Branimir Kondov in Sofia -

Bulgaria plans to keep sticking to tight fiscal policies next year, targeting a cut in its budget deficit and planning a touch higher economic growth that will be backed by increased investment and absorption of EU funds.

The 2012 draft budget, which the cabinet approved on October 31 and has submitted to parliament, keeps unchanged one of the lowest corporate and personal income taxes in Europe and the government's fiscal reserve at the level projected for the end of this year. The draft provides an option for the issuing of fresh domestic and foreign debt next year to secure the payment of BGN1.8bn worth of global bonds maturing in 2013. Finance Minister Simeon Dyankov said the government may not use the option to issue new debt in 2012 just like it did in the previous two years.

Operating under the restraints of a currency board regime that bans the central bank from lending to the government, Bulgaria has to rely on fiscal prudence to sustain growth and the stability of its currency peg to the euro. Using money from its fiscal reserve, the right-of-centre government of the GERB party that took office in August 2009 has so far avoided bailout borrowing from multilateral lenders amidst the sovereign debt crisis - unlike the governments of its indebted neighbours Romania, Serbia and Greece, or much bigger economies in Europe.

The fiscal reserve fell to around BGN5bn at the end of August from over BGN8bn two years earlier when GERB came to power. Dyankov said he hoped the fiscal reserve will be boosted by privatisation revenue as Bulgaria is expected to wrap up the sale of its minority stakes in two of its three power distribution companies majority owned respectively by CEZ, EVN and E.On.

A slim rise in spending on education, culture, healthcare and justice and an increase of the minimum salary to BGN290 from BGN270 also are parts of the next year's budget draft, which Dyankov described as "conservative and prepared within the context of what is happening in the national and the European economy."

The draft envisages a consolidated budget deficit equivalent to 1.35% of the projected GDP, lower than the 2011 fiscal shortfall of just above 2% forecast by Dyankov in October and in line with the government's aim to achieve a balanced budget in 2014. The budget deficit is projected to decline next year mainly thanks to a faster rise in budget revenue, by 9.6%, compared with a spending increase of 5.9%.

The GDP is forecast to grow by 2.9% next year, compared to a projected rise of 2.8% in 2011. A rise in domestic consumption is likely to spur economic growth next year, but sluggish economic recovery in Europe is expected to slow down external demand for Bulgarian exports, the draft says. The EU is Bulgaria's main trading partner, absorbing about 60% of the country's exports.

The president of the Bulgarian Industrial Association (BIA), Bojidar Danev, however, sees even the 2.9% GDP growth target as too ambitious and hardly attainable. A more realistic projection would be for a growth of 1.5%, he told BNR national radio on October 24. At the same time, Danev added, end-year inflation in Bulgaria in 2012 could be lower than the 2.8% mark projected in the budget draft due to the economic slowdown in Europe that is likely to lead to a fall in the global prices of oil, gold and raw materials. The finance ministry expects end-year inflation of 3.9% in 2011.

BIA definitely supports the projected increase in budget spending on education and scientific research as an investment in future development that will encourage innovation and technological renewal and will improve the environment for doing business in Bulgaria, said Danev.

The draft, which parliament has yet to approve, projects that investments will rise by 43%, while funding under various operational programmes of the European Union is forecast to increase to BGN3.8bn from BGN2.1bn targeted in 2011.

Government debt is projected to increase to BGN15.3bn, or nearly 19% of the GDP next year, from around 16% of GDP forecast for the end of this year, still one of the lowest in the EU.

A faster economic recovery on a global scale, including in Europe, will help Bulgaria beat its budget deficit target next year as the prices of oil and raw materials will boost inflation in the country above the government's expectations, increasing budget revenue from Value Added Tax, said Lachezar Bogdanov, managing partner at Sofia-based Industry Watch consultancy. The 2012 budget draft projects VAT revenue rising to BGN7.1bn from BGN6.5bn expected in 2011.