EKIP– Expert Club for Economics and Politics A Different Opinion
Budget 2018 is in fact just a worse version of Budget 2017. The government continues with the same vicious practices of higher spending in the absence of structural reforms and increases in the tax burden, which will worsen the business environment and hit the incomes of workers. And, of course, the biggest disappointment of the new budget is that it is again not balanced, although there is an ideal opportunity to achieve this.
The economy has grown at its fastest pace since 2009 this year, boosting tax collections and raising revenues more than expected. There has also been a surprising improvement on the spending side – the government’s actual spending this year will be well below the initial budget, according to the latest estimates by the Ministry of Finance. As a result, 2017 will not end with a budget deficit unless the government comes up with another huge capital expenditure scheme to pump in a few hundred million in December.
Why is a deficit being planned again?
But despite this idyllic fiscal situation, the Ministry of Finance is once again planning a deficit for next year and even the year after that. Why? Well, apparently simply because it can. Remember that the same thing happened in 2016, when the 2017 budget was being discussed. Note that the 2018 Budget assumes a deficit in the conditions of both the highest economic growth since 2009 and an increase in taxes and social security contributions. This is an extremely irresponsible approach that could lead us into a fiscal crisis in the long term when the trend reverses and the current economic boom comes to an end.
The main reason why Bulgaria’s fiscal position did not deteriorate too much when the crisis hit after 2009 was that in the years immediately before, the budget had been running surpluses. The budget had a buffer that protected it from the strongly negative effect that the sharp decline in economic growth had on tax collection. This is precisely why, while other countries were on the brink of fiscal crisis, Bulgaria was one of the countries with the best fiscal performance in the EU.
Neither money is set aside for "rainy days" nor debt is repaid.
However, we do not have such a buffer now and clearly will not have one. Currently, tax collection is significantly boosted by the fact that the economy is growing at record levels for the last decade. And yet, the government's fiscal policy is such that the budget will continue to be in deficit. Imagine what will happen if this tax collection falls to crisis levels. Then, if the government continues to maintain the current level of spending, we are not just talking about larger deficits, but about record high deficits.
Turning to debt policy, we see that according to the draft budget, the level of public debt will seemingly improve in 2018. The Ministry of Finance expects a decrease in the ratio of public debt to GDP to 22.3%. However, this will be due to higher GDP growth, and not to a reduction in the amount of debt itself. The nominal value of public debt is forecast to be BGN 23.5 billion by the end of 2018, which is practically the same level as the current one – the difference compared to the current level is about BGN 0.1 billion down.
That is, in the end, in the conditions of an economic boom and surprising budget surpluses, the government is neither setting aside savings for "rainy days" nor repaying the state debt. Quite the opposite. Expenditures are rising so much that even despite the parallel increase in the tax burden, the budget is still planned to be in deficit for the next few years until 2020.
Money is being poured indiscriminately into unreformed sectors
The government plans to increase spending by a total of over BGN 4 billion to BGN 39.3 billion. And if we take a look at the higher spending listed in the discretionary measures in the budget (those measures that impact the main fiscal indicators) we see that they will go to higher salaries, pensions and other social benefits. The problem is, a large-scale increase in spending is planned in the absence of the necessary structural reforms in the relevant sectors.
Education and the pension system are two sectors that are in urgent need of structural reform. Teachers’ salaries are at the national average and are growing in parallel with it year after year. However, the quality of education continues to deteriorate. How exactly does the government hope that if salaries start to increase, this trend will magically reverse? Doing the same thing and expecting a different result is the definition of insanity. What needs to be done in the education sector is to carry out structural reform that will stimulate more efficient use of funding in education and lead to an increase in the quality of education.
The situation in the pension system is similar, only even worse. The pension system is practically bankrupt – the deficit in the Pension Fund is higher than the revenues, according to the National Social Security Institute. The reason is that the cost-covering model that characterizes state social security is absolutely unprofitable in the long term. With the constant increase in the ratio of pensioners to workers, this deficit will continue to worsen – pouring more money into it will not change this. That is precisely why this sector needs a fundamental structural reform. In the optimal case - complete elimination of the cost-covering mechanism and a transition to a completely free and private pension system. Otherwise, in the long term , the deteriorating financial condition of the Pension Fund is capable of causing a fiscal crisis in itself.
Revenue policy raises taxes and discourages investment
However, the disappointments with the 2018 Budget do not end there. Instead of undertaking some more serious policy to stimulate savings and investments through deregulation and tax cuts, the government is doing the opposite – raising the tax burden. Both the minimum social security income (MSI) are being increased by 3.9% and the rate of contributions to the Pension Fund by 1%. This is intended to increase social security revenues and mask the deplorable financial situation of the state social security, which I mentioned above. As well as, of course, to slow down, at least in the short term, the deterioration of its financial situation as a result of the increase in pensions.
For all those who are hopeful about the pension increase, remember that it is only being implemented thanks to a higher tax burden. The young and working generation will pay for this increase - with lower net incomes and fewer jobs than otherwise, due to the increase in business costs. The tax burden on labor in Bulgaria has already increased once in 2017 and will apparently increase again in 2018. According to calculations by the Belgian Molinari Institute, the real tax burden on labor in our country has increased from 37.57% in 2016 to 38.39% in 2017. And in Budget 2017, only social security contributions were raised, without the Social Security Act, i.e. now the effect will be even greater.
Instead of stimulating investments, such a policy does the exact opposite – it repels them. And it's not like there is currently a serious influx of foreign direct investments. In recent years, they have actually been decreasing and their levels are lower than before the crisis. However, instead of thinking about how to reverse this trend, through such a policy of increasing taxes on labor (because "social security" is exactly that), the government will only strengthen it.
The new budget is just a worse remix of the previous one
Although it is not obvious at the moment, the fiscal policy followed in this Budget 2018 is extremely risky. Instead of saving to protect the fiscal from a possible future crisis, and cutting taxes to attract investment, the government is increasing state spending completely indiscriminately. Without carrying out any reforms to optimize these costs. Make no mistake. With such a budgetary framework, a possible economic crisis will certainly be followed by a fiscal one.
The article was originally published on Offnews.bg
