Opposition Socialists Snub Bulgarian FinMin's Financial Stability Pact

Finance | March 9, 2011, Wednesday // 19:21|  views

Stanishev (right) has snubbed the fiscal board initiative of FinMin Djankov (left). Photo by BGNES

The opposition Bulgarian Socialist Party (BSP) has formally refused to support the Constitution amendments proposed by Finance Minister Simeon Djankov to guarantee fiscal soundness with a "Financial Stability Pact."

Djankov held talks with BSP Chair and ex PM Sergey Stanishev for more than an hour on Wednesday trying to convince the Socialists to back his project.

"If such provisions had been in place last year, there would have been no way to revise the budget the way it was revised," Stanishev told the Finance Minister.

He thinks the proposed Financial Stability Pact will strip Bulgaria of fiscal and tax policy flexibility, which is unacceptable because it "dooms Bulgaria to endless poverty."

Stanishev also declared that his Cabinet in 2005-2009 followed financial stability policies and guaranteed low taxes without Constitutional amendments.

According to Djankov, his talks with the Socialists were constructive even though an agreement was never reached.

He and Stanishev did agree, however, that if the Pact is approved, it should enter into force on January 1, 2012, and not on January 1, 2013, as Djankov originally envisaged.

The Finance Minister and the Socialists also agreed that Bulgaria should be unconditionally against the introduction of common EU tax rates because this will strip it of its advantage of currently having the lowest tax burden in the European Union.

Djankov vowed to oppose any such proposals at the upcoming meeting of ECOFIN, the council of EU Finance Ministers.

Stanishev did slam the government of the center-right party GERB that it only served the interests of big business and big capital, and failed to aid the some 40 Bulgarian municipalities facing budget trouble.

"How come the government is not dealing with what is more important to the people but talks about some kind of policies to be introduced after 2013?" the Socialist leader asked.

Djankov vowed to continue his discussions with all political parties for the Financial Stability Pact.

The measures termed "Financial Stability Pact" were first announced by Djankov on February 8 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.

Its first measure provides for banning the government from redistributing more than 37% of the GDP, without factoring in Bulgaria's contribution to the common EU budget, and all state expenditures on EU funding such as national co-funding of programs and projects.

The second measure refers to the budget balance, with the maximum allowed budget deficit being 3% of the GDP. However, the Finance Ministry has crafted a detailed set of rules which account for periods of economic growth or downturn.

Thus, in the event of positive economic growth, if the public debt is between 20% and 40% of the GDP, 40% being the maximum allowed, the Council of Ministers will be entitled to propose improving the budget balance by at 37% of the projected GDP growth. If the state debt is below 20% of the GDP, the proposed improvement of the balance can be below 37% of the projected GDP growth.

In the event of an economic downturn, the government will be allowed to propose worsening the budget balance by up to 37% of the projected GDP decline if this does not go beyond a deficit of 3% of the GDP, and if the funding of the deficit with public debt will not lead to its going over 40% of the GDP.

The government plan also provides for a special mechanism in case of emergency situations such as natural disasters that can affect substantially the national economy. The emergency mechanism is also designed to keep the budget deficit below 3%.

The third measure states that changes of the direct taxes can be adopted only by a qualified majority vote, with 2/3 or 160 out of a total of 240 MPs required to vote in favor.

It is highly doubtful whether Djankov will be able to get his fiscal board through. 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.

Djankov believes that the Financial Stability Pact and the so called "fiscal board" that it stipulates will help Bulgaria to join the euro zone in the medium run while he himself does not plan to be pressing for accession to the euro zone waiting room, ERM II, for the time being.

Djankov, a former senior World Bank economist, is a globally renowned economic scientist. His lecture at Harvard on fiscal discipline appears to be important in light of his hopes to "export" the Financial Stability Pact idea to other EU countries once the measures are adopted and proved to be feasible in Bulgaria.

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