Cause and Effect in European Politics and Law

EU: Sofia is an optimist, but reforms are needed!

Ralitsa Kovacheva, May 1, 2010

The objectives in the Bulgarian Convergence Programme are broadly in line with the requirements of the Stability Pact, but the programme is based on more favorable forecasts, there is a lack of long-term measures and there are some serious risks for its implementation.

This is written in the assessment of the Council of the EU for the updated Convergence Programme of the Bulgarian government. The update is being made every year and the cabinet sent the document in January when the deadline for its submission expired. Subsequently, however, the government urgently had to send new budget data, after admitting higher budget deficit of 3.7% for 2009, 3.9% according to Eurostat. These numbers are taken in mind in Brussels' assessment and the document noted that a negative budgetary revision was one of the essential risks for the implementation of the goals in the programme for 2010.

Convergence Programme's importance arises from the fact that it sets the basic parameters of economic and fiscal policy to meet the requirements for budget deficit and public debt in the medium term. Hence, the commitments set in the programme serve as starting points in the government's policy and must be followed through the entire programme period up to 2012.

The baseline macroeconomic scenario on which the assessment of the budgetary projections is based, envisages that real GDP growth will improve from -5% in 2009 to 0.3% in 2010 before reaching an average rate of 4¼% over the rest of the programme period. The Council stated, that “the baseline scenario appears to be only slightly favourable compared with the Commission services' autumn forecast and taking into account the most recently available information, its plausibility critically depends on the assumed rebalancing of growth towards a more sustainable pattern, with exports as a main driver.”

For 2010, the Convergence Programme aims at achieving a balanced budget. The revenue-to-GDP ratio is expected to increase to almost 39¼% of GDP (from 37½% of GDP in the previous year), supported by higher indirect taxes and other revenue. “In spite of moving to a less tax-favourable GDP composition, the strong pick-up in indirect tax revenue is explained by an expected significant improvement in tax compliance and an increase in excise tax rates for cigarettes and electricity for industrial production.” (the numbers for the revenue collection for the first two months of the year do not fulfill these expectation)

“However, the programme does not give any details on the expected increase in other revenues by 1% of GDP”, the Council noted: by contrast social contributions are projected to decline by ¼ of a percentage point of GDP due to a lowering of contribution rates by 2 percentage points. Nominal public sector wages and intermediate consumption are set to remain unchanged at 2008 level, reducing their share as a percentage of GDP in 2010. “These expenditure-reducing measures more than compensate the increase by 0.2% of GDP in pensions for widowers and the elderly in 2010”, the Programme states. But the prime minister Boyko Borissov canceled the increase as part of the government’s anti crisis measures.

The main goal of the medium-term budgetary strategy is to maintain a balanced general government budget throughout the programme period. The medium-term budgetary objective is a surplus of ½% of GDP, which the programme aims to achieve from 2010 onwards. Given the most recent projections and the debt level, the MTO more than adequately reflects the objectives of the Pact, the Council thinks. But it warns that the budgetary outcomes could turn out worse than projected.

“The main risk stems from the underlying macroeconomic scenario, which is based on slightly favourable growth assumptions for the programme period. In particular, revenue could be lower than projected in 2010-2012 as a result of a slower and less pronounced economic recovery. Furthermore, the scope for additional expenditure cuts to compensate for revenue may turn out to be limited following the significant frontloading of fiscal consolidation efforts in 2009. Finally, the downward revision of the 2009 general government balance announced after the submission of the programme poses additional risks to the budgetary outcome in 2010.”

The Council criticized the Programme because “the framework does not incorporate any multi-annual rules and the expenditure ceilings set in the course of the medium-term fiscal planning are binding only in the short-term. The programme does not envisage any substantial changes to the budgetary framework except for increasing the time horizon of the medium-term fiscal framework from three to four years to coincide with the government mandate and thus making the medium-term policy more predictable.”

Regarding the existing weaknesses in the quality of public finances that the Programme recognises, “ambitious structural reform measures are presented in the area of healthcare, education, pension system, and public and revenue administration with a view to enhancing the efficiency and effectiveness of public revenue and expenditure and increasing the growth potential of the economy”.

Taking into account the risks to the fiscal targets mentioned above, the Programme's budgetary strategy can be regarded as broadly in line with the requirements of the Pact and conducive to preserving macroeconomic stability and investor confidence in the Bulgarian economy, the assessment says. “The Program envisages quite an ambitious structural consolidation by -2¾ % of GDP in 2010, with no further improvements in the following years. The planned consolidation in 2010 is not fully underpinned by measures outlined in the programme.” There is a lack of specification of the measures for 2011, the Council notes. In addition, its full achievement depends on an optimistic macroeconomic scenario with further risks coming from the upward revision of the 2009 deficit.

The overall conclusion is that the Programme's aim to maintain a sound budgetary position, reflected in planned general government balanced budgets, is considered adequate at the current economic juncture and in view of the need to contain the economy's external imbalances. “The undertaken consolidation measures and the strong political commitment to fiscal discipline are expected to partially compensate the risks stemming from the slightly favourable assumptions on growth and revenue collection.”

In conclusion, the Council invites Bulgaria to “continue implementing strict fiscal policies and adopt further consolidation measures to achieve the programme target for 2010 with a view to sustaining the on-going adjustment in the external imbalances and safeguarding investor confidence in the economy; in particular, contain public sector wage growth in order to contribute to overall wage moderation and improve competitiveness”.

The council recommends Bulgaria to strength the efficiency of public spending by vigorously implementing planned structural reforms in the area of public administration, healthcare, education, and pensions in order to boost productivity and ensure sustainable convergence within the European Union.

Ultimately, regardless of the unexpected recent change of the data for the deficit for 2009, the main objectives in the programme remain unchanged. Now, as the Council notes too, true and profound reforms should be started for public finances strengthening. Otherwise the budgetary targets will have to be achieved by “filling the gaps method” and by breaching the commitments made in the programme. This certainly will be reported by Brussels in next year's assessment in early 2011. And by Bulgarian voters at next elections which now appear deceivingly too far.