The first days of the Oresharski Cabinet: ignorance or populism?

oresharski bsp

In a few short weeks, Plamen Oresharski’s government has undertaken a number of measures and unveiled policy plans that showcase not only its economic ignorance, but, in many cases, are borderline foolish. Below, we have attempted to list some of the most damaging decisions and plans of the new government – given the multitude of insufficiently thought out proposals in recent days, it is likely that we missed some.

The amendments to the State Agency for National Security Act and Peevski’s appointment: From the very start of its term, the government shocked with its actions. After the most inadequate political appointment possible, the government followed it up with admonishments and arrogance towards the thousands of people out on the streets in protest, who “did not understand” and “had been lumpen-ised”.

Budget revision: The Budget figures through May 2013 show that the problem is entirely on the spending side – the money is being spent quicker than planned. In such a situation, the most logical solution is to tighten the reins on spending, rather than seek the easy solution of revising the Budget, increasing the deficit and issuing more government debt. Everything else is populism and dangerous game to play with the stability of public finances.

The return of early retirement and stopping the pension age increase: The government cannot afford any steps back concerning pension reform because of the enormous, and constantly rising, deficit of the state pension system. The pension fund revenue falls well short of covering the expenditures, despite the 12 per cent state contribution in place since 2009. If the state subsidy is taken out of the picture, the deficit, according to the latest data, is about 60 per cent of the spending. The return of early retirement will only speed up the rate at which the deficit in the pension system is growing.

The Bulgarian Development Bank (BDB) will attract one billion leva to finance small and medium-sized enterprises: The Budget simply does not have this amount available. There is no reason to seek funding for BDB from international lenders, given that Bulgaria’s commercial lenders have long been able to draw credit lines from European institutions. It is not the state’s job (as BDB’s owner) to pursue commercial lending activities, never mind expanding such activities.

Saving VMZ Sopot plant, take two: We witnessed the latest operation to save a bankrupt company using taxpayers’ money. This time, it was skilfully disguised as a cash injection of 27.5 million leva from the State Consolidation Company. If the funds had not been invested in VMZ Sopot, this amount (or a large share of it) would have been transferred to the state Budget as dividend paid by the state company. It is highly likely that this capital injection will trigger a European Commission infringement procedure for unlawful state aid.

The Investment Planning Ministry: One of the first measures of the new government was to separate “public works” from the Regional Development and Public Works Ministry, creating the new Investment Planning Ministry. This structural change led to an institutional freeze of a number of large-scale state investment projects (including motorways), until the necessary legislative changes are passed (a bill of amendments covering 82 different laws has been drafted so far).

Measures to fight youth unemployment: The “novel” measures to encourage youth employment are actually familiar measures that have been used for years, without any result. The latest waste of public funds for these measures shows a lack of understanding for the existence of youth unemployment – a lack of flexibility on the labour market, high (and constantly rising) minimum social security thresholds and minimum salary, as well as the education system’s failure to impart knowledge and skills sought by businesses.

An effective ban on the operations of a number of online bookmaker websites in Bulgaria: The ban on foreign online bookmakers to carry out operations in Bulgaria is equivalent, in practice, to a ban on all online retailers registered outside Bulgaria, who, accordingly, do not pay taxes in Bulgaria. Using the regulator’s logic, it must ban access to online shopping platforms like Amazon, SportsDirect and EastBay, since their operations also create missed opportunities in terms of lost tax revenue. The decision was accompanied by a number of procedural and administrative absurdities that created technical and time constraints on foreign bookmakers that wanted to register in Bulgaria.

The government’s social package: The increase in benefits without reforms directed at decreasing the number of beneficiaries put Bulgaria’s social system under enormous strain. In many cases, the size of the benefits discourages the recipients from seeking work. At the same time, there is room for manoeuvre concerning the funds allocated for social policy – for example, the paid maternity leave in Bulgaria is five times longer than the average in other EU countries. It is high time that the government thought about creating the conditions that would allow people to work and have an income, rather than encourage them to receive benefits and stay in the same social group.

Child benefits of “50-60” leva: Every mistake in the social policy area will forever tie the Budget down with measures that are popular, but generally not very effective and difficult to turn back. Increasing child benefits and expanding the number of beneficiaries would be such a move. What is the point of entry barriers for a programme if seven or eight children in 10 will potentially have access to it. If the plan to increase the monthly child benefits to “50-60” leva is approved, that will mean an additional annual Budget expenditure of at least 150 million leva to 200 million leva. Where will this money come from?

Subsidies for tobacco growers until 2020: It seems that the Oresharski government will continue the spineless policy of previous Bulgarian governments. Regardless of whether it is wheat producers, vegetable farmers or tobacco growers, we are witnessing a typical manifestation of the rent-seeking phenomenon. The availability of subsidies, licences and various state transfers, there will always be a fertile growth for such behaviour. What should not be forgotten is that while a small group receives their benefits, the rest of the society loses some of its welfare.

A new attempt to regulate relations between retailers and their contractors: Amendments to the Competition Protection Act, due to be discussed in Parliament, introduce the notion of “significant market presence” and sanctions for abusing it. The amendments are the result of longstanding efforts by Bulgarian producers (and the Made in Bulgaria association most of all) to introduce a regulatory framework that will protect them from retail chains. Retailers, according to producers, require large discounts and different payments from their contractors as a prerequisite of doing business. These regulations, if passed, will represent gross intervention into the market relationship between independent commercial entities. No one forces producers to sell their goods to retail chains, they can sell their produce elsewhere.

The promise from the Economy Minister to increase the price of coal produced by Mini Maritsa Iztok before the end of the year: The price of coal does not depend on the Economy Minister, but the long-term contracts that the mining company has with coal-powered power plants – AES Maritsa Iztok 1, Maritsa Iztok 2 and Contour Global Maritsa Iztok 3. These contracts stipulate that the base price is calculated and contracted annually based on a certain formula. Secondly, the higher coal price is in sharp contrast with the promise to reduce the electricity price by five per cent. Coal accounts for more than half of the electricity produced in Bulgaria, which makes the electricity price very sensitive to changes in the price of coal. The announcement appears populist and will likely further exacerbate the misbalance in the energy sector, rather than improve the energy system.

Decreasing the electricity price by five per cent: Such a measure may sound good, but one must not forget that setting prices through administrative decision is never a good idea. To achieve this goal, amendments to the Energy Act were pushed through speedily and without much transparency, but a clear methodology of how this price cut will come to pass is still lacking. One of the measures is stimulating exports, which are currently at a standstill. Another measure is changes to the renewable sources and co-generation tariffs, but this will open a deficit in the system – a deficit that, at this point, it is unclear who will pay for. This lack of information comes against a background of constant explanations about the poor state of the energy sector, but the decisions being made are only further worsening the lack of balance in the system.

It is difficult to summarise such intentions and decisions, but one thing is clear – even if it is too early to judge their impact, as some say, there are sufficient grounds for worry. If the government continues in the same vein, then it is highly likely that the planned Budget revision will fail to cover all the expenditures. Then, in addition to the current protesters, who disagree in principle with the government coalition, we might see on the street those who are now counting on the generous promises of Budget payments.

(Prime Minister Plamen Oresharski photo by bsp.bg)

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About the Author

Desislava Nikolova is chief researcher at the Sofia think-tank Institute for Market Economics (IME), focusing on macroeconomics and public finances. Yavor Alexiev is a researcher at IME with a focus on macroeconomics and international relations. Kaloyan Staykov is a researcher at IME with a focus on macroeconomics and finance.