Bulgaria's consolidated budget turned to a BGN 7.6mn (EUR 3.9mn) deficit in the first half of 2013 after posting a BGN 45.5mn surplus at end-May, finance ministry data showed. The deficit in H1 was mainly a result of a 14.3% y/y increase in Bulgaria's contribution to the EU, which amounted to BGN 533.4mn for the first six months of the year. The deficit for the first half of the year accounted for only 0.009% of the full-year GDP projection. In the same period of 2012, the consolidated budget posted a BGN 62.4mn surplus.

In the first half of 2013, total revenue grew 7.1% y/y to BGN 14.16bn as tax proceeds went up 3.6% y/y to BGN 11bn and non-tax revenue rose 6.6% y/y to BGN 2.1bn. Meanwhile, expenditures (including the country's contribution to the EU budget) climbed 7.7% y/y to BGN 14.17bn.

The latest budget performance data comes at a time when the government is pushing for a rise in the deficit target from 1.3%/GDP to 2%/GDP, mainly on the basis that revenue collection will fall short of the original projection.

Budget Forecast vs. Actual Budget Performance

The previous (prior to the revision) finance ministry's estimate was for 6.4% y/y increase in revenue for the full 2013 which equals BGN 1.83bn more in proceeds compared to 2012. The latest data showed that in H1 2013 the government has collected BGN 941mn more than in the same period of last year, which leaves BGN 896mn to be collected in the next six months to meet thе BGN 1.83bn target.

This target was approved by the previous government back in December 2012, while the current government (in power since May 2013) considers it is unachievable. Finance minister Petar Chobanov has warned that tax revenue - VAT and excise duties, to be precise - will fall short of the estimate included in the budget law.

While it is true that as of end-June the annual growth in tax revenue lags behind the 8.4% projection, non-tax revenue performs better than expected. It was seen rising by 6.3% y/y but it has so far posted a 6.6% growth. In addition, receipts from grants were expected to decline 4.5% y/y but at end-June they had increased 64.6%.

Chobanov has said that VAT from imported goods and excise duties will bring smaller than expected revenue due to the weak domestic demand. The data shows that at end-June 2013 the government has collected BGN 1.8bn from VAT from imported goods, which is exactly the same amount it had collected a year earlier. Meanwhile, excise duties revenue also amounted to BGN 1.8bn, which was only BGN 23mn less than in H1 2012.

Budget Revision

The budget revision bill legislates a higher deficit (2%/GDP, up by BGN 493mn) and also lifts this year's new debt ceiling from BGN 2bn to BGN 3bn. The bill passed at second reading in parliament today, August 1. It would become a law only if president Rossen Plevneliev signs it. Plevneliev has so far only said that using his veto power is not off the table.

According to the bill, revenue collection is expected to fall short of the original estimate by BGN 207.4mn, while the projection on state expenditures is raised by BGN 286mn.

The biggest drop in collection is to come from 2.9% lower-than-expected VAT revenue, which is seen shrinking by BGN 229.2mn. The forecast on proceeds from excise duties will be cut by 4.5%, equal to BGN 195mn in absolute terms. However, non-tax revenue is seen exceeding the 2013's budget law projection by 20.2%, or BGN 347.6mn.

On the expenditures side, the ministry proposes a change only in the budget's reserve for urgent and unexpected expenses. The reserve is to grow to BGN 405.5mn from current BGN 119.5mn. We note that the funds in the reserve are not earmarked - the parliament approves only their size but not the purpose they will be spent on. In other words, this reserve provides the government with money it can spend on its own discretion.

Bulgaria had one of the smallest budget deficits in 2012, according to Eurostat. The country's general government deficit amounted to BGN 350mn (EUR 179mn) at end-2012, or 0.5% of that year's GDP.