Bulgaria’s new Government held its first meeting on November 11 to discuss and approve an updated Budget revision bill, which envisioned a lower deficit than the earlier amendments put forth by the caretaker cabinet, but still in excess of EU-mandated budget deficit levels. The Cabinet did not say when it would submit the bill to Parliament, but it was expected to do so by the end of the day.
The new bill recycled much of the earlier draft, but reduced additional spending and set a new consolidated Budget deficit target of 3.7 per cent of forecast gross domestic product (GDP), compared to the four per cent target set in the caretaker cabinet’s bill. The other key part of the bill, which would allow the Government to borrow up to 4.5 billion leva (2.3 billion euro) before the end of the year, remained in place.
Bulgaria’s Finance Ministry said on November 10 that the preliminary data put the consolidated Budget deficit at the end of October at 1.78 billion leva, already exceeding the 1.47 billion leva figure in the 2014 Budget Act. By comparison, the consolidated Budget deficit for the first 10 months of 2013 was 443 million leva, the ministry said.
In its memorandum accompanying the revision bill, the ministry said that it expected a revenue shortfall of 1.06 billion leva (on top of the 1.47 billion leva deficit target), caused mainly by lower value-added tax receipts (estimated to fall 670 million leva short of the target) and excise duties (expected to fall 318 million leva short).
The ministry said that the lower revenue had been caused by unrealistic economic growth targets set by the previous administration of Plamen Oresharski, continued deflationary processes, “regressive” legislative changes that curtailed the Customs Agency’s powers, and the dropping oil prices on international markets.
On the spending side, the revision bill envisions the allocation of 398 million leva to state institutions, covering payments due before the end of 2014. Half of that money will go to the Interior Ministry – 125.7 million leva to cover the associated costs of the Interior Ministry Act amendments passed by the Oresharski government (which did not allocate the funds to cover such costs, the Finance Ministry said) – and State Fund Agriculture, which will receive 70 million leva.
The net increase in spending, however, would be only 279 million leva, as the Cabinet plans to use the left-over 119 million leva from the “regional development programme” of the Oresharski administration to cover part of the costs. (The programme was allocated 500 million leva under the 2014 Budget Act, most of which have already been parcelled out, with critics of the now-departed government accusing it of using the money as a discretionary fund to finance projects mainly in municipalities governed by elected officials from the parties in the former ruling axis.)
The Cabinet’s decision to reduce the additional funds for government ministries and use the funds available in the “regional development programme” are the main reason for the lower Budget deficit target. Added up, the revenue shortfall and additional spending will push the new state Budget deficit target to 2.68 billion leva, or 3.3 per cent of the forecast GDP.
The consolidated Budget deficit target would rise to 2.99 billion leva, or 3.7 per cent of GDP, because of additional funding allocated to cover payments to projects financed with EU funds under programmes with temporarily frozen financing (200 million leva) and more money for the National Health Insurance Fund (100 million leva). EU rules allow member states to run deficits of up to three per cent before triggering the bloc’s budget monitoring system and excessive deficit proceedings.
Speaking to reporters after the Cabinet meeting, Finance Minister Vladislav Goranov said that the new deficit target was “high, but objective” and was the result of “planning mistakes and poor management of EU funds”.
He defended the decision to exceed the EU-mandated deficit target guidelines, saying that the only way to keep the deficit formally in check would be to postpone some payments for next year, but such overdue payments would still be counted by the EC towards the 2014 deficit.
“We understand that an excessive deficit proceeding could be started against Bulgaria, but we will explain to our colleagues in Brussels the reasons [for the higher deficit] and we will undertake the necessary measures to bring public finances in line with the three per cent deficit [threshold],” Goranov said.
The higher Budget deficit and the need to “secure a safe buffer for liquidity support” for Bulgaria’s banking sector required increasing the government debt ceiling – from 18 billion leva to 22.5 billion leva (the equivalent of 28.4 per cent of GDP) – and the annual borrowing limit from 4.4 billion leva to 8.9 billion leva.
Of the 4.5 billion leva in new debt (the same figure envisioned in the caretaker cabinet’s Budget revision bill), no more than three billion leva could be borrowed on foreign markets.
The bulk of the money raised that way, 2.9 billion leva, would be used as a loan to the state deposit guarantee fund and to provide liquidity support for the country’s banking sector under a state aid scheme approved by the European Commission in June. The bill envisioned that the Government would lend two billion leva to the deposit guarantee fund – which is estimated to require at least 1.6 billion leva to cover all guaranteed claims from depositors in the Corporate Commercial Bank.
The rest of the funds raised via new debt will go towards covering the increased Budget deficit.
(Bulgaria’s Cabinet building. Photo: Clive Leviev-Sawyer)