Cause and Effect in European Politics and Law

How long is the brake-way of the Bulgarian debt brake?

Ralitsa Kovacheva, March 1, 2011

The Bulgarian Ministry of Finance is ready with the draft of the so-called Financial Stability Pact (FSP) and has submitted it for discussion with the political parties in Parliament. The idea is to put limits on the redistributive role of the state, on one hand, and on the budget deficit and public debt, on the other. These limits must be stipulated in the Constitution to ensure long-term financial stability, regardless of who is in power.

To this end, the draft sets the following parameters:
- a 37% of the projected GDP ceiling for the redistributive role of the state (excluding the country’s contribution to EU's general budget, the expenditure on EU grants or the respective national co-financing);
- a 3% of GDP limit on the budget deficit (as per the Maastricht criteria);
- a 40% of GDP ceiling for possible increases of the public debt.

The pact also provides any changes to the direct taxes rates and/or the introduction of new direct taxes to be made only by a majority of two thirds (160) of all members (240) of Parliament.

The redistributive burden – up to 37% of GDP

Finance Minister Simeon Djankov explained that this particular value was chosen because it was the average redistributive burden in Bulgaria in the recent 10 years. At the moment it is 35-36%, but at the beginning of the period it was above 40%. According to Minister Djankov, this is the most important measure in the Pact, because in addition to ensuring that the state will not reallocate more resources than the 37% envisaged in the Constitution, it will motivate ministries to use the available resources more efficiently. For example, the security sector in our country is spending two and half times more than the EU average, almost the same is the situation in the defence sector, the Finance Minister argued. Instead, according to him, the state should spend more on education, culture, cultural and historical tourism and active economic policies.

Budget deficit up to 3%, public debt up to 40% of GDP

The Ministry of Finance proposed a formula by which to calculate the budgetary position depending on the outlook for a real change in GDP for next year. The deficit is considered upon a cash basis, but the Minister of Finance explained that it was no longer crucial, because the 2011 budget had been the first introducing a restriction government departments to conclude unprovided for contracts, so that the difference between the calculations on a cash and these on accrual basis was only 0.2%. Over time, the accrual basis will become the basic methodology for preparing and implementing the budget, but this is a long process, Deputy Finance Minister Vladislav Goranov noted.

According to the Finance Ministry's methodology, the step for alteration of the deficit, used in the formula, is 37% of the projected GDP alteration for the coming year. If there is growth, the budget balance should be improved by no less than 37% of projected GDP growth, provided that public debt is over 20 percent of GDP. Consolidation, however, may have a smaller amount if the debt is below 20 percent.

“If the debt is below 20% we have the possibility of expansionary fiscal policy to help the economy. If, however, we have a debt exceeding 20 per cent, we must make a more rapid consolidation”, Minister Djankov explained.

In the event of economic downturn, the government may propose a deterioration of the budget balance up to 37% of the estimated real GDP drop but only “in case the balance proposed would not form a deficit of more than 3% of GDP and given that deficit financing would not lead to an increase of the consolidated public debt over 40% of GDP.”

The principle is that the government cannot indefinitely maintain the deficit below 3% of GDP financing it with debt, because when the 40 per cent limit is reached, the so-called debt brake will be activated. The government will be forced to seek other solutions (spending cuts) to achieve the necessary consolidation.

"If adverse scenarios occur in several consecutive years and we move downward, it is possible for several years a certain deficit to be allowed under these rules, but as long as the consolidated public debt reaches 40 per cent. Then, regardless of unfavourable economic development, the government will be obliged to take measures on the expenditure part, in order to prevent the increase of public debt over this benchmark”, Deputy Finance Minister Vladislav Goranov said. According to him, if we have the maximum deficit of 3% of GDP, the accumulation of these 20% additional debt will take 6 years and more. But “there is no case in which the indebtedness can be justified by any political expediency.”

He explained that the limits of 20% and 40% of the debt were chosen because the first was the current level and the second - the maximum indebtedness, which Bulgaria could afford. The inbetween of these 20% and 40% is the corridor, where in a period of decline the state can form a deficit. Although the Stability and Growth Pact sets the debt limit at 60% of GDP, it is not a reasonable debt for a small open economy like Bulgaria, Goranov pondered. According to him, “the more free the targets are, the faster we will reach them.”

S.Djankov: There are some questionable ideas in the Pact for competitiveness

Asked how the independence of the forecasts will be ensured, upon which the budgetary position is being calculated, the team of the Finance Ministry unanimously answered: through the European semester. Within this procedure the European Commission is closely monitoring the fiscal policy of each Member State at an early stage and has the ability to make binding recommendations. So, if the forecasts differ substantially from those of the Commission, it may require a revision before the adoption of the budget, Minister Djankov explained.

He described the Financial Stability Pact as more important than the entry into the ERM II. However, it would be of great benefit because, so far the most frequent comments from the ECB and the European Commission to Bulgaria were focused on the lack of consistency in the fiscal policies of various governments. In other words: "How can we believe that once you enter the ERM II and then the eurozone, the Greek scenario won't happen again?” Therefore, Bulgaria will not apply for the ERM II before the adoption of the Financial Stability Pact.

To the question of euinside whether by introducing the FSP now, Bulgaria wants to demonstrate its willingness to participate in the Pact for the competitiveness of the eurozone, the Finance Minister replied: “No, there is no link with the Pact for Competitiveness, which contains some questionable ideas.” According to the Bulgarian Finance Minister, the unification of tax systems in the EU is not a meaningful idea, given that Member States are currently at different stages of economic development. "Countries such as Bulgaria aim at much higher average growth rate than what can be achieved by the developed countries, therefore we need a much more favourable tax policy. From this perspective, Bulgaria belongs to the group of countries who believe that the EU is still far from the possibility of a common tax policy.”


Deputy Prime Minister and Minister of Finance Simeon Djankov is expecting the changes, which will be proposed by the ruling party GERB in Parliament, to be supported by the opposition, after it strongly criticised him personally for poor financial discipline. If the Pact is adopted, Simeon Djankov believes it will be enforced no later than 2013. The same year when Bulgaria will hold the next parliamentary elections.