Cause and Effect in European Politics and Law

Budget 2013: Let the Elephant Enter the Room!

Ralitsa Kovacheva, October 14, 2012

Sitting down to write this text down, my first thought was that I can simply use my text from the last year and only change the numbers. Why not, since that the government can plan the public budget in this way? And my second thought was that obviously we, the citizens, and the government live in parallel worlds. There is no other way to explain the ease with which the same goals, priorities and policies are served to us again and again (not because they are result of a long-term strategy, but because they have not been met), however, at an increasingly high price. Because, as noted by Finance Minister Simeon Djankov, this is the biggest Bulgarian budget so far - with revenues of 30 billion 548 million BGN (around 15 billion euro) and spending of 31 billion 648 million BGN (around 16 billion euro).

This year, the feeling of parallel realities has at least one reason less, thanks to the European semester - the procedure in which the budget plans and key policy documents of the EU member states pass through Brussels before being approved by national parliaments. The EU Council found that the macroeconomic scenario used by Bulgaria for economic growth of 1.4 percent in 2012 and 2.5% in 2013 was too optimistic. As a result, the government adjusted its forecasts to 1.2% this year and 1.9% next year. However, the outlook still remains optimistic compared to the recent projections made by the IMF for Bulgaria in early October – growth of 1% in 2012 and 1.5% in 2013. The finance minister, however, assured that the budget would be enough because "the accounts are made with the assumption of 1.2% growth".

Optimism is definitely a convenient prerequisite to fix budget parameters, but it also creates "significant risks" to the planned budgetary consolidation, as noted in the Council recommendation. And assuming that cooled optimism in the macroeconomic scenario has somewhat mitigated these risks, a big "however" still remains. According to Dessislava Nikolova with the Institute for Market Economy (a Bulgarian economic think-tank) "the main risks for the budget arise from the optimistic forecast for increased demand which, given the enormous uncertainty over the EU economy, the expected stagnation (at best) in Bulgarian labour market and households behaviour since the beginning of the crisis to date, is rather not a realistic scenario."

And there is another risk factor mentioned by the EC: "inefficiencies in the public sector, particularly with respect to arrears in healthcare, which may lead to considerable expenditure pressures". In other words, these sectors will swallow more and more money without clarity what it will be spent for.

"The overall funding of the sector 'Education' is increased, as it is key for preparing specialists to make the transition to a knowledge-based economy," says the report accompanying the draft budget. We have no disagreement with the government on this issue. The funds allocated for education in 2013 amount to 2 billion 868 million BGN (1.4 billion euro), representing 3.5% of GDP. According to the Ministry of Education, the money is spent on specific policies and priorities, which are properly described. However: "Education reform has been losing credibility since its first stage in 2008 and legislative proposals have been continuously blocked in Parliament. A strong new impetus is required," notes the Commission staff working document accompanying the Council recommendation to Bulgaria.

But there is no need the European Commission to tell us something that we all know from personal experience, right? What policies and priorities does the government finance since there is neither (new) legislation on school education nor a law on higher education? Why, after the money for education have been increased, parents still have to "donate" funds to schools, pay private tutors or spare their personal time to teach their children and ultimately the result is worse, not better? Why do students choose to study abroad and businesses cannot find the needed personnel among graduates in the country? If the "white" money for education amounts to nearly three billion BGN (1.5 billion euro), how much is the "grey" money that actually prevents the system from collapsing? This, indeed, is the cost of the parallel reality we, the citizens, inhabit. This is the price of the refusal of reforms that we all pay - once officially, via the budget, and again unofficially by everyone taking care of themselves.

Exactly the same can be said for the other risk sector – health care. The funds allocated for health care amount to 3 billion 343 million BGN (nearly 1.7 billion euro) or 4.1% of GDP, which is more than last year. "Healthcare reforms in particular have largely stalled," the same document notes. And you do not need to be in Brussels in order to see that this money would still not be enough and the sector will be geared by the "grey" money. According to a study by the Association of Industrial Capital in Bulgaria of February 2012, the grey economy in health care is between 50% and 75%. In other words, the money paid by the state (by us) for health care finance only the appearance of a functional sector, and in fact it is driven by the grey money paid again by all of us.

One could wonder where all the money comes from since "Bulgaria has the highest rate of people at risk of severe material deprivation in the EU (35% in 2010 compared to an EU average of 8%)". Therefore, the fight against poverty is declared a priority by the government and the money allocated for social security and welfare have again the largest share of all costs - 35.5%, or nearly 11 billion BGN (5.5 billion euro). This includes 865 million BGN (433 million euro) for social benefits and 7 billion 852 billion BGN (nearly 4 billion euro) for pensions, which is nearly 600 million BGN (300 billion euro) more than in 2012 (then it was more than 2011, etc.). It is beyond any doubt that the state has certain social functions and that pensioners deserve their pensions to be increased. However:

"Social transfers have, so far, had little effect and priority should be given to making them more effective," because "Bulgaria is currently among the Member States where social transfers do the least to reduce poverty: in 2010, 27.1% of the population was at risk of poverty before receiving transfers, and 20.7% of the population was at risk of poverty after receiving transfers."

"It is therefore essential to create better conditions for ensuring adequate benefits by combating contribution evasion, limiting access to early exit pathways, including invalidity, equalising the retirement age for men and women and stepping up efforts in work places and labour markets to increase the employment rate for older workers."

So the question is not to spend more money, the question is how to spend it. And not least - where does it come from. The answer is - it has to be produced. To that end, the economy must run, there should be more workers working better and longer. However, as the Commission has found out, "at the current juncture, job creation does not appear to be sufficiently high on the government’s agenda." That is why the government needs to resort to ideas like the tax on deposits interest, which rather creates smoke in the air than is a substantial contribution to the budget. But as Chekhov said, if in the first act you have a gun hanging on the wall, then in the following one it has to shoot. Therefore we have to wait to see what will shoot when the budget enters Parliament. We can only guess what a feint will be used to increase revenues if, in the typical style of the Borissov cabinet, the idea of taxing deposit interest is dropped 'under public pressure'.

Ultimately, the Commission concludes, "despite the progress the government has made in implementing its reform agenda, the main policy challenges for the country have remained broadly unchanged." In other words, the budgets are getting bigger, more taxpayer's money are spent, new and devious ways are sought to collect more money, but ultimately there is no change. Another proof: the budget for defence and security is higher than that for education (2 billion 898 million BGN or 1.450 billion euro), as only the Interior Ministry takes over 1 billion BGN (0.5 billion euro). I will only tell you two words: monitoring and Schengen.

In fact, the elephant in the room of ‘Budget 2013’ is the forthcoming elections. "This is a budget of increasing a large part of the incomes. We encourage pensioners - 9.8% growth in pensions before 2009, an average increase of 9.3%; 10% increase of the salaries of teachers, 10% increase of libraries, museums, community centres etc.; 8 to 10% increase in the army ... So in the social sphere as a whole, we are spending about 1 billion and 300 million BGN (650 million euro) extra - quite a large sum," Finance Minister Simeon Djankov boasted on the state-owned TV. He, who took away the sausage from the pizza and showed an empty pizza box to demonstrate the austerity measures and the lack of money, now has served a real banquet in 2013 budget. The biggest Bulgarian budget ever, remember? Just do not think that it has anything to do with the elections!