiscal reserve should have at least 4.5 billion levs at the year's end. As the indicator is monitored by the credit rating agencies and markets, it is better not to reach the absolute minimum. Also, with the inflow of revenues to the budget typically lower than the expenditures in the first two months of the year, it is important to have money in the reserve as a liquidity buffer.
The most expensive month of the year
In December 2020, budget revenues totalled about 4.5 billion levs - a bit more than the previous months' average of 3.7 billion). But the increase in expenditures was much more significant - at 8 billion levs for the month, expenditures practically doubled compared with the previous months' average.
It is not that unusual for government spending to skyrocket in the last month of the year. Usually, between 1 and 2 billion levs get distributed in the last days of the year as extra expenditures based on last-minute decisions of the Council of Ministers. However, spending in December 2020 was the biggest monthly expenditure in at least four years. For comparison, in December 2019 the government spent reached 6.4 billion levs, whereas the previous months' average was about 3.5 billion.
Last year, the "extra" money spent in December reached about 1.1 billion levs. The rest may have been expenditures from previous months, accounted for in December - e.g. various infrastructure projects or the monthly supplement to pensions of 50 levs which the government began to distribute in September.
"At the expense of the relatively low extra costs, an old practice was resumed in December - of piling up budget liabilities for the following years. In December, the ceiling for such commitments was raised by close to 1.4 billion levs, of which about 1.3 billion levs were set for the Ministry of Defence's budget," said Kaloyan Staykov, senior economist at Sofia-based Institute for Market Economics (IME). In other words, the government can brag about having the lowest debt and budget deficit in the EU relative to GDP, but it will bequeath contracts worth millions of levs in budget expenditures to the next government.
Tax revenues increase despite the crisis
In 2020, revenues from social security contributions, direct taxes on corporate profit and household income, as well as VAT on domestic purchases, increased compared to the previous year, according to finance ministry data. On the other hand, revenues from excise duties, customs, and VAT on imports fell because of weaker consumption and lower oil prices.
Thus, 2020 ends with 570 million levs more in collected tax compared to 2019. The main factor driving the increase is the higher minimum wage and the hike in public sector wages for groups like teachers, medics, civil servants.
The increase in revenues from personal income tax (4.6% compared to 2019), and from social security contributions (4.3%) is largely due to several administrative factors: the increase in the minimum wage and the minimum insurance threshold for people working in restaurants and bars; the 10% increase in public sector wages in 2020, and the additional hikes for public sectors workers battling the COVID-19 pandemic on the front lines.
However, people working in freelance and so-called free professions like lawyers, accountants, architects, translators, etc., reported less income in 2020, which resulted in a 7.4% decrease in revenues from income taxes paid by this group.
Revenues from corporate taxes are slightly higher (by 0.7%) compared to the previous year. The finance ministry points out that the increase is partly due to higher advance payments made in December when revenues from corporate tax reached 907 million levs - up by 163 million compared to the like month of 2019.