Bulgaria's FinMin Reveals Plan for Financial Stability Pact'

Bulgaria might be able to "export" the Financial Stability Pact project if it works, according to Finance Minister Simeon Djankov. Photo by BGNES

Bulgaria's Finance Minister Simeon Djankov has officially announced proposed Constitution amendments designed to bolster and guarantee the country's financial stability.

The measures termed "Financial Stability Pact" were announced by Djankov on Tuesday at a lecture at the New Bulgarian University in Sofia following the US tradition in which crucial policy speeches are delivered at academic institutions.

The three main pillars of Djankov's Financial Stability Pact to be solidified via Constitutional amendments are introducing a limit to allowed budget deficit, restricting the ability of the state to redistribute public funds as a percentage of the GDP, and introducing a qualified majority vote of two-thirds of the votes in Parliament to change Bulgaria's direct taxes.

The Finance Minister has thus given up on his controversial and much criticized idea that provided for making changes to tax rates only after a referendum.

He has announced that the government will discuss the proposed financial stability measures with all parties in Parliament in preparation of the adoption of respective amendments to the Bulgarian Constitution.

In order to amend the Constitution, the Borisov government will need to have three-fourths of the MPs, or 180 MPs, to vote in favor of the motion in three different votes. It is still unclear if the Cabinet stands a decent chance of muster enough votes to get the Djankov plan through since the ruling party GERB and its allies from the nationalist party Ataka have a total of 137 votes.

The opposition in the face of the Bulgarian Socialist Party and the ethnic Turkish party DPS has a total of 76 MPs, which is enough to block the motion.

"Such an amendment will guarantee a predictable fiscal and taxation policy for the investors," Djankov argued.

He told the students at the New Bulgarian University that the measures in the proposed Pact are intended to guarantee Bulgaria's financial stability in the long run.

"These measures must be enshrined in the Constitution in order to ensure the financial stability as a long-term policy," he said.

It is still unclear what exactly will be the limit to be set on Bulgaria's maximum allowed budget deficit as a percentage of the GDP but the Finance Minister indicated that it will tighter than the 3% of the GDP threshold set by the EU Stability and Growth Pact.

Djankov declared the second pillar of his program – restricting the capacity of the state to redistribute wealth – to be the most important because the smaller share of the GDP is redistributed by the state, the lower the taxes will be.

He pointed out that Bulgaria at present has the lowest percentage of funds redistributed by the state – 36%, compared with an average of 40-43% annually in the past 10 years; the average EU figure is 50%.

The Finance Minister also suggests that the direct taxes in the country be changed only with a qualified majority vote of two-thirds of all Members of Parliament (i.e. 160 out of 240).

"In the past two years 24 out of 27 EU member states increased their taxes, while Bulgaria is one of only three countries, which did not do that. Tax increases are bad for a country aspiring to catch up with the average EU standards. That is why it is important to make the increase of direct taxes very hard," Dajnkov explained while saying that the Bulgarian government can most influence the direct taxes while the excise, customs and VAT duties are largely determined by EU policies.

"The requirement of a 2/3 majority for changes to the taxes will make necessary a very broad consensus," the Deputy PM said.

He further declared his hopes to "export" the Financial Stability Pact idea to other EU countries.

"The Financial Stability Pact is the most important topic for the state finances and if this idea is successful in Bulgaria, it can be adopted by other states as well," he stated while also saying that every "soberly thinking" Member of Parliament should support the proposed measures.

In his words, Bulgaria has just experienced in the past couple of years its hardest financial crisis since World War II; yet, the government has for the time being managed to fend off the demands on the state budget for greater government spending.

Djankov is concerned, however, that the pressure from various factors to up state spending is continuing, and the adoption of the Financial Stability Pact would serve to remedy this situation.

The Finance Minister did point out that in 2010 Bulgaria registered one of the five lowest budget deficits in the EU, and that expects that in 2011 the country will make it in the top three. With respect to the public debt as a percentage of the GDP, Bulgaria is second in the EU after Estonia, and since January 2011 it officially has the lowest taxes, Djankov said.

Latest data has showed that Bulgaria registered a budget deficit of 3.9% in 2010 instead of the forecast 4.8%. Bulgaria's deficit under the consolidated fiscal framework on cash basis was BGN 2.8 B in 2010, or 3.9%. The accrual deficit, which is measured according to EU accounting rules, was 3.6%. According to Bulgaria's revised 2010 State Budget Act approved in June, the expected 2010 budget deficit was 4.8%, or BGN 3.691 B.

Bulgaria has the lowest personal and corporate income tax in the EU at 10%, which was introduced at the beginning of 2008, replacing the previous system, which combined several different tax rates - between 20 and 24%, depending on income.

Bulgaria also has the lowest social security rates, which coupled with a 10% flat rate, makes it very attractive for physical entities, employers and potential investors.

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