A deficit of almost 5 billion levs (2.5 billion euro) is planned in Bulgaria's 2021 budget bill but government finances are going into the red much faster than anticipated. The budget deficit topped 600 million levs by the end of March, as expenditures increased by a quarter compared to the same period of 2020. Moreover, the funds in the government's fiscal reserve - a de-facto buffer for the budget, have been decreasing. This raises the question of whether the next cabinet that is expected to be formed as a result of the April 4 general election would have enough liquidity to do their job, or enough space to maneuver if the economy were to take another dip this year.
A deficit as early as March
By the end of March, budget expenditures exceed revenues by 656 million levs - the largest deficit recorded since 2014. The gap is not entirely unexpected given the plans of the outgoing government of prime minister Boyko Borissov for significant anti-crisis expenditures called for by the pandemic but costs are up 24% compared to March 2020 whereas revenues have increased by just 2.2%.
To be fair, there are reasons to believe that the budget position might improve by mid-year. To start with, some of the costs - like the supplementary pension benefits worth 100 million levs per month are due to end in April, and the extra remuneration for people working on the frontline of the pandemic will expire when the situation normalizes. Also, the first payment for the Sofia airport concession - 660 million levs, was received in April, and revenues from corporate taxes will start to trickle in. Lastly, unlike previous years, in 2021 the budget has an extra buffer - 5% of the ministries' budgets will be off-limits until December.
Still, many experts believe that the next government will have to submit a budget revision.
"The next finance minister will have a significantly bigger problem with maneuverability and flexibility compared to 2009. We now have a 25% increase in spending that cannot be reduced," says former deputy finance minister Lyubomir Datsov. According to him, risks are bound to mount if this pace of spending is maintained.
"I think every new government will want to revise its budget because it is made with the previous government's priorities. On the other hand, we have a permanent problem with spending because the funds meant for investments are usually not used. Some projects will probably be revised, others will probably be delayed this year as well," said economist Georgi Angelov of the Open Society Institute.
However, according to people close to the government, there is a significant probability that the deficit will exceed the planned figure. Since the start of the year, the government has spent an extra 300 million levs for temple renovation, municipal infrastructure, sewerage systems.
What's up with the reserve
Meanwhile, concerns have been raised about the fiscal reserve. Its purpose is two-sided - in the short term, the government can use it to provide liquidity for current payments, and in the medium term, it serves as a guarantee that Bulgaria can pay its debts.
As of April 9, the government's deposit in the Bulgarian National Bank (BNB) amounted to 5.9 billion levs. In addition to those, the fiscal reserve usually includes several hundred million levs in commercial banks. This means that there were about 6.4-6.5 billion levs in the reserve at that time, or the volume of funds has thinned out by 1.5 billion levs since the start of the year. The decrease has raised concerns that the outgoing government will leave the new one with no liquidity. Although 6.5 billion levs may not sound like a reason for concern, about 3.3 billion are off-limits as part of the Silver Fund meant to guarantee the sustainability of the pension system, and cannot be taken out.
"The problem is that there's a large budget deficit planned at 4.9 billion levs. It's clear that the fiscal reserve won't be able to cover that gap and this year Bulgaria has to raise funds on international markets," said Georgi Angelov.
The maximum amount of debt that the government can issue this year by law is 4.5 billion levs, of which 800 million has already been raised from the domestic market.
"If a new government is formed, it would be expected of the new Minister of Finance to go meet investors before issuing new debt on the international markets. Of course, a caretaker government can also do that, but it will be more difficult and possibly more expensive. After all, the markets want to know what they can expect in the coming years, and it is more difficult for a caretaker cabinet to convince investors that we will be stable in the next 10 years," Angelov said and added that debt issuance should not be politicized because it will have to be done no matter who is in power.
So far, if everything goes according to plan, the reserve should be able to cover the budget deficit at the end of the year. A larger deficit would change the estimates but it would also mean a higher debt limit so there is no immediate risk as long as Bulgaria can easily and cheaply raise funds. However, as the first months of the year are traditionally slow on the revenue side, and in March of next year the government will have to pay back loans worth 2.5 billion levs, 2022 may be quite tense for the next finance minister. One thing is for sure though - he or she will have to work around this during their entire term because a deficit does not disappear in a year, and large debt issues are due to mature in both 2023 and 2024.