When in 2009 Simeon Dyankov took over the Ministry of Finance, the first thing he dealt with was to keep the budget deficit below the limit of 3% – the reference value, defined in the Stability and Growth Pact, which, if exceeded, would incur sanctions.
Once he proved that the triple coalition has left budget deficit of about 500 million BGN, the Financial Minister initiated suspension of already agreed payments to the business, pretending to limit the budget expenditures. According to official data, about 660 million BGN was suspended. As expected, however, the deficit in Bulgaria considerably exceeded the 3%-level, and ultimately it amounted to 4.3% for 2009.
The answer to the question why did the Financial Minister decide that limiting government expenditures and non-payment of already agreed obligations could withhold the deficit exceed 3% is regretfully simple. It is ignorance.
The government makes estimations for the budget deficit on cash basis or based on the actually paid funds, i.e. without taking into account the payables on the part of the state, the way a company would do. The so assumed engagements remain hidden. The European Commission, however, takes into account also the engagements already assumed by the government and yet unpaid. It is obvious that the Bulgarian Financial Minister had no knowledge of the EU methodology. Hence, all of his actions and managerial decisions have been based on wrong information.
Considering his self-confidence as a leading economist and high-ranking expert of the World Bank, as well as his pride of being one of the 100th most-cited economists in the world, such gaps in his knowledge of EU financial rules are peculiar. That, on its part, raises the question of how responsibly he approached his post as a Minister.
A similar misunderstanding can also be found in the management program of GERB, the first goal of which first priority says “Maintaining balanced budget”. In order to maintain something, this something has to be present. Otherwise, it should claim “achieving balanced budget”.
Obviously, the authors of this part of the program had no idea about the changed economic environment and the expected serious deficit at the end of the year. By that time, they used to believe that the budget will remain at a level close to balanced. It appears that the government had been totally unprepared to adequately evaluate the seriously aggravating economic environment both in Bulgaria and in the whole of Europe. The fiscal policy is the main pillar for conducting any kind of government policy and should it be vested in the hands of an incompetent team, the probability of bad managerial blunders is extremely high.
The present moment clearly shows that the above claim is correct.
Needless to say, GERB made multiple wrong decisions in the field of financial management and economic development of the country. Fortunately, it is chaos itself and the inconsistent implementation of managerial decision that frequently turned into a life-belt for the government.
The continuous stagnation and constantly aggravating negative economic processes turn Budget 2012 into an absolute failure of GERB. It is only the increase in international prices of raw materials that managed to compensate and increase the receivables from VAT (with 13.6%) and excise duties (with 7.3%) for the first seven months on a yearly basis. The import of more expensive raw materials increased inflation, which, on its part, increased the costs for the households, and respectively, once again lead to higher tax receivables. Thus, actually, the higher international prices are all to the good of the government, since without their help, the budget indicators would have surely been much different. The European funds that enter the country also increase the surplus and help the government balance the budget.
According to preliminary data, in Budget 2013, GDP growth is expected to be 1.8% and the deficit – 1.3 to GDP. Unlike the economic forecast for 2.8% of economy growth for 2012, the forecast for 2013 in this year’s budget is much more realistic. Considering the fact that the European economy is entering a second recession, the statement that the final numbers for the growth will be fixed only after the autumn forecasts of the European Commission are ready, seams rather reasonable.
Nevertheless, here comes the question why would the government need such double-checking. Is it because the experts, who prepare the budget forecasts, are not much more familiar with the economic situation in our country than the experts in Brussels?
The increased budget deficit, estimated for the next year as compared to the initial forecasts, shows that the government refuses to follow the prescribed fiscal consolidation, which is probably related to GERB’s wish to spend more during the year of elections.
Let’s go through the changes in the budget deficit once again.
An interesting comparison may be made here. According to Eurostat data regarding the budget deficits of the member states in 2009 – the hardest year for European economies, in terms of deficits, Bulgaria in on the 9th place amongst all 27 member states. I.e. there are as much as 18 countries with much greater deficits than the one of Bulgaria.
On the other hand, regarding the consolidation measures initiated in 2010 and 2011, our country takes the 14th place, which means that there are as much as 13 countries behind it, which have undertaken much less fiscal consolidation, including Ireland and Italy: two of the countries with most serious problems with their public finances.
While there is some logical explanation for the initiated measures for decreasing the budget deficit for the purpose of its reduction to the reference value of 3% for 2010, the accelerated reduction, which continued in 2011 and 2012, is hardly understandable, considering the constantly aggravating economic indicators in the country. Moreover, the Conclusions of the Council of Europe, placing Bulgarian in an excessive deficit procedure, prescribe a much relieved requirement for annual shrinking of the budget deficit in the country.
Practically, there is no reason why Bulgaria would need to apply such severe restrictions in government expenditure and exceed the levels, recommended by EU. This could only encumber our economy, without being a requirement, placed by the officials in Brussels.
Clearly, the reason is not in Europe, but in the Bulgarian Financial Minister. Even though Simeon Dyankov could be qualified as a victim of the extreme liberal concept of the state being neutral towards the economy, his work in the conditions of this biggest economic recession after the Great Depression of 1929-1933 should have made him take more adequate and correct decisions.
Actually, it is exactly this frantic ambition to balance the budget instead of being neutral that played a procyclical role during the crisis, i.e. it aggravated the negative development.
Such continuous squeezing of the public spending lead the European economies to a second recession and this approach already lost a great part of its supporters in EU, including in Germany.
Unfortunately, Bulgarian government can’t manage to adapt as quickly. Instead of stimulating the economy, they continue bragging about the applied efforts and measures, which lead to its mortification. Because of this approach of theirs, hundredths of companies already bankrupted and closed business. Employment is dropping with faster rates than anywhere else in EU. The business environment is additionally deteriorating by the partiality to big companies, close to the government, and the creation of whole monopolized sectors.
Unfortunately, during the last months, the extreme liberal position of Mr. Dyankov underwent a serious change and passed over to openly left decisions – his ideas for freezing prices, introduction of minimum purchase prices, as well as the last government’s decisions to increase pensions, the minimum salary and all social payments.
It should be clear that Bulgarian people’s incomes are among the lowest in the whole EU and their increase should be the first and foremost task of the government. Increase in the above payments by means of consolidation of the redistributional role of the state, however, would definitely not lead to sustainable improvement of the economic environment in the country. On the contrary, no matter how much money the state throws for increasing social payments, this won’t increase the standard of living because it doesn’t improve the economic development. To achieve this, the state regulations should be optimized in order to improve the business environment, promote competition and lead to increase in GDP. The expenditures that GERB had prescribed, contrariwise, increase inflation and will thus lead to new demands for increase in the payments on the part of the state.
Thus, the offered measures turn into bribery, which will be used by Boyko Borisov to attempt to make Bulgarians vote for him. It is a fact that currently, all kinds of ways to increase budget receivables are being wanted, including by introduction of a tax on pensions and bank deposits with the sole purpose to increase pensions even only one month before the elections next year.
The rush of the government to tax pensions in order to be able to increase them thereafter, is next door to perversion.
Another holdback to improving the state’s economy is the expected worsening of the options for Bulgarian export due to the second wave of recession in EU. The possibility for export to third countries outside EU for compensating the export from the country to our main business partners in EU is minimum.
Moreover, the big economies outside EU will also delay their development. Import in Bulgarian economy will considerably surpass export due to its dependence on the more and more expensive imported raw materials. This will shatter the balance of the current account, which is closely monitored by the European Commission because it is directly connected with the economic stability.
Using one Keynesian rule for describing economic dependencies in one state, the current account balance can be presented as a function of the GDP growth and the labor expenditures per a production unit. Unfortunately, in Bulgaria, labor expenditures grow fast as compared to all other member states.
Expenditures in Germany for the period 2005-2011 have increased with 5.2%, in Greece – with 11% and in our country, for the same period, the increase is 52.2%. Eurostat forecasts that this year, Bulgaria will be the sole leading country much ahead the others in this list. These high expenditures drastically decrease our economy competitiveness and the increase in the minimum salary and minimum wage thresholds in different branches of economy will additionally aggravate the problems since it will lead to decrease of Bulgarian economy competitiveness and thereupon to a lower GDP growth, while on the other hand, it will worsen the current accountbalance .
Insistence on incomes increase is inevitable in the present situation, and moreover to some extent, it is encouraged by Prime Minister Borisov and his ministers.
The problem is that raising incomes should result from increase in the economy growth and improvement of the market environment and not from detrimental left decision, which will only result in increased expenditures, inflation and new protests.
The problems, which will arise, if the government applies this left approach, combined with incompetence or disinterest, are so serious that it is doubtful whether they would ever be solved or the economic development and standard of living in Bulgaria will continue for many years to drag behind all other member states, even behind the ones that are yet to be accepted in EU.
The article is published for first time at 01.10.2012 on www.mediapool.bg