The economic promises of the parties – harmful even before they fail

Before the upcoming parliamentary elections, we are witnessing one of the strangest election campaigns in recent years. This is a campaign in which political parties are falling into heavy populism, promising us absurdities at full throttle - economic growth of 6-7% per year, doubling of pensions, huge increases in the average and minimum wage, as well as doubling of salaries in some sectors of the budget sphere. The very fact that such numbers are even being commented on shows very clearly how far from the real economy the people who make decisions in our country are. This is to some extent the basic reason why we are the poorest country in Europe.

Are the promises achievable?

In the presented economic programs, political parties "promise" and even "guarantee" absolutely unrealistic and unattainable levels of minimum and average wages in the relevant time horizon, and it is not at all clear how they will be achieved. Unfortunately, so many years after our transition from a planned to a market economy, our domestic politicians clearly still cannot understand how a market economy functions. Realistically speaking, all a party can do is present to its target voters a set of structural reforms in key sectors of the economy and economic policies, in line with its political ideology, which could eventually lead to the predicted economic effects. In Bulgaria, however, for some reason this process is completely reversed. The majority of parties quite irresponsibly throw some general figures into the public space, behind which there is no specific economic argumentation to support them. The situation with the average wage in the country is particularly interesting, which indeed achieved remarkable growth in 2016. Politicians across the spectrum expect significant increases in the average salary over the next 4 years without considering the following key factors:

1. Labor productivity for the period 2010-2015 has increased by only 12%. Where will the growth of about 10% per year expected by the party members come from to reach an average salary of 1,500 leva? Labor productivity is a key factor that determines wage levels in a market economy;
2. What is driving up the average salary level in Bulgaria is Sofia, which in recent years has become something of an IT center of Eastern Europe and a preferred outsourcing destination. The demand for specialists in these two sectors has had a positive effect on the average salary level in Sofia, and hence in the country. Currently, however, labor prices in both sectors are at levels close to their limit. If you talk to any owner of a small or medium-sized IT company, they will tell you that programmers' salaries are already chasing parity with those in Western Europe. That is, the growth of recent years cannot be maintained. The situation is very similar in the outsourcing sector;
3. The business cycle has also had a positive impact on average wage levels in the country over the past few years. After the global economic crisis of 2008, employment and wage levels began to recover. What would be the effects on these forecasts if the business cycle reversed and Europe entered a recession, especially in the context of high levels of political risk in the EU? This is a process that is completely ignored in the economic programs of the parties;
4. The Bulgarian economy is characterized by significant regional fragmentation of labor costs. It is very difficult to transfer the factors that increase the cost of labor in Sofia to the countryside. If we remove Sofia from the NSI statistics on the average salary in Bulgaria at the end of 2016, we will see that it amounted to 809 leva or 563 leva below the average for the capital. It is for this reason that there is a real danger of additional asymmetry in labor prices at the regional level, which could lead to a number of negative social problems;

A similar approach to analysis can be applied to other contradictory election promises. Starting with the ideas of creating state funds to invest in reindustrialization, granting interest-free loans to businesses and households, moving on to a minimum wage of 650 leva, an average pension of 750 leva and ending with the construction and sale of state housing at prices of 350 euros per square meter. However, the end result will always be the same – promises without any economic logic and coverage. Theoretically speaking, some of the election threats can indeed be achieved in a short period of time, but at the cost of huge budget deficits and an increase in state debt, which will lead to much more serious negative effects for our economy in the medium and long term.

The risks of failure

The effect of the failure of the generous election promises is that a significant portion of voters will become disillusioned with the political process. The sharp political polarization that we have witnessed in recent years has led to record low approval ratings in parliament and the Council of Ministers, which clearly shows the public's disappointment with our political class. An additional disappointment from the failure of the loud election promises during this campaign will further reduce the representativeness of our future rulers in parliament, simply because in the next elections people will not go to vote.

More importantly, all these dangerous election promises that politicians are showering us with generate additional economic uncertainty in business, which becomes extremely cautious when launching new investment projects and hiring new workers. Consistency and predictability in economic policy are of fundamental importance for achieving sustainable growth in a market economy.

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