© Tsvetelina Nikolaeva
The preservation of individual preferences once again proves how easy it is to respond to public pressure for populist measures and how imperceptibly “temporary” becomes “permanent”.
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The analysis is from the weekly newsletter of the Institute for Market Economics (IMI).
On the landmark date of November 10, 2023, the Ministry of Finance published the draft law on the state budget of the Republic of Bulgaria for 2024 and the updated medium-term budget forecast for the period 2024 – 2026. These are perhaps the most important documents in the budget procedure, the parameters of which determine the development of the public sector and analyze its impact on the economy for the coming years.
The budget law and the medium-term forecast also have a political dimension – they signal whether the government is working towards the fulfillment of its goals, namely membership in the Eurozone and the Schengen area. The budget as an instrument of public policies will redistribute more than a third of the GDP for the next year, and its parameters will affect every single citizen of the country.
What are the assumptions in the macro framework underlying the preparation of the budget?
The macroeconomic forecast underlying the budget for 2024 sets indicators for GDP growth of 3.2%, consumption growth of 3.5%, inflation of 4.8%. In the medium term, the expectations are that GDP will grow by around 3% on an annual basis, and inflation will decrease to 2.2% at the end of the period. The planned higher level of capital expenditure is the basis for the expectation of a significant growth (9.6%) in the gross fixed capital formation next year, although the growth of investment will slow down at the end of the period to around 5%.
At first glance, the ministry’s macro forecast does not seem particularly surprising, as compared to the forecasts of other institutions, the ministry shows greater optimism regarding GDP growth and higher inflation expectations. The key question remains whether these optimistic expectations will be realized in practice, as this will have a direct impact on the implementation of budget revenues, and hence on the budget balance.
A deficit again
The budget balance on a cash basis for the entire period is again negative – 3% per year for the period 2024 – 2026. We remind you that for every year after 2019, a cash budget deficit has been reported. The gross debt of the General Government sector will rise to over 27% of GDP at the end of the period.
Asen Vassilev will resign if the budget deficit exceeds 3%
Accumulation of deficits, albeit within the framework of fiscal rules, is neither mandatory nor advisable for a number of reasons – increasing indebtedness and the need for internal or external financing, higher current interest costs in future periods – more more so after the significant rise in interest rates in both the US and the Eurozone – and potentially the risk of possible funding difficulties. Placing buffers in the budget is not a reason for generating deficits.
Revenue is at the center of the debate this time
Unlike other years, the current draft budget for 2024 is accompanied by amendments to a number of tax laws and other changes affecting the revenue side. The planned total amount of revenues is BGN 77.6 billion, of which BGN 42.5 billion are tax revenues, and BGN 17.7 billion are social and health insurance revenues. VAT revenues are about BGN 2.4 billion higher than the expected implementation of the budget for 2023, which means that the forecast is highly dependent on the expected significant growth of consumption and imports, as well as on the relatively high rate of expected inflation.
The increase in the tax-insurance burden in recent years in Bulgaria is a fact, and although the level of the tax burden in Bulgaria is still relatively low compared to other EU countries, it will reach 31.1% of GDP in 2022. However, the development of business and investments in our country requires a long-term stable tax system with low levels of taxation and a broad tax base, as well as high tax collection without exceptions for certain businesses and sectors – this guarantees the effectiveness and fairness of taxation.
In the 2024 budget, we still see the preservation of certain preferences – for example, the extension of the zero rate of VAT for the supply of bread and flour until mid-2024 and the reduced VAT tax rate of 9% for restaurant and catering services until the end of 2024 d. – which once again proves how easy it is to respond to public pressure for populist measures and how imperceptibly “temporary” becomes “permanent”.
And finally – about the missing reforms in the expenditure part
The budget is the government’s tool for realizing policy goals – through it, it implements in practice its views on the development of sectors and public services. And while in the current budget it is not clear what the goals of the policies are, what changes the government envisages to improve the quality of services and how exactly they will be implemented, we recall what (although not only) we expect from the government:
Assessment of the quality of secondary education (possibly through value-added funding models); Changing the financing model of hospital care (if possible by introducing an adequate model based on the diagnostically related groups); More effective social assistance in order to reduce poverty and inequalities by changing the approach of a broad scope of social assistance at the expense of targeting the programs to the truly needy; And – perhaps – most importantly – a judicial reform guaranteeing the rule of law and the independence of the judiciary.
However, if the executive does not take advantage of the opportunity to show initiative for reforms, to lead the process by formulating ideas for changes in models of management and financing of activities in the public sector, this does not mean that legislators will remain passive.
As we have repeatedly witnessed in the past, and in the current complex political configuration this is even more likely, people’s representatives will be able to and will form thematic majorities to push their ideas for reshaping spending programs, redirecting funding or opening tax loopholes. windows – without analysis of the effects on the economy and citizens in general, but almost always in the interest of specific groups of stakeholders.
The column “Analyses” presents different points of view, the opinions expressed do not necessarily coincide with the editorial position of “Dnevnik”.