Bulgaria's state budget ran a surplus of over BGN 1.5 billion as of July 31, 2022, Petar Ganev, Senior Economist at the Institute for Market Economics, says in an analysis dated August 26. He says that at first glance the implementation of the budget is going well, creating the usual expectations of increased spending at the end of the year, refinancing of policies and projects for next year, and registering a smaller-than-projected state budget deficit. However, caretaker Finance Minister Rossitsa Velkova fears a considerable rise in public spending in 2023, which will put the budget balance at a major risk, Ganev warns.
The latest medium-term state budget forecast (April 2022) indicates that between 2022 and 2025 the budget deficit will gradually settle at around 3% of GDP annually, the economist says. But the forecast does not take account of the budget revision of June 2022, which entailed additional expenditures, including a further rise in pensions. The budget revision pushed up the planned deficit-to-GDP ratio to 4.1% in 2022.
Under a basic scenario not involving any new policies, state budget expenditures will increase by more than BGN 6 billion in 2023. According to the Finance Minister, this calls for "a structural adjustment of expenditures to avoid a tax policy shift", Ganev notes. This is a key observation as it suggests a return to a 20-year-old budgeting tradition at the Finance Ministry, which was more conservative. The tradition was slightly shaken in the last couple of years, which brought about a more rapid increase in expenditures. Minister Velkova's stance is fitting for a caretaker government, whose aim should be to keep the public purse full rather than inflate the state budget, the analyst says.
The next regular government will have to find quick solutions for the expenditure side of the state budget for 2023, because raising taxes will hardly be on the agenda. Still, taxation should be on the radars, because the differentiation of VAT rates will be a topical issue. VAT differentiation is supposed to be a temporary incentive, but practice shows that such measures often become permanent, the more so when they are bound to influence prices at a time of fighting inflation and trying to meet the euro convergence criteria, the analyst says.
He notes that in purely technical terms, state budget-related engagements for next year imply a considerable rise in expenditures and probably a larger deficit, but this does not mean that the fiscal balance cannot be controlled politically. History shows that at a time of public revenue growth (resulting from economic growth and inflation), the state budget can be controlled "manually" without any major shocks. Prospects would be far worse if the economy plunged into recession and the revenue side of the state budget was frozen, but for now this is not very likely to happen. If there is a political will, the state budget balance can be kept within certain limits by carrying out structural reforms on the revenue side or by using technical leverage to reduce or delay public investments. The latter method, however, would hinder growth over the long term and would send current expenditures out of control.
The big welfare programmes in Bulgaria are beset with problems as they seek to encompass large groups of beneficiaries but produce poor results. The Institute for Market Economics has proposed social policy reforms which involve re-orientation towards the most efficient welfare programmes and ensure better results on far less money. This is the kind of approach that should be adopted in every domain to curb current expenditures, Ganev says.
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