Bulgaria's proposed budget revision raises 2014 deficit target to 4%/GDP, lifts debt ceiling by EUR 2.3bn

By bne IntelliNews September 29, 2014

Bulgaria's interim government has drafted a budget revision bill that raises this year's deficit target to 4% of GDP from the current 1.8% and also lifts the ceiling on new net debt for 2014 by BGN 4.5bn (EUR 2.3bn).

The budget update proposed by the cabinet of PM Georgi Bliznashki is based on an estimated full-year revenue shortfall of BGN 1.06bn and on an additional spending of BGN 618.5mn. The projected cash-basis deficit figure of 4% of GDP also reflects a downgraded forecast for the country's 2014 economic growth. The government now expects Bulgaria's GDP to grow by 1.5% this year compared to a previous forecast of 1.8%. 

Under the proposed budget revision, the deficit widens to 3.6% of GDP on an accrual basis as calculated under Eurostat methodology, which is above the EU's limit of 3%. This could prompt the EU to open an excessive deficit procedure against Bulgaria. The Balkan country was previously placed under an excessive deficit procedure in 2010 but managed to exit it two years later because of consistently lowering its general government deficit from 2009 to 2011.

The updated revenue plan lowers the expected income from VAT by BGN 670mn, revenue from excise duties by BGN 318mn and that from corporate taxes by BGN 79mn. The plan is based on budget execution data for the first eight months of the year, according to which the actual levels of general economic activity, the value of imports, and the current efforts to improve tax collection cannot support the original budget figures.

Meanwhile, half of the proposed expenditures increase reflects a BGN 200mn worth of additional spending on cohesion and structural projects under EU's operational programmes (OP) and also an extra BGN 100mn to finance healthcare costs. Bulgaria has been using national budget money to facilitate the launch of OP projects since the start of 2014 in an effort to avoid losing frozen EU funds. The interim government recently capped these expenditures at BGN 750mn. If approved, the healthcare allocation will go to the National Health Insurance Fund (NHIF), which already received BGN 225mn from the central budget in July to deal with a projected BGN 328mn full-year deficit. Higher social-welfare spending and various other unbudgeted expenses account for the rest of the proposed expenditures increase.

The widening of the 2014 budget gap by BGN 1.68bn above the current estimate of BGN 1.47bn and the government's precautionary plan to support the banking system with BGN 2.82mn worth of liquidity require lifting the ceiling on new net debt for 2014 with BGN 4.5bn. Thus, the interim cabinet's budget bill raises the limit on the end-2014 public debt to BGN 22.5bn (28.4% of GDP). Some BGN 2.12bn of the proposed new debt will go directly to troubled banks and the rest will be lent to the country's Deposit Insurance Fund to guarantee the repayment of all of the insured deposits at the cash-flow insolvent Corporate Commercial Bank (Corpbank). The government will also guarantee BGN 2bn worth of debt the Deposit Insurance Fund is expected to try to borrow from the markets. The Fund currently has only BGN 2.1bn and should Corpbank be declared balance sheet insolvent, it would have to pay out BGN 3.7bn to the lender's depositors.

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