08.08.2013

The President of the Republic stated his motives for issuing a decree and exercising his right of a veto within the meaning of Article 101, paragraph 1 of the Constitution of the Republic of Bulgaria and returns for a reconsideration in Parliament the provisions of § 1, concerning Article 1, paragraph 1, section I. \"Revenue\", item 1 \"Tax Revenue\", § 1 concerning Article 1, paragraph 2, section \"II. Expenditure\", item 4 \"Contingency Reserve\", § 2, item 3 (which amends the wording of § 13, paragraph 1 of the Transitional and Final Provisions of the 2013 State Budget of the Republic of Bulgaria Law) and item 4 (which establishes a new § 14а) of the Law amending the 2013 State Budget of the Republic of Bulgaria Law.
We cannot share the economic logic of the President\'s motives for a veto of the Law amending the 2013 State Budget of the Republic of Bulgaria Law. These motives do not state any legal arguments necessitating the President\'s veto. They are purely political and serve as an example for an obvious political positioning, which runs contrary to the President\'s unifying function.
Expressing his motives, Mr. Plevneliev failed several times to answer the question why in 2010 he submitted a revision made in the middle of the year planning a revenue reduction by BGN 1.9 billion, an expenditure increase by BGN 900 million and a deficit rise by BGN 2.8 billion. These figures are many times higher than the revision of the 2013 budget. What is more, the \"non-transparent\", according to President Plevneliev, contingency reserve increased in 2010 by over BGN 1.1 billion, i.e. an amount over 4 times higher than the one planned in this revision. Unfortunately, due to ill-planned budgeting and breaching the principles of fiscal discipline, BGN 660 million out of those BGN 1.1 billion are aimed at payments to business! Likewise, there were payments to business left as of end-May 2013 due to the same philosophy of budget execution.
In performing its activities of state budget execution, the Council of Ministers is subordinate to the Constitution of the Republic of Bulgaria and to the Organic Budget Law. In accordance with Article 10, paragraph 4 of the Organic Budget Law, the Council of Ministers shall introduce to the National Assembly a motion to amend the state budget wherever variances affecting adversely the revenue and expenditure by increasing the budget deficit from the level provided for by the annual State Budget Law are likely to emerge during the relevant budget year. The settled case-law of the Constitutional Court follows the same line.
The arguments against the revision of the revenue side of the budget are not convincing. Tax revenues register a serious underperformance compared to the 2013 budget parameters planned. With a tax revenue growth by BGN 1.8 billion (8.4%) compared to 2012 as planned in the Consolidated Fiscal Programme, the execution as of end-May reports a nominal growth of BGN 486.8 million (5.6%) compared to the same period of 2012. As of June, this clear-cut trend gets worse and the cumulative increment of taxes and social security contributions slows down to BGN 379.6 million (3.6%).
This can clearly be seen from the data given in the table of the revenue execution parameters under the Consolidated Fiscal Programme.
The tax revenue trend observed simply shows that the parameters planned for the year could not be achieved, which will inevitably lead to a deterioration of the budget balance, including of the Republican budget, as set in the annual 2013 State Budget Law.
The proceeds from corporation taxes and personal income taxes are not evenly spread by month and quarter throughout the financial year. Traditionally, higher direct taxes are collected in the first half of the financial year compared to second half due to the following reasons: the annual corporate tax due for the previous financial year is declared and paid by 31 March, while the personal income taxes are declared and paid by 30 April. Analyses show that higher corporate tax prepayments are made in the first half of the financial year compared to the prepayments made in the second half.
As far as the position that the VAT refund is not planned as a budget expenditure is concerned, one should take into account the fact that it is not substantiated since the refund of VAT and excise duties is not a budgetary expenditure (the less so as an expenditure under the budget of the Ministry of Finance), but is reflected in the revenue side of the budget.
In addition to the macroeconomic indicators (GDP growth, inflation, consumption, etc.) influencing VAT and excise duty proceeds, there are implicit factors that have an adverse effect on the revenue. Such a factor is the amount of non-refunded VAT. The normal levels of refundable VAT should be around BGN 200-250 million. Non-refunded VAT as of 30 June 2013 amounts to BGN 776 million, including BGN 319 million of overdue VAT and BGN 457 million of VAT due for May 2013.
Despite the urgent measures aimed at improving tax collection, the revenue will not performed as planned in the 2013 budget. On the one hand, there is a need to refund an extraordinary amount of BGN 500 million of VAT in order to reach the normal levels of non-refunded VAT, and on the other hand, the VAT declared in the period December 2012-May 2013 to the amount of BGN 450 million is not collected. The greatest increase in uncollected VAT, i.e. around 70%, is observed in the period February-May. Even if all claims under VAT returns are collected by the revenue administration, almost the same amount should be refunded to avoid the payment of default interest for the overdue VAT. BGN 12 million of default interest have been paid for the first five months of 2013.
The Government has also planned other measures aimed at improving revenue collection and improving the work of the revenue agencies which need legislative amendments, the effect of the implementation of which is expected in 2014.
If the state budget is not revised, the Government will face an objectively unachievable revenue target, i.e. BGN 1.4 billion more compared to the second half of 2012 should be collected in the remaining six months. This means that in the second half of 2013 the revenue administrations should achieve a growth of 13.7% compared to the same period of last year at a revised GDP growth forecast from 1.9% down to 1.0%. These data show an explicit impossibility to retain the budgeted parameters and the delay of the revision will only put off the problems without giving any options for their solution.
We cannot share the thesis for lack of transparency in respect of the planned increase in revenue. The reasons of the draft law clearly outline the priority directions, i.e. support to citizens, payments to businesses and alleviation of the burden on consumers in connection with the amendments to the Energy Law. We also plan for the additional expenditure set in the contingency reserve to be approved by an act of the Council of Ministers so as to ensure transparency and information about the use of these funds. The expenditure and arrear commitments are already a fact under the relevant budgets and any extra expenditure may not be transferred for other purposes. There is absolutely no doubt that the failure to pay the commitments taken has a pro-cyclical effect and hinders the economic recovery. This lowers the trust in the state and gives rise to negative effects. The question \"What happens if there are contingencies when all expenditures are charged to the budgets of the relevant ministries?\" arises. Do we continue with the strategy of non-payment and making believe that problems do not exist?
Mr. Plevneliev\'s concern for the municipalities would be appropriate, if consistent. Let us not forget that he was a minister of regional development in the government whose 2010 budget revision started off municipal indebtedness and this is a problem that may not be overcome even today. The 2010 revision envisaged a drop in the amount of transfers to municipalities by 15% year-on-year, except for the expenditure for education, social assistance and care, defense and security and ecological sites. We should point out that the state mandate arrears amount to BGN 5.4 million, or around 3.4% of the overall structure of municipal arrears. Local mandate arrears amount to BGN 154.7 million. One of the aspects of the financial decentralization which has been neglected in the last four years is to work jointly with the local authorities in order to improve their creditworthiness, i.e. the possibility for accumulation of free resources to allow the long-term planning of investment expenditure and their financing.
The interpretation of the increased limit for new debt is biased and incorrect. The suggestions that the greater \"indebtedness is thus irresponsible not only towards us but towards the future generations\" lacks logic. Such interpretations are at best unsound given the reiterated explanations, including the arguments in the motives to the draft Law amending the 2013 State Budget of the Republic of Bulgaria Law that this will not leave to an increase in the planned government debt limit of BGN 14.6 billion, or 18.3% of GDP, at the end of 2013. We are afraid that these motives run the risk of being interpreted in disparate ways and even of undermining the fundamentals of public finance, including within the EU with its Maastricht criteria accepting that a safe and acceptable level of debt should not exceed 60% of GDP.
The linking of a loan to the financing of current expenditure only is also illogical. We will not take a loan for such purposes. Linking the additional debt limit to specific expenditure, such as the social package of BGN 40 million, is not correct. This limit for newly issued debt in 2013 is revised as a result of the extraordinary issue in January which depleted it. It serves to fill in the fiscal reserve in order to reach the minimum statutory level, as well as to secure resources for the payments forthcoming in 2014.
The arguments for a lacking analysis of the optimal level of the fiscal reserve are currently unfounded but may be addressed to the time of drafting the budget. Such an analysis was made when passing the 2013 budget where the minimum amount of the fiscal reserve by the end of 2013 was determined and this revision does not aim to change it but rather to make it possible for this level to be reached. Unfortunately, the fiscal reserve has been considered recently as a money-box from which to draw money only. Its basic function, i.e. as a reserve, an immune system of the fisk guaranteeing its stability, has not been realized. The fiscal reserve must therefore be timely filled in rather than only being spent.
We cannot share the concerns that the envisaged new debt \"yet again is not targeted at supporting an active policy of enhancing competitiveness, growth and improving the business climate\". It is obvious that the existence of the Government Debt Law is not taken account of. This law has been part of national legislation for more than 10 years and Article 5, paragraph 1 therein explicitly specifies the cases of incurring new debt. They are: to finance the budget deficit; to finance investment projects and specific programmes where approved by the National Assembly; to refinance government debt in circulation on the maturity date or before that date; to secure the payments under callable government guarantees and to support the country\'s balance of payments.
Completely groundless and strongly misleading are the conclusions that \"...The Law does not contain any guarantees for spending this loan in an expedient, transparent manner that is subject to public control\". We express the hope that those correspond above all to the lack of in-depth knowledge of this specialized field, i.e. the guarantees mentioned are not subject of any budget law but a subject of the legislative provisions of the above Government Debt Law. Last but not least, the occurrence and the management of the government debt, the government-guaranteed debt and the use of debt instruments is subject to an annual audit from the National Audit Office in accordance with Article 6, paragraph 2, item 7 of the National Audit Office Law.
This veto will limit the time frame for attracting this additional debt. Last year Mr. Djankov had 12 months for BGN 1.7 billion. We only have 3 months because the revision will enter into force as early as mid-October, which limits the options for attracting these resources.
The negative rhetoric, the wrong, misleading and biased interpretation of the problems related to public finance, including especially in respect of sovereign debt, disguises serious risks for difficulties in the offering of debt, a surge in the cost of financing and hence an increase in the debt service costs. The materialisation of such concerns requires an awareness of and shouldering of responsibility by those who have caused them. It is no accident that these extremely serious issues are within the scope of the rating of our country\'s creditworthiness by the international rating agencies as well.
This budget revision should be considered along with the Government\'s programme and the efforts it makes, as well as the specific results it achieves in respect of the improving the business climate and the growth. A key problem of the business climate is the conversion of the state into an irregular payer though the chronic liabilities to the business and VAT non-refunds having reached up to BGN 800 million at certain time during the GERB government.
The veto is the strongest instrument of reaction but in this case it is used to hinder and delay the implementation of the Government\'s programme which is aimed at predictability, punctual relations and solidarity with the vulnerable social groups.