27.09.2014

The need to draft a Bill amending the 2014 Law on the State Budget of the Republic of Bulgaria (the "Bill") arises from the impossibility the fiscal targets provided for in the 2014 State Budget to be achieved. The reasons behind this are, on the one hand, considerable digression from the assumptions for key indicators in the macro framework and the overestimated forecasts of the revenues in the state budget, and on the other, the need to provide additional expenditure in certain budget systems. 

An update of the macroeconomic forecasts has been made in September that reflects the current developments in the national economy and the changed assumptions for the international environment by the end of 2014 and in 2015. The started in 2013 drop in international non-energy raw material prices continues in the current year. Further factor restricting nominal growth not only in Bulgaria was the stronger than expected rise of the Euro to the US Dollar. Inflation in the EU is at historically low levels, the trend being this to continue longer than expected a year before. The updated forecasts for Bulgaria envisage negative consumer price inflation of 1.1%, while in the previous forecast the figure is positive - 1.8%. The GDP deflator is also forecasted to be negative - 0.1% (the previous forecast was a positive figure - 1.5%), reflecting the changed inflation forecast. The revised 2014 forecasts envisage a real GDP growth of around 1.5% year on year, which is a slightly more pessimistic scenario compared to the one provided for in the macro framework to the 2014 budget - 1.8%. Despite the slight change in the growth forecast for 2014 the updated macroeconomic forecasts revise the nominal GDP figure for 2014 downward by more than BGN 2.4 billion (from BGN 81,582 million to BGN 79,178 million). Other things being equal, the lower nominal GDP means lowering the forecast for the economy's ability to generate higher tax revenues. This relates to risks for budget revenue performance not only in 2014, but also in the medium term and requires a conservative approach to revenue planning in the national budget.

• Underperformance of state budget revenues

The reasons behind the non-fulfilment of state budget revenue estimates are complex - macroeconomic, administrative, regulatory, etc. The forecast for the economic situation is overestimated and the impact of the unfavourable external environment developments is underestimated. The unrealistic assumptions for key macroeconomic indicators at the planning stage, the yet weak influence of domestic demand recovery on indirect tax revenues, the intensification of the deflationary processes in the economy, the overestimated effects of the measures to improve revenue collection, etc. can be pointed out among the main factors.

The estimates made for the state budget revenue parameters reflect the net effects in tax and non-tax revenues of the forecasted non-fulfilment, exceeding of the plan respectively, in respect of some indicators, and assessment of the effects of the measures to improve revenue collection. The key taxes where the forecast is for lower than the planned in the 2014 State Budget Law revenues are VAT on imports, excise duties, corporation taxes, etc. The updated state budget revenue forecasts envisage the underperformance of the planned in the 2014 State Budget Law revenues to amount to BGN 1,061.8 million (1.3% of forecasted GDP), which is provided for in the Bill.

• Pressure by expenditure in a number of budget systems

Serious problems and insufficient financing of already made expenditure commitments in a number of first level spending units have been identified based on the audits made (ordered by the Caretaker Government) and the Summary Report prepared. Some budget systems are placed in a situation not to be able to perform their functions and responsibilities after their expenditure ceilings have been lowered for the last 4 months of the year. For example, at the Ministry of Interior, where 80% of expenditure is costs of personnel, an objective impossibility the budget for the year to ensure the performance of its functions and responsibilities is created. The problem in the system of the Ministry is further aggravated by the adopted amendments to the Ministry of Interior Law which provide for increase of the expenditure for employee remuneration and social security contributions. However, there are no funds planned for the purpose in the 2014 budget of the Ministry.

Insufficient financing is also expected for social payments under the Ministry of Labour and Social Policy budget because of the increased number of beneficiaries for social protection of the most vulnerable groups of the population, those disadvantaged, and for ensuring the support of children and families.

The Ministry of Health experiences difficulties to ensure the necessary funding of psychiatric help, haemodialysis, the treatment of people suffering from HIV/AIDS, the emergency care, and for financial support of hospitals in inaccessible and remote areas, where the absence of health establishments poses a serious risk for the population.

Problems with insufficient financing of already made expenditure commitments exist also in other budget systems and therefore the estimates in the Bill provide for resources for structural and additional fiscal measures to the amount of BGN 448.5 million (0.6% of forecasted GDP), which is provided for in the contingency reserve.

• Change of the fiscal target for the state budget balance

In the context of the above the Bill provides for worsening the state budget balance by BGN 1,510.3 million (1.9% of forecasted GDP) compared to the provided for in the 2014 State Budget Law and thus the 2014 state budget deficit becomes BGN 2,846.5 million (3.6% of forecasted GDP).

In addition to the state budget, there is serious tension also in other budget systems which additionally worsen the forecast for the deficit under the consolidated fiscal programme (CFP) for 2014. Worsening of the budget balance compared to the parameters planned in the 2014 State Budget Law is expected in particular in the EU funds accounts of the National Fund and the NHIF budget. For this reason the Motives to the Bill state that a revision of the CFP deficit forecast is also required after reflecting the worsened balance under the state budget and other budget systems. The estimates to the Bill foresee worsening of the annual forecast for the deficit on a cash basis under the CFP to 4% of forecasted GDP (BGN 3,152.3 million), this estimate reflecting the effects of the measures to improve revenue collection and the measures to make advisable expenditure savings mainly under the Public Investment Programme "Growth and Sustainable Development of the Regions" projects.

In the context of the proposed deficit increase and ensuring a reliable buffer for liquidity support a need is created for assuming new government debt and changing the debt limits for 2014 respectively that would allow to ensure additional debt financing to the amount of BGN 4.5 billion in the current year. The new debt provided for includes a possibility for debt financing with a view to provide liquidity support within the framework of the approved by the EC State aid to the amount of up to BGN 2.9 billion or within the framework of the same limit to issue new debt in order to grant a loan to the Bank Deposit Insurance Fund to the amount of up to BGN 700 million. The above circumstances require an increase of the maximum admissible government debt as of the end of the year to BGN 22.5 billion (28.4 % of forecasted GDP).

It is foreseen to increase by BGN 2.0 billion the maximum amount of the new government guarantees that can be issued during the year in relation to the foreseen possibility to issue government guarantees in favour of the Bank Deposit Insurance Fund.

From the above it is evident that the budget position for 2014 cannot be stabilised in the short term via the measures in respect of revenues and expenditures because the possible corrective actions can only meet partially the negative effects of revenue underperformance and the unprovided for expenditure commitments for 2014 on the budget balance. This is namely the main reason for the prepared draft to revise the 2014 State Budget Law presented for consideration.

You can see the Motives here.