Bulgaria's 2014 draft budget increases public spending, pledges reforms

By bne IntelliNews October 24, 2013

Bulgaria's socialist-led government of PM Plamen Oresharski has proposed a draft on next year's budget that increases public spending in a pledge to revive the country's struggling economy, reform education and healthcare, and provide bigger support for the socially disadvantaged. The draft bill is expected to be submitted to parliament next week.

Budget Breakdown

The government plans to spend BGN 32.35bn next year, up by 1.2% from the estimated expenses in 2013. The bulk of the increase in expenditures will represent higher spending on social programmes, education and healthcare.

Revenue is expected to grow by 1.6% to BGN 30.86bn. Tax proceeds are seen rising 6.5% to BGN 24.3bn. On the other hand, non-tax revenue is projected to fall by 12.4% to BGN 3.32bn.​

Proceeds from privatisation are estimated at BGN 151.2mn and will come from selling the government's share in Navigation Bulgare Maritime and in the Sunny Beach seaside resort. 

Social spending will grow by BGN 423mn, of which BGN 251mn are allocated to the budget of the state pension system. The rest would fund a raise in the size of the maternity allowance, bigger financial aid to the poor and disabled and subsidises for their electricity consumption.

Pension system

The overall pension system expenditures will reach BGN 8.12bn in 2014 (up from BGN 7.87bn in 2013), accounting for 10% of GDP.

The government plans to freeze the retirement age next year, which would increase the number of pension beneficiaries by 15,000, resulting in some BGN 45mn in additional expenses. The golden Swiss rule will be adopted in July 2014, thus enforcing annual pension indexation that is calculated as a weighted average [in a 50:50 ratio] of the growth in insurance income over the past calendar year and the national CPI inflation. The average pension will rise by 3%, raising the pension system's costs by BGN 120mn. In addition, the maximum pension is projected to grow to BGN 840 (from the current BGN 770), further pushing up pension expenses.

Education

The government intends to increase spending on education by BGN 100mn in 2014, boosting total expenses for the sector to BGN 3bn, equal to 3.8% of GDP. The cabinet of PM Oresharski vows to improve the quality of education but no specific measures have been outlined yet.

Healthcare

Expenditures on healthcare will grow by BGN 115mn to reach BGN 3.46bn in 2014, accounting for 4.3% of GDP. The state plans to demonopolise the state-run national health insurance fund by allocating some of the healthcare contributions it will collect next year to a second fund.

Budget Deficit and Expected Economic Output

The finance ministry projects that the economy will expand by a real 1.8% in 2014 after growing by an estimated 0.6% in 2013 (revised down from an earlier estimate of 1%). The forecast is based on expectations for recovering external demand and improving domestic consumption - both investment and household. The ministry warns that a deviation of the actual output from the projected one is the biggest threat to the execution of the budget it has proposed.

The government has set a budget deficit target of 1.8% of GDP for next year, thus leaving itself very little margin of error in its expectations for the progress of the economy. According to Bulgaria's law on public finances, the cash-base deficit can not exceed 2% of GDP. Furthermore, the EU's stability and growth pact enforces a deficit limit of 3% of GDP. If the economy performs worse than expected, the government would have to cut spending or ask the parliament to raise the budget gap ceiling.

Compared to forecasts made by international institutions, the one from Bulgaria's finance ministry strikes as the most optimistic one. Earlier in October, the IMF revised its projection for Bulgaria's economic growth for 2014 to 1.6% from 2.3%. Furthermore, in its spring forecast from May, the European Commission lowered its expectations for the country's GDP growth next year to 1.7% from 2%.

Risks to Revenue Side

Though the Eurozone technically emerged from the recession in the second quarter of 2013, it is too early to tell whether the economies from the monetary block are on a sustainable growth path. In fact, it has been speculated that the European Central Bank might launch another long-term refinancing operation (LTRO) as banks in the region have problems repaying the funds they got from the previous financing facilities. Furthermore, governments in the region (specifically the PIIGS) continue to have fiscal problems and mounting debt that prevent them from having full access to bond markets.

On the other hand, the rising social and political opposition to austerity measures as a way out of the economic crisis might boost growth in the short-term via increased public spending. This would translate into higher budget deficits and deepening sovereign debt problems.

The Bulgarian government also counts on an improvement in the business climate that would facilitate higher levels of private investment, thus boosting employment and consumption. However, the reforms it has pledged to implement do not address the structural problems of the economy (high level of government involvement in several sectors of the economy, obstacles to competition, entrepreneurship, private investment, and job creation), which have been hindering growth also in the pre-crisis years.

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