What are the biggest problems of Budget 2020?

Extremely quickly and without almost any in-depth discussions, the 2020 Budget was adopted on first reading this week. We cannot help but be left with the impression that the budget for next year was very much overrun. And it shouldn't be, especially considering that this year the economic situation in Europe and the whole world is undergoing a transition from a period of upward growth to a period of slowing growth and even recession. This is especially clear if we look at the situation in the industry of Germany, for example.

In this context, of all the budgets prepared by the current government, this one should have been the most carefully thought out. And it should contain measures that would counteract the coming crisis. Instead, we actually get the exact opposite – Budget 2020 is prepared in such a way that it risks a serious swelling of the fiscal deficit in the event of a crisis. The major problems of this budget can be summarized in three points.

1. Overly optimistic growth forecasts

The first major problem with the 2020 Budget is evident at the very beginning, when it presents the expectations for the economic situation in the next three years. The government expects Bulgaria's GDP to grow by 3.4% this year, and in 2020 the growth will be 3.3%. The same level is expected for 2021 and 2022. This assumption seems quite unrealistic against the background of the serious economic problems experienced by some of the largest European economies, such as Germany and Italy. These two are also Bulgaria's main trading partners, and especially in the last year the connection between the decline in activity in German industry and the deterioration of sales and production in ours is very obvious.

However, the Ministry of Finance actually expects our exports in 2020 to improve compared to 2019 and increase by 2.0%, compared to 1.8%. How exactly will this happen given that the situation in Germany, Italy and Turkey (Bulgaria's three largest trading partners) remains critical and is very likely to worsen? The European Central Bank seems incapable of fabricating any growth in Italy and Germany. Despite its massive money printing, even the leaders of the central bank itself, such as its former governor Mario Draghi, are now saying publicly that monetary policy tools cannot achieve more.

And domestically, the ministry's forecast is also worrying, because it once again relies on consumption as the main driver of GDP growth. And what about investments? What has any government done in the last 10 years to stimulate investments? Absolutely nothing. And now, precisely when we are facing the risk of recession in Europe, the government again seems not to even think about the issue. Here we come to the second big problem of Budget 2020.

2. There are no policies to stimulate growth

This is another budget without any policies to stimulate investment in the country. There are no tax cuts, no plans for larger-scale deregulation and easing of administrative regimes. On the contrary, the government plans to introduce amendments to some laws (specifically VAT), which aim to limit the opportunities of business to minimize its tax burden. I suppose that this time we should actually be glad that there is no direct increase in the tax burden, as happened in the first two budgets of this government in terms of social security rates.

But what kind of consolation is this? Should we be happy that, thank God, the government has not decided to raise taxes? During a (still) economic boom? Given that it is supposedly "right-wing"? Correct me if I'm wrong, but supposedly socialists are not in power? In fact, to be completely accurate, there is an increase in the tax burden through the increase in the minimum wage. This automatically raises the minimum income on which workers can be insured and accordingly increases the insurance burden for workers and employers.

And of course, as we have explained many times, raising the minimum wage always worsens the situation on the labor market and makes it less flexible. It may not be obvious now, but when the next recession comes, we will very quickly find ourselves in a situation of severe structural unemployment, which will take a very long time to clear up due to the unreasonable increase in the minimum wage. As a pre-crisis measure, its level should actually be frozen. An even better measure would be to abolish the general level of the minimum wage and switch to a regime where it is negotiated between employer and employee organizations and varies by sector.

As for tax policy, as we have already suggested, why not consider eliminating double taxation of business income? One measure that would immediately provide some incentive for investment is the elimination of corporate tax, which is unnecessary anyway. It collects very little revenue (just over 2 billion leva) and it is taxed precisely on that profit that is undistributed, i.e. kept by businesses for reserves or investments.

And why don't we also think about how to stimulate Bulgarian small and medium-sized businesses, for example by raising the threshold for VAT registration? These measures were proposed by the EKIP exactly one month ago while the 2020 Budget was still being prepared. These are tax reforms that are easy to implement, the treasury would not lose too much revenue from them, on the contrary - the incentive they would give to businesses to develop and invest would lead to an even faster increase in tax revenues in the long term.

3. Reckless spending and lack of fiscal buffers are at stake

But as strange as it may sound, the first two problems of Budget 2020 are not even the most serious, although they are quite alarming in themselves. No, the biggest problem of Budget 2020 is extremely basic and fundamental – there are no measures to ensure the financial stability of the treasury. This is of particular importance when a slowdown in economic growth and a crisis are expected. However, Budget 2020 does not include any measures that would put government spending (especially current spending) under control, while at the same time setting aside savings that could play the role of buffers in a situation of economic crisis.

In fact, if the government had done at least this – to increase the fiscal reserve – this would have given some justification for the lack of measures to stimulate growth. But it is not doing even that, quite the opposite, the fiscal reserve from 14.2 billion leva in 09.2016 has fallen to 10.1 billion leva in 09.2019. Instead of saving money, higher current expenses are being set in line with a 10% increase in all salaries in the public sector and a 17% increase in teachers' salaries. For years now, the EKIP has been repeating how reckless it is to set higher expenses for "cap" salaries. For another year, all salaries in the public sector are being raised without any assessment of the impact of such a measure. Is this continuous increase justified in terms of productivity in the sector? Think for a moment, does the quality of the public services you use increase every year. No? Exactly.

Let there be at least prioritization. Salaries can be raised, but reasonably, for those who deserve it. Our state bureaucracy is so bloated that raising salaries for absolutely everyone is not only unjustified, but also harmful. Because this significantly increases the current expenses of the government year after year. And these are expenses that the government will certainly not want to reduce during a crisis, because it will cause mass dissatisfaction in the bloated state bureaucracy (which is a significant electorate). And what will happen? Tax revenues fall, current expenses remain the same, and so we wake up with a large fiscal deficit.

Conclusion

In the new Budget 2020, the government is practically adopting almost identical policies that it followed in the previous two budgets. The problem is that the same mistakes are being made again, which are becoming increasingly risky, in view of the looming economic crisis in Europe. The government cannot but save, but continue to invest in ever higher current wage costs without prioritizing this money. Even when it comes to teachers' salaries, the government could actually have achieved much more if, instead of increasing everyone's salaries "indiscriminately", it had focused on creating incentives to attract young staff to the sector.

On the other hand, there is the lack of policies to stimulate growth and specifically investment and, of course, the overly optimistic economic forecasts. Given that key European economies such as Germany and Italy are on the brink of recession, it is unrealistic to expect growth in our country to continue without delay. Especially when absolutely no measures are being put in place to stimulate growth by, for example, easing the tax burden. Due to these factors, the 2020 Budget as a whole is a recipe for fiscal instability and a swelling deficit. We must pray that Europe does not fall into recession, because we are certainly not prepared for it.

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