Lachezar Bogdanov: Complete confusion on key macroeconomic and budgetary parameters

The caretaker Minister of Finance has been silent for a long time - on all sorts of topics, but mostly on the topic of the draft budget for 2022, economist Lachezar Bogdanov commented in his analysis in the weekly bulletin of the Institute for Market Economics. Meanwhile, the ministry published two versions of the macroeconomic forecast for the month. After all this, last week he began to speak in three directions - purely procedural about the government's intention to adopt and submit to the National Assembly a draft budget law, some general parameters of the fiscal framework, and a number of details on assumptions about amount of various social payments.

All this happened almost simultaneously with the lively discussions on tax policy and budget priorities in the negotiations for a new regular government between the parties. During the week, the ministry published regular monthly data on budget execution, but did not make any additional comments on trends and the expected situation in the last month of the year. In short, instead of clarity, we receive mixed signals and assessments, completely detached from the data and reality.

How, for example, to answer the question of whether we will have consolidation in 2022 - ie. will the budget deficit be less than 2021 - or vice versa? On the one hand, the caretaker minister spoke of a deficit of 2.9% of GDP in 2022, on the other hand, the negotiations seemed to have an understanding of value in the range of 3.5-4.5% of GDP. But we do not even have a forecast for the nominal amount of GDP for 2022 - the Minister actually said that they are working on a new (third) autumn macroeconomic forecast.

And at the same time, we don't know how 2021 will end - whether the government will "seal up" the 5 billion deficit that was expected by September, or end near a balanced balance or with a minimum deficit. Will there be a "shock" payment in the last weeks of the year, similar to previous years - a practice of GERB, which was systematically criticized?

How many activities have been performed under contracts with construction companies, for example, which will be paid this year, and how many will be postponed? In one case, they will be reported on a cash basis in 2021, in the other - in 2022; however, on an accrual basis, the costs must be reported when the activity is performed. According to the recovery plan, we can have an advance next year, but only if the plan is approved by December 31; otherwise it will be implemented without an advance and on a schedule for payments twice a year - here are another 1.6 billion levs that may have, may not be and will hang until the last days of 2021.

Data on the implementation of the budget until November add unknowns, instead of clarifying the picture. Since the beginning of the year, total public revenues have increased by BGN 8.1 billion, or by an impressive 20.3%. If we consider only the tax and non-tax revenues, the increase is BGN 7.4 billion - with 2.1 billion growth in the budget of GERB and 3.6 billion in the update proposed by the caretaker government at the end of the summer. From this point of view, revenues, and this means economic recovery, exceed expectations. In November alone, revenues grew by BGN 2.2 billion. Without EU aid, the increase is 1.6 billion - this month alone. This is partly due to the dividend of BGN 450 million withdrawn from Kozloduy NPP for energy subsidies for business and the earlier deadline for advance payments of corporate tax (in December 2020 they brought about BGN 900 million).

More detailed data until October show an increase in VAT revenues by nearly BGN 1.5 billion, or 16% compared to a year earlier; in the income tax the increase is by BGN 550 million, also about 16%, in the corporate tax - BGN 480 million, or nearly 30% growth, the revenues from social and health insurance increase by BGN 1.1 billion, or by 11.5 %.

Indeed, we are still in a period of high inflation, which was not taken into account until a few months ago. Inflation combined with wage growth has a very favorable effect on the fiscal system, but the forecasts for the dynamics of prices next year are extremely mixed. If energy resources remain expensive, this will support an ongoing process of spillover to the prices of all other goods and services; if we have a decline at the end of winter or even earlier, the new budget will not be able to rely on an inflationary "gift". Recall that a similar increase in revenue for the last 23 years we have seen only in 2007 - when there was both high inflation, record foreign investment and a sharp rise in excise duties.

But these factors are one-off only in the narrow sense - higher prices will generally persist, even with energy reversals, energy profits continue to rise and nothing will stop future rulers from realizing more dividend income from these state-owned companies. Moreover, we still do not have an increase in the prices of electricity and heating for households - even if it is minimal, from the beginning of 2022 there will be higher sales values ​​and hence higher VAT revenues. We are obviously in a situation where several factors are working in parallel to increase incomes - unexpectedly (until recently) high inflation, faster than expected economic recovery driven by wage growth and low unemployment, active lending to households and hence - additional consumption, a continuing boom in construction and the real estate market in general, a significant increase in the value of exports - both because of higher prices and because of high global demand, and so on.

The paradox is that there are many more unknowns when it comes to spending. Bulgarian public finances follow the logic that the legislator (of course, on the basis of a proposal of the ruling majority that elected the executive) sets limits on expenditures and parameters for determining part of these expenditures - salaries, pensions, social payments, subsidies, etc. while revenues are a function of economic dynamics.

In other words, although the tax laws are clear, exactly how much revenue will come depends on the efficiency of the revenue administration, as well as on economic activity, investment, income, consumption, etc. In this framework, we can traditionally forecast the amount of government spending more accurately, and revenues are unknown and possibly uncertain. Now, however, the picture is reversed - we cannot predict the costs, because a huge part of the possible expenditures are government ad hoc decisions.

One part is a variety of investment projects that have been done, but so far the government has refrained from paying, another part is subsidies and compensation for businesses and various incentives and additional costs in health care - and they can and will change every month with new parameters. eligible candidates, sizes, etc. With the available data, we cannot judge whether the government - this or the future - will not urgently "pour" compensation in the last days of December of a billion or more, just as in previous years money was directed to builders, municipalities for large projects or were set aside for future construction such as the Hemus Motorway.

The data until November show a total increase in expenditures compared to the same period last year of BGN 8.5 billion, while until October it was only BGN 5.6 billion - in just one month there is an increase of BGN 2.9 billion. Apparently, the payment process has begun, although there is no publicly available breakdown of what exactly.

According to the data until October we see a significant increase in expenditures on salaries (1.5 billion levs, or 16%), maintenance (740 million levs, or 23%), social payments (2.6 billion levs, or 17 %) of subsidies - which include various anti-crisis measures for business - by BGN 1.2 billion, or 37%. As mentioned, the practical suspension of public investment due to the political cycle can be seen in the data - capital expenditures even fell by BGN 480 million (due to reimbursed funds from the Ministry of Regional Development and Public Works, set aside for Hemus Motorway). Again, billions can be paid in the last days of December, and that depends solely on the political will of those in power.

So, on December 3, we still cannot predict how much spending will be incurred in 2021 and hence - to have clarity about the deficit.

And the caretaker Minister of Finance created even more confusion with the omitted remark that he sets a limit for issuing new debt of BGN 12 billion in 2022, although he later adjusted it to BGN 10 billion. These numbers have nothing to do with the deficit values ​​discussed - not even in the so-called baseline scenario prepared by the current team, nor with the mentioned parameters in the coalition negotiations. Next year, there are repayments of old debts of about 2.8 billion levs (1.25 billion euros of external debt and 305 million levs of domestic), which leaves a "buffer" of 7.2 to 9.2 billion levs - and these are far larger amounts than the deficit figures discussed. We hope to get more clarity soon.