About the merits of the excessive deficit

Ralitsa Kovacheva, April 25, 2010

The European Commission will prepare a report on the factors that lead to the increase of Bulgaria's fiscal deficit with over 3% of its GDP. This is the first step of the excess deficit procedure which has been automatically activated for Bulgaria after the Eurostat announced its spring data about the deficits in EU member states. According to this data, Bulgaria's deficit is 3.9% or 0.2 percentage points more than the calculations of the Bulgarian government. On April 9 the cabinet announced the fiscal deficit for 2009 will jump from 1.9% to 3.7%. The Commission's report, aside from being an obligatory element of the excessive deficit procedure, will be the most reasonable and complete analysis of our near economic past - as such the government was unable to make for its 10 months of governance.

According to Eurostat's spring data only 5 out of EU's 27 member states had lower than the 3% barrier for fiscal deficit, as the Stability and Growth Pact stipulates. A worrying fact is that all EU member states have scored shortages in their budgetary frameworks. Those which cause most concern are: Ireland (-14.3%), Greece (-13.6), Britain (-11.5%), Spain (-11.2%). Austria and Germany, although with a budgetary deficit over 3% of their GDP, are in the category of admissible exceptions (up to 3.5%) because the excess is quite close to the referent value and can be perceived as an exception.

Bulgaria however, does not fit into this category and this is why its case (as well as the case of another 19 states) an excessive deficit procedure is started. After several Bulgarian media reported a start of the procedure, the Ministry of Finance explained in detail the overall regulation of the procedure. All the measures in the procedure, if applied to Bulgaria, will be quite useful for the country, which is exactly the meaning of the procedure.

And the procedure is long and complicated. It starts with a report, mentioned above, of the Commission about the reasons for the fiscal deficit. The report will take account of all additional factors like whether the deficit surpasses the share of the public investments in GDP, as well as another important information regarding the mid-term economic and fiscal perspectives of the country. Only after a thorough estimation the Commission will decide whether there is excessive deficit of not. Then this assessment will have to be confirmed by the Council of the European Union, which is expected to happen at the May Ecofin. If the Council of the ministers of finance would find an excessive deficit for Bulgaria, it will make recommendations to the country to solve the issue.

Initially the recommendations are not public (we will not be able to learn what the government will be advised to do and whether it will do it), but if there are no results, the recommendations will be published as a way to increase the pressure on the country. Only in extraordinary cases the monitoring over the country-violator of the Stability and Growth Pact will be increased or financial sanctions will follow.

The excessive deficit procedure has no punitive but corrective effect. A country will be sanctioned only if it refuses to do what's necessary to consolidate its public finances and cuts its deficit below the 3 per cent barrier, the Ministry of Finance further explained.

It is important to note however, that the procedure against Bulgaria comes in a moment when the Commission is considering tightening of the sanctions against member states that often violate the fiscal discipline. It is the May Ecofin when the Commission will present the final draft of a proposal, aimed at reinforcing the Stability and Growth Pact and at better coordination of the economic policies of member states.

We have to sharpen our teeth, the Economic and Monetary Affairs Commissioner Olli Rehn recently said. The decision of the Commission not to allow another Greece in the Union is obvious. The fact that Bulgaria quickly admitted the differences in the data it provided the Commission with, is a good sign. Now it is important the government to show that it is investing efforts in the right direction which is only one - public spending cuts.

Because, unlike other countries with much larger fiscal deficits, Bulgaria has quite a lot of things to worry about. What can the country offer against financing its fiscal loops with debt? This is the question the government, the opposition and the society must ask themselves when they review the data about the situation of public finances. Britain (-11.5%), for example, can offer high productivity, high-tech production for which there will always be demand and will always be a market at a high price and the high education in the country will continue to produce highly qualified human resources who will secure that all future lending will be paid off.

While in its report for Bulgaria the Commission will probably write that the country has low productivity in proportion with high wages, too big and ineffective public administration, cheap labour as a compensation for the lack of technological progress and more and more - many things that we know very well. Against this background the experts of the Commission will probably add in their report bad demographic perspective, combined with reluctance for reforms in any social sphere - like education, healthcare, pension system.

This is the real reason to worry about. And it is good that we have an excessive deficit because it is making us worry.

The crisis