EKIP– Expert Club for Economics and Politics A Different Opinion
Vladislav Goranov has decided to become a lobbyist. This is the gist of the news that the former finance minister has decided to establish a consulting firm after his resignation from the GERB government. All doubts about a potential conflict of interest aside, hardly anyone can be seriously surprised by such news. After all, Goranov left the Borisov-3 government precisely after accusations and suspicions of "lobbying" for the interests of certain oligarchic circles, from within the government itself and for years. Of course, this is not his only "merit" as finance minister, but it will certainly be the one for which he will most likely be remembered the most. As taxpayers, we should study Vladislav Goranov's career as finance minister carefully and evaluate it objectively. Because not he, but we will be the ones who will reap the fruits of his triumphs or... pay for his mistakes.
The nagging suspicions of ties to the oligarchy
Of all the finance ministers of Bulgaria since 1989, perhaps Vladislav Goranov is the one about whom there are the most rumors and signs of ties to the oligarchic circles in the country. Goranov's accession to the post of finance minister immediately raised many eyebrows precisely for this reason. Even before he became known as a minister, Goranov (when he was deputy finance minister in Borisov's first cabinet) became known for his relationship with Delyan Peevski.
In 2010, photos of the two sitting together at a meeting in a capital city restaurant appeared in the media. It is striking that this seems to be a personal meeting, because they are the only ones present at the table. Logically, this scene is interpreted as a clear indication that Goranov has close and not just formal contacts with Delyan Peevski. In this regard, an interesting episode in Goranov's professional biography occurs immediately before his inauguration as Minister of Finance. After being an MP from the GERB list during the party's first cabinet, as well as for some time as an opposition member during Plamen Oresharski's prime ministerial term, in the spring of 2014 Goranov left his MP seat to join the management of the well-known Municipal Bank as executive director.
Interestingly, this is happening at a time when it is believed that Delyan Peevski is most likely trying to privatize the bank for his own benefit with the help of Hristo Kovachki. In addition to these specific examples, over the years there have been regular rumors that the real "boss" of the Finance Minister is not actually Prime Minister Borisov, but Delyan Peevski. None of these rumors have been categorically confirmed, of course, but such guesses are certainly not unfounded. Personal meetings with Peevski, temporary participation in the management of Municipal Bank and all the rumors about Goranov's close relations with the MRF lead to the fact that his inauguration as Finance Minister began with the words "I have no relations with Delyan Peevski". His meeting with the MRF MP in 2010 was a mere coincidence, he was there "by chance" and the new Finance Minister does not want this case to be commented on further. Alas, contrary to Goranov's wishes, this case not only continued to be commented on, but suspicions about his ties to Peevski only continued to grow over the years.
Not without justification, Vladislav Goranov and Emil Karanikolov (Minister of Economy) became known as "Peevski's ministers". Not only because the state-owned Bulgarian Development Bank regularly supported Delyan Peevski's businesses through low-interest loans, although in theory it should only support small and medium-sized enterprises. It is significant that despite all his protests against these speculations over the years, Prime Minister Borisov a month ago demanded the resignation of Goranov (and Karanikolov) precisely because of them. GERB stated in plain text that this was being done in order to dispel doubts that the current government of GERB and United Patriots has any dependencies on the MRF... thus practically confirming the doubts about Goranov and Karanikolov.
Peevski is not the only oligarch with whom Vladislav Goranov has been associated. We should not forget the accusations of close ties and providing "services" to the now-ousted gambling magnate Vasil Bozhkov. Accusations that came from Bozhkov himself, in the form of text messages that he exchanged with Goranov during his work as finance minister. In short, according to Bozhkov's version, it was Goranov who influenced the Gambling Commission in favor of his business. The former gambling baron even claims that from 2017 to the end of 2019 he directly handed over over 60 million leva to Vladislav Goranov and Boyko Borisov at their direct request. The implication of these accusations is that with this money Bozhkov bought himself favorable treatment from the regulatory institutions.
Goranov, of course, denies any such accusations, but it is an interesting fact that in 2018 he eloquently opposed the attempts of Deputy Prime Minister Valeri Simeonov to ban gambling advertising (and specifically lotteries). At that time, the Finance Minister even said that the lottery topic was being overexposed. At that time, Goranov claimed the following: "If you ask me, the risks of this topic are being exaggerated. This is not a topic with fiscal dimensions at all, because - yes, there are very serious revenues from gambling, but they will not break the state budget."
These words are particularly interesting given that his position on the issue seems radically different only a year and a half later. As of January 2020, the gambling issue certainly has significant fiscal dimensions for Goranov, when the Ministry of Finance suddenly revealed that between 2015 and 2019, 500 million leva had been "lost" due to uncollected gambling fees from Vasil Bozhkov's companies. This is 100 million leva per year, amounts that certainly have "fiscal dimensions."
Goranov, of course, claims that he was not aware that this was happening and shifts the blame entirely to the Gambling Commission. The problem is that this commission is subordinate to his ministry. Everyone can draw their own conclusions about the competence of a minister who has not noticed that hundreds of millions are being hidden annually from the supervision of an agency that is directly subordinate to him.
The Scandalous Attempt at Pension "Reform"
Leaving aside the suspicions of corruption ties between Vladislav Goranov and certain oligarchic circles, his work in the field of fiscal policy as a minister is controversial. At the very beginning of his term in office at the end of 2014, it was the Minister of Finance who initiated a reform of the pension system, which in practice envisages the nationalization of money in mandatory private pension funds, the so-called "second pillar" of the pension system. The proposed change would in practice lead to a partial merger of the mandatory private and state pillars of the pension system. The aim is to patch up the ever-growing deficit in the Pensions Fund of the National Social Insurance Institute with the savings accumulated in private funds. The pension system is the responsibility of the Ministry of Social Affairs, but it is striking that it was Goranov who was the government's spokesperson on the subject at the time.
The practical effect of the proposed reform would be a complete change in the pension model and the loss of the main advantages of the private pillar of the system. The money would be poured into a "common pool" shared between the first and second pillars of the system, which means that insured persons would lose a very large part of their rights over savings in private funds. The proposed reform is met with a very sharp reaction, especially from some circles in society. We from EKIP and the Bulgarian Libertarian Society actively joined the opposition against this proposal, realizing the potentially catastrophic consequences that it would have for the pension system.
As we have said many times over the years, the necessary reform of the pension system in Bulgaria is exactly the opposite of what was proposed at the time. What is needed is a shift to a greater role for private forms of insurance and the provision of greater freedom to insured persons in managing their savings, rather than limiting their rights and increasing the role of the state. Ultimately, the proposed reform was not adopted in its original form. A compromise option began to operate, in which workers are not obliged, but have the option to transfer their savings from the second pillar to the first. However, the option is one-sided, the opposite – a transfer from the state fund to a private one – is not allowed, which places the state pillar in a categorically privileged position within the pension system. A change that alters the nature of the system, contrary to the principles on which it was built in 2000, when it was taken for granted that the state and private pillars would be equal.
Although it did not completely "bastise", as the fancy Bulgarian expression goes, the pension system, this attempt at "reform" leaves a rather bad taste in the mouths of all those who follow the financial policy of the GERB government. Not only because of the scandalous nature of the proposed change, but also the way in which it happened - in the last days before the Christmas and New Year holidays of 2014, just before the parliament went on vacation. It was then that this approach of pushing through key financial reforms secretly, between readings, at a time when the media's attention is not so focused and it is likely that they will not be very well covered, was adopted. An approach that Menda Stoyanova, chairwoman of the parliamentary committee on budget and finance, is particularly famous for.
Tax dogmatism
Beyond this ill-fated attempt at reform, Goranov actually became known for his categorical refusals to make any serious changes to the state’s fiscal policy, especially in relation to the tax system. Something that he and Prime Minister Borisov often highlight as a positive is Goranov’s categorical refusal to change the tax system and its rates themselves. Throughout Goranov’s terms as Finance Minister, the Finance Ministry’s main priority was to keep personal income taxes, business profits, and VAT absolutely intact.
On the one hand, some would say that Goranov’s firm stance against significant changes in the tax system is commendable and contributes to a stable and secure business environment in the country. On the other hand, a strong argument can be made precisely against this fiscal dogmatism of the minister, which often borders on unproductive stubbornness. Something that has become very clear in recent months when, due to the Covid-19 crisis, many businesses, especially in the tourism and restaurant industries, began to request temporary tax breaks, specifically in the VAT area. Prime Minister Borisov agreed to reduce the VAT on food and beverages in restaurants and bars from 20% to 9%, but Vladislav Goranov (while still a minister) said that he was categorically against it.
Goranov's categorical position against any changes in taxation (even temporary ones) from perhaps something positive in other conditions, in a period of crisis turns into a counterproductive dogmatism that only and only delays economic recovery. In this sense, it would not be objective to claim that Goranov's firm position regarding the personal income tax, corporate tax and VAT has been only and only positive for the economic development of Bulgaria since 2014.
Yes, changes in the tax system can be dangerous and threaten long-term fiscal stability, especially when they are not planned adequately. But the lack of any flexibility and the rejection of anti-crisis measures widely adopted throughout Europe, including fiscally disciplined countries like Germany, is stubbornness that could cost the country lost economic growth and hundreds of thousands of jobs. And in the end, isn’t that the most important indicator of the qualities of a finance minister – to implement tax reforms that stimulate economic growth without threatening the long-term financial stability of the treasury?
The increase in the insurance burden
Another crack in Vladislav Goranov’s fiscal responsibility narrative is the fact that while he was finance minister, the tax burden did not actually remain unchanged, but increased. This did not happen through the large direct and indirect taxes that he stubbornly kept fixed, but mainly through compulsory social security contributions. Excise duties also rose year after year under his supervision, but their growth was also largely influenced by EU-level directives, so it is difficult to hold the Bulgarian minister fully responsible for this part of tax policy.
When it comes to social security payments, however, the picture is clear. During the last two GERB-led governments, in which Goranov was finance minister, the tax burden on labor in Bulgaria increased by about 2 percentage points, according to calculations by the Belgian Molinari Institute (see here and here ). This is happening entirely due to the pension and social security burden, which increased by 2 percentage points during the period 2016-2018.
In addition to the increase in social security contributions, one should not forget the increase in the minimum social security thresholds in Budget 2018. For Budget 2020, an increase in the maximum social security income in Budget 2020 from 3,000 to 3,500 leva is also proposed, which would have been another increase in the tax burden on labor, but it was ultimately rejected. In these areas, the Ministry of Social Affairs, of course, has a leading role, but being the final authority with respect to all elements of fiscal policy, they cannot be proposed without the approval of the Minister of Finance. These facts show that Vladislav Goranov not only stubbornly refuses to reduce taxes, he even slightly raises them as Minister of Finance. Over the past decade, the tax burden has been steadily increasing, almost continuously, although it is not noticeable from the level of direct taxes.
Planning for chronic (and fictitious) deficits
The more significant part of the fiscal policy led by the Ministry of Finance over the past 6 years is not on the revenue side of the budget, but on the expenditure side. It is in terms of government spending that the two biggest vices of the Ministry of Finance, led by Vladislav Goranov, become apparent - the accumulation of new current spending without reforms and the constant planning of budget deficits.
The second is perhaps the fiscal policy for which Goranov and GERB have become most infamous in the last few years. Despite having the opportunity to completely balance the budget as early as 2016, Goranov chooses to continue planning deficits for another three years. Despite planning deficits, the treasury accumulates surpluses year after year, which is precisely why critics of this type of policy have been saying that the budget can (and should) be balanced.
The planning of these fictitious deficits has one sole purpose – to allow the sudden spending of accumulated surpluses at the end of each year, without having to be voted on by parliament. The fact that the way in which budget surpluses are spent is not subject to control gives the government enormous freedom to use them in a way that suits only its interests. This type of policy opens the door for the executive branch (the government) to partially bypass the control that the legislature (parliament) exercises over perhaps the most important element of the overall policy of a government – the allocation of government spending.
The loose spending policy
The other essential element of Goranov's spending policy is the regular increase in current spending, especially for salaries in the budget sector. This is a policy that has become particularly popular during the current mandate of the GERB and United Patriots government, which began in 2017. A policy that we have repeatedly criticized due to its long-term irresponsibility. Increasing current spending is an easy and very popular policy in periods of economic growth, when tax revenues are growing. However, raising these costs is very dangerous in the long term, if one does not take into account the extent to which they will be covered in a period of crisis, when tax revenues are shrinking. The lack of adequate planning in this regard is a serious threat to the country's fiscal stability. It was precisely the lack of this type of long-term planning that led to the debt crisis in Greece at the beginning of the (already) past decade.
For example, in Budget 2018, the government increased spending by over BGN 4 billion compared to the budgeted amount for 2017. All of this additional money goes to current expenses – higher salaries, pensions and other social benefits. For Budget 2019, the scenario is similar – there is again a significant increase in current expenses, with a planned 20% increase in teacher salaries – a huge increase in expenses for a sector that clearly needs reform. In all these years, the budget has not been balanced and a deficit has been planned. While countries like Portugal, which were in a severe crisis just a few years ago (the likes of which we have not seen) manage to come out with a balanced budget by 2019, we continue to run deficits. And this is due to higher current expenses, not investments.
This policy of increasing current spending is most detrimental when it is done "in a blind alley", without prioritization, by pouring money into sectors that have low productivity and need reforms. Such as education (teachers' salaries were raised most often) and the entire state administration, which received several consecutive salary increases of 10% per year. Sectors with low productivity simply cannot compensate for the increased costs in the long term through higher revenues, and so without reforms they become a black hole for the budget. The risks to the stability of the state treasury that were sown by this type of spending policy are yet to be reaped now that Bulgaria has entered a severe crisis for the first time in more than a decade.
ERM-II – Vladislav Goranov's only success or...?
All of this leads to the conclusion that Goranov's reputation as finance minister is, at best, questionable. Given the suspicions of ties to notorious oligarchs, through attempts at scandalous reforms, to a very controversial and rather negative in its long-term effects fiscal policy, it is difficult to categorize Goranov's career at the head of the finance ministry as "successful". However, even acknowledging these shortcomings, almost all politicians and economists in the country categorize one thing as a huge success for Goranov - the entry of the lev into the ERM-II exchange rate mechanism, which is often called the "waiting room" of the eurozone.
An interesting fact is that the same journalists and experts who most sharply criticize Goranov for his controversial fiscal policy and suspicions of ties to oligarchic circles, recognize our accession to ERM-II as his categorical success. Realizing this almost universal popularity of his sharp turn towards European integration, Goranov always emphasizes it in his interviews, conveniently ignoring the more controversial details of his ministerial career. And the turn was indeed sharp.
Until the beginning of 2018, it seemed that the Minister of Finance, and the GERB-led government as a whole, had no interest in seeking rapid accession to ERM-II, let alone to the eurozone itself. Particularly interesting is the position of Vladislav Goranov, expressed in his article published by the newspaper "24 Chasa" in March 2017. The following quotes are most indicative:
"The argument that if we are in the eurozone 'we will be at the table' only betrays our wrong incentives. This is rhetoric typical of consumerist politicians who see our membership as an opportunity to receive, not to contribute. This only reinforces the distrust of Bulgaria."
And more:
"Joining the eurozone itself will not mechanically bring us higher growth rates or the opportunity to loosen fiscal and financial discipline in our country. It is wrong and harmful to expect our entry into the eurozone to bring us an automatic resolution of economic problems and a quick satisfaction of our desires."
Goranov also adds that "Even with regard to the nominal criteria - it is not at all clear to what extent Bulgaria fulfills them (although this is widely talked about in our country today)." Overall, the article expresses a seriously skeptical tone regarding the possibility of Bulgaria joining the ERM-II exchange rate mechanism in the near future. At that moment, however, GERB was not in power and the country was governed by a caretaker government, which probably significantly contributed to Goranov's cautious tone regarding joining ERM-II at that time. Of course, only a few months later, when he was already Minister of Finance again, Goranov's tone was completely different.
The government reversed its position 180 degrees in mid-2017 with some statements by Prime Minister Borisov. Later, it was the Ministry of Finance that announced that it would seek to join the exchange rate mechanism and subsequently the eurozone itself as soon as possible. The process of this accession, at best, can be said to have proceeded in a controversial manner. First of all, the lack of any transparency regarding the negotiations that the Ministry of Finance undertook with the European Central Bank and other EU institutions is, to put it mildly, problematic, given the extreme importance of the topic, be it a regular practice of the European institutions themselves. More obviously problematic are the unprecedented and largely humiliating conditions that were imposed on Bulgaria in order to be admitted to membership in ERM-II.
Bulgaria was imposed conditions that are neither written down in the EU treaties nor have been imposed on any country that decided to join ERM-II before us. The most dangerous of these conditions is the mandatory accession to the Banking Union before joining the eurozone itself. Something that exposes banks in Bulgaria to the risks that are smoldering in the eurozone banking system, without Bulgaria having the categorical right to benefit from the ECB's liquidity support in the event of a banking crisis.
By far the biggest scandal in relation to this topic erupted at the beginning of this year, with the proposed changes to the law on the BNB, which concern the exchange rate, proposed by Menda Stoyanova. The proposed changes in practice provide for the abolition of the fixed exchange rate by law and the transfer of control over the exchange rate to the council of the exchange rate mechanism ERM-II. This is one of the requirements that are set for us to be admitted to the exchange rate mechanism, but the scandalous thing is that a bill of such key importance for the country's currency stability is proposed between readings, without any public discussion. GERB's attempt to abolish the fixed exchange rate of 1.95583 leva for 1 euro through the "back door" grew into a public scandal and a big headache for Prime Minister Borisov. Goranov certainly played a very significant role in stirring up this scandal, given the fact that it was he, in the role of Finance Minister, who was leading the negotiations for joining ERM-II.
The entire prioritization of Bulgaria's fastest possible accession to ERM-II and the eurozone seems like a very exaggerated and ill-considered step on the part of the government and in particular the Ministry of Finance. First of all, because the eurozone itself has not yet fully recovered from the previous crisis - Italy's public finances were in an extremely difficult state even before the pandemic and the subsequent crisis in 2020, not to mention its banking system. In each of the last few years, a bank in Italy has needed state support. Years after the so-called "Eurocrisis" was supposedly over.
The enhanced banking supervision that the ECB is supposed to provide under the Banking Union seems increasingly overstated in light of the money laundering scandals at one of Latvia’s largest banks in 2018 and the recent conflict of interest scandals and suspicions of misuse of state aid at one of Portugal’s largest banks. No objective observer would argue that the eurozone is now “stable”. On the contrary, the monetary union increasingly resembles a time bomb, the explosion of which is being delayed by the ECB’s relentless money printing. The question is for how long?
The lesson remains for us.
Of course, the long-term consequences of his policies, whether in terms of the state of the treasury or the country's banking and currency stability, are unlikely to keep Vladislav Goranov awake at night. His career as finance minister is over. Now he will reap the fruits of that career as a "consultant" or, more directly, a lobbyist, in the private sector. The long-term consequences of his policies will have to be dealt with by another minister, who, just like him, will most likely try to pass the buck to his successor.
Those who must carefully study and put into perspective the work of Vladislav Goranov as Minister of Finance are us - the taxpayers of the Republic of Bulgaria. The lesson from his career in the Ministry of Finance, from all the scandals, from the lack of adequate reforms, from the questionable budgetary practices remains only for us. Because we are the ones who will reap the economic fruits of the seeds planted by him, be they sweet or bitter.
