Finance Minister: Low Consumption Crucial for Budget Revision

One of the main factors that necessitated the revision of Bulgaria’s 2010 state budget is the low level of domestic consumer demand, said Finance Minister Djankov at opening of the Parliament debate on the budget update.

Bulgaria’s Parliament is debated Thursday at first reading the proposed State Budget Revision Act, which projects an economic growth of 1% in 2010.

“The expected positive growth will result mostly from the increased exports, i.e. sectors that do not contribute directly to the budget. This is why we are more pessimistic about the state revenues, and expected a deficit of BGN 2 B,” Djankov told the Members of Parliament.

In his words, the declining imports lead to smaller VAT revenues while exporters are entitled to tax refunds.

“The good pre-crisis levels of economic growth had to do with the deepening of the huge disproportion in the trade balance and the considerable current account deficits – 27% of the GDP in 2007 and 24% of the GDP in 2008. The growth of domestic consumption and imports increased substantially the revenues from indirect taxes. The economic crisis from 2008-2009 changed the engines of the Bulgarian economy which gradually became oriented towards growth based on exports,” explained the Finance Minister.

He emphasized strongly the fact that the revised budget does not provide for any tax increases in order to avoid additional burdens on businesses and households.

“At the same time, we are faced with additional expenditures due mostly to the arrears from previous years, which were not accounted for in the 2009 state budget,” he said.

Djankov summarized the major points of the proposed changes including providing additional BGN 220 M for Bulgaria’s National Health Insurance Fund, BGN 116 M in subsidies for the tobacco producers, and BGN 142 M for social spending and benefits.

About BGN 200 M are set aside for funding infrastructure projects, while another BGN 660 M are envisaged for paying out debts owed by the state to private companies.

It also provides for a 20% reduction of non-interest state spending; cuts in administrative expenses are expected to save BGN 900 M, and for a deficit of 4.8% of GDP on a cash basis and 3.8% of GDP under EU accounting rules. It sets the fiscal reserve minimum at BGN 4.5 B down from BGN 6.3 B.

“It is crucial to stress that using funds from the fiscal reserve to a certain extent will not exert a substantial influence on the stability of the currency board because its proposed parameters preserve the levels from 2004 and 2005. A preemptive measure for raising funds is the option to issue state bonds worth up to BGN 2 B – in December 2009, we had envisaged only BGN 1.2 B,” said Djankov.

He outlined the three main pillars of the government’s approach to handling the state finances in time of crisis: first, no increases of direct and indirect taxes; second, increasing social payments and state investments by BGN 800 M at the expense of cuts in the state administration; third, expecting an economic growth of 1% and a deficit of 3.8% of the GDP.

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