What are the most dangerous economic promises that parties have made so far?

The most notable (and frightening!) part of the election campaign so far has been the unprecedented escalation of populist economic promises from parties that have already announced some of their economic programs. Almost all parties are pushing each other to propose "solidarity" economic policies that would have severely negative consequences for both the state budget and the economy as a whole. Here we will examine the three most absurd populist promises in the election campaign so far.

Increase in the minimum wage

Almost all parties promise a serious increase in the minimum wage if elected. GERB directly promises to raise the minimum wage to 650 BGN within one mandate, while the BSP proposes that its increase be linked to the increase in the average wage at the national level. Both ideas would have many bad consequences - raising the minimum wage has a number of negative economic effects, some direct, and others indirect. The net effect of raising the minimum wage would inevitably be an increase in unemployment, especially among the young population. The biggest drawback of such proposals is that the introduction of the MPZ would have the worst impact on areas where the average wage level is relatively low and the labor market is in poor condition.

The highest concentration of such areas is in the northwestern region of the country. For example, the average salary in the Vidin region according to the latest HCI data is 657 BGN, and the unemployment rate in the northwestern region is the highest in the country. The start of the MZ will inevitably increase the labor costs of local businesses, which will start to lay off workers to compensate. Some companies may even stop operations completely and lay off their entire staff, as a result of which unemployment will start to rise.

This will also worsen the demographic picture in the region. The workforce that is cut will likely be low-skilled and experienced, i.e. young people, because these are the workforces with the lowest productivity. As a result of the loss of jobs, these young people will most likely migrate either to other regions in Bulgaria or directly abroad, which will further worsen the demographic picture in these regions. All this will only deepen the deterioration of the standard of living and the depopulation of a number of regions in the country, which are lagging behind in their economic development.

Pension increase

Another very popular promise is the increase in pensions. The first to propose such an increase, a few months ago, were the parties in the "United Patriots" coalition. They proposed a minimum pension of 300 leva. Almost all other parties began to propose ever higher (and correspondingly ever more unrealistic) pension increases. Over the past week, even the new right-wing project led by Radan Kunev and Trajco Trajkov, "New Republic", has promised to increase the average pension to 700 leva, which is strange, given the fact that populist promises for a sharp increase in social payments have been reserved for the left.

Such promises are an example of exceptionally uncompromising populism in view of the fact that state pension insurance in Bulgaria has practically failed. The deficit in the state pension fund is larger than the size of the income. Given the dire financial condition of state pension insurance, we should talk about structural reform, not about pension cuts, which would only worsen the size of this deficit. For such proposals to be paid in a long-term plan, the social security tax burden will have to be seriously increased - of course - the money for these pensions has to come from somewhere, and when we talk about state pension insurance, that "somewhere" is always the taxpayers.

This short-term populism aimed at winning elections through March would practically condemn all young and future workers to long-term misery in the future. The pension system needs a structural reform to solve the problem of the deficit of the Pension Fund, which has practically failed. Unfortunately, it seems that neither party has the political will to even broach this topic, which is extremely disappointing.

Increase in student salaries

The third most popular populism, which enters the campaign of almost every party, with promises to increase student salaries. So GERB does not hesitate at all and leads with the most serious proposal - doubling student salaries, while BSP takes second place with the proposal for a 40% increase. These proposals are largely expected, given how hot a topic education is. Experts, public figures and politicians constantly argue that there is not enough money in education for higher salaries, which is why the quality is low and there is a shortage of young staff. Such claims have some logic, but they seem to completely ignore historical experience.

Public spending on education has increased by 43% over the period 2007-2015. Despite this, with each passing year the quality of education that students receive appears to be deteriorating, judging by the dynamics of Matriculation results over the past few years. Why does everyone think that if we just pour twice as much money into education, this trend will magically reverse? Many studies show that increasing teacher pay by itself does not improve the quality of education (see for example this and this ). In Poland, for example, the ratio of teacher salaries to GDP per capita is lower than in Bulgaria, but the quality of education is many times higher. RISA studies show that decentralized education systems are more effective in acquiring the resources they have and therefore provide better quality education. Our system is highly centralized. However, no one is talking about decentralization, only about increasing output. Why? Without the necessary reform, a sharp and unnecessary increase in education spending will only worsen the fiscal situation without having a noticeable effect on the quality of education.

The fact that the parties are rushing to propose populism, and not the structural reforms that many sectors need, is extremely disappointing. Given how valuable many of these economic promises actually are, we must hope that the parties are not serious and that all these promises are, as former Minister Lykarski once put it, "an election ploy." Otherwise, the consequences for the state budget and the economy as a whole would be catastrophic.

This article was first published by money.bg on 13.02.2017.

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