Reforms and savings – the way to control the alarming budget deficit

Once a snowball gets rolling down a hill, there is no stopping it. This is a useful analogy for the situation with the growing expenses in the Bulgarian state budget, according to which, in the current and coming year, a deficit of about 9 billion euros, or 8-9% of the country’s GDP, is about to materialize. Any score above 3% for this indicator, however, threatens Bulgaria's accession to the Eurozone.

The estimated amount is based on data provided by the Bulgarian Ministry of Finance (MoF) in recent weeks, according to which revenues are expected to grow by 3.6 billion euros next year, while expenditures are expected to significantly outpace them increasing by 9 billion euros. This would mean a deficit of over 5.5 billion euros, which, added to the expected 3.1 billion euros for this year, will approach 9 billion euros altogether.

As Economic.bg previously wrote, this will bring the country's public finances into their worst year in the last decade.

And although at the beginning of the month, the interim finance minister Lyudmila Petkova commented that there are "all sorts" of measures to deal with this situation, during a press conference last week it became clear that the ministry has not yet figured out a solution. At the same time, there are less than ten days left for the presentation of Budget 2025, including the preparation of the medium-term fiscal forecast, in line with the provision in the Public Finances Act.

Is there anyone who can hit the brakes?

Up until the first caretaker government in the summer of 2021, (Bulgaria) had a budget surplus and no budget problems. Since then, newcomers to politics have pushed the snowball down the hill," commented Nikolay Vassilev, financier and former Minister of Economy, to Economic.bg

Since the spring of 2021 until now, in Bulgaria, there have been four caretaker governments formed by President Rumen Radev, two regular governments led by the "We continue the Change" party and two interim governments led by Dimitar Glavchev, considered close to the GERB political party. Each of the budgets in that period, albeit with a great delay, had been adopted while Assen Vassilev was the finance minister.

Their philosophy (of “We Continue the Change”) is populist and leftist - they borrow, they spend, and then do it again. The inertia that has strengthened the snowball down means there is no stopping and every year it gets worse," Nikolay Vassilev believes.

He added that "due to the endless chaos of changing caretaker and regular governments and the lack of a stable political majority, there is no one to hit the brakes."

As a third reason for the current state of the Bulgarian state budget, the former economy minister pointed out that at the moment "all governments, regular and interim, have not made a single reform", nor have they saved costs by reducing the number of ministries and, accordingly, civil servants.

The Bulgarian population is decreasing, but the bureaucrats are not," stated Vassilev.

"For example, in 2013, Assen Vassilev was a caretaker minister of one ministry, which is now divided into four ministries. Why is this necessary?" asks the expert rhetorically.

He warned that if the situation continues in the same spirit, with increasing salaries, pensions and other budget expenses, the financial stability of Bulgaria will evaporate.

For many years, the country has not had an increased credit rating even once - some brag that this or that credit agency has confirmed our credit rating, but this is like a scoring draw against Luxembourg in football – it’s not a win," he described the situation figuratively.

What are the options for dealing with the growing deficit?

The problem with the budget is not in its revenue section, but in that of expenditures, according to economists.

"For me, the problem is the expenses, I have nothing to say about the revenues, they are more or less good. I don't want taxes to be raised, but we need to reduce expenses, which in recent years have increased enormously, almost doubling in four years," said Nikolay Vassilev.

The financial expert Lyubomir Datsov shared a similar opinion.

I would not recommend that anyone raise taxes. If something has to be done, it should be in the opposite direction," he commented.

According to him, it is pointless to have a simple tax system, based on and pursuing higher efficiency compared to other tax structures, while at the same time imposing a shadow tax through administrative procedures – something that disrupts the business climate.

He gave an example of the tax burden on small and medium-sized enterprises (SMEs) in Bulgaria, which, together with the Czech Republic, is the highest in Europe. "It's mainly because of these administrative procedures and tax collection practices, not because of the system."

A balance must be found, and the reverse process must begin. Everything is already over-regulated, which creates problems for business, hinders development, and repels investors," added Datsov.

He also mentioned some good practices in budget management, which are must-do rules. One key one is that “consolidation (managing the budget deficit) is done much more effectively and well by doing it through the expenditure side of the balance.”

"Making structural reforms to optimize spending and improve efficiency is at the heart of good politics," he summarized.

He added that raising taxes in order to pay expenses is "pointless" as the state budget "provides services and is not meant to be a feeder for one part of the population."

The focus should certainly be on spending, there’s not that much capacity to increase revenues at the moment," confirmed Georgi Vuldzhev, an economic analyst.

"If we have to look at the revenue part, we can only think about raising taxes there. The alternative to this is simply to seek higher economic growth, but measures to do so do not magically produce immediate results. The deficit issue is short-term, and to address it as effectively as possible in the coming years, one simply needs to look at spending. In my opinion, raising the tax burden is a bad idea and the situation will get worse," Vuldzhev added.

According to him, consideration should be given to easing the tax burden in some respects. As an example, he gave the newly introduced measures for higher tax collection, which have given certain good results.

But if you talk to the business, many of them, although not publicly, note that this year the pressure from the institutions regarding revenue collection, namely the National Revenue Agency, is significantly greater than in previous years. There is a result, but even they (ed. - measures) are not enough," the expert shared.

As an example, he gave the new minimum corporate tax of 15% for large corporations operating in Bulgaria, introduced under the initiative of the Organization for Economic Cooperation and Development (OECD). According to him, the legislation in Bulgaria was implemented in a way that increased the tax burden more than necessary.

Whether it was because the politicians did not understand what they were introducing textually, or whether it was on purpose, I am not sure, but this is how the tax burden was raised," Vuldzhev added.

As for the state budget, the economist predicts that cuts will most likely be made to the capital expenditure program. "They (the Ministry of Finance) will either wait for a new parliament to be formed and discuss options with it before proposing a budget at all or if they propose a budget on time (by the end of October), they will propose it with a large deficit and in the process of discussion they will expect to hear ideas on how to reduce it," commented Vuldzhev.

He added that cutting the capital program would be a problem because it also means less investment.

This is a big problem and is one of the reasons why the Bulgarian economy is growing at such a low rate, we have barely managed 2% growth in recent years. It will get worse in the future, because investments are at a very low level, their share as a percentage of GDP has fallen to absurdly low levels for a country with our level of economic development," the expert added.

Translated by Tzvetozar Vincent Iolov