Lachezar Bogdanov, IPI: A few billion through the "side entrance" of the budget

Industry / Finance
3E news
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The intention of the acting finance minister to limit the surge of populist proposals threatening fiscal stability is beginning to crack - at least according to the decisions that have already been submitted and partially adopted so far. The logic seemed solid - only the executive power can propose a budget law, because it will have to implement it, accordingly, in case of refusal to submit an annual budget for 2023, there is no way for the National Assembly to redo the framework at its discretion and with a view to extracting dividends for likely recent elections.

However, the devil is in the details – even if an annual budget is not adopted, the restriction to spend within the previous (ie 2022) year has an important exception. The National Assembly can quite legitimately adopt changes in tax laws - which affect the revenue in the treasury, as well as in other laws that directly create additional or new spending commitments. The parties obviously decided to make ambitious use of this opportunity, economist Lachezar Bogdanov from the Institute for Market Economy presents in his analysis.

Where is the problem? Simply put, words matter - it is no accident that we traditionally use terms such as "budgetary framework", "budget law package", "tax law package", "income policy", "deficit and debt policy" etc. .n. This means that it is good practice, and common sense suggests it, to make an interrelated framework that takes into account the expected dynamics of the economy, basic indicators of economic activity and hence - of potential income, to assess what changes in salaries, pensions, social payments, it is reasonable to undertake, to what extent are the priority and to what degree of readiness are the investment projects offered for financing and so on. It starts with questions like: do we change or keep taxes, if so - which ones and how, what are the effects on total revenues, but also on economic activity, etc. On the expenditure side - are there priorities, how to distribute the increase in income by functions and economic elements, will the structure of social programs change or only the values of existing measures and so on.

This should give us an answer to the question of why we have both legislative and executive powers - such detailed analyses, calculations and various options can realistically be expected from the Ministry of Finance, not from 240 MPs and certainly not in a few days. And here we are not talking about sliding along the easy rhetoric of "populism" - yes, it is natural to want to offer apparently popular things, but it is about the risks of chaotic and unrelated to each other and to a common framework, new or amended policies that can have a significant budgetary effect. If we ask a random member of parliament next week the question "by how much did you increase the budget deficit with the dozens of texts voted on", it is unlikely that you will get an answer.

What to do is not an easy question in this political situation, but the IPI will still propose solutions within the "(No) Alternative Budget for 2023" discussion next week, Bogdanov commented.

The most frequently commented on is the new way of determining the minimum wage. This state regulation exists anyway and is always increasing, so there is no news here. But is fixing by the only criterion a percentage of the average salary for a past period the smart decision? Instead of marathon meetings with half an hour of speeches, it should have been the result of a comparison of at least 3 options, with calculations under different scenarios. It seems intuitive that with nearly 20% inflation, wages are rising and should rise – including in the public sector and the government-set minimum wage. But with exactly how much, from which month, to what budget effect this will lead - there are no accounts.

Similar are the ideas in the social sphere. Let's take the amount for the second year of maternity leave - instead of BGN 710, BGN 850 should be paid. Messy arguments are used - for example, that it should have been equal to the minimum wage. But the salary is taxed, the compensation is not, so this apparent rule "exhales". More generally, the entire benefits policy needs to be thoroughly discussed. Bulgaria - by the way, again with purely conjunctural political motives during the triple coalition - introduced the longest maternity leave with full replacement income. Is there an analysis of whether this leads to more births, what happens to mothers in the labor market, and any other effects worth evaluating? The same happens with the benefits for the second year - this feather has already increased to 400 million BGN per year, which is by no means a negligible amount.

At the same time, we observe a repeated rejection of changes in the structure and approach in social assistance, which would better direct social transfers specifically to the poorest. The deputies hardly know, but if they inquire, the people with the lowest incomes in Bulgaria receive a total support of about 30 million BGN, aimed at less than 30 thousand households. Is it just the poor in the country? There are no ideas on how to use the funds allocated for the disabled in a more rational way - so far it is less, but for 650 thousand people, most of whom hardly have a particular need for 30-40 BGN per month, at the expense of others, for whom they are completely insufficient for independent living and integration. We have an increase in the prices of energy carriers, most strongly felt by the poorest, who heat with wood.

And this program is not touched, only conferences are held (for years with a similar program) on the approaches to defining energy poverty. If we talk about high fuel prices, we must not miss transport either - we have introduced a stupid subsidy of 25 cents per liter "per head". However, it is not aimed at those who actually suffer from the high price not only of fuel but also of transport services. And the census recently showed that more than 20% of the employed travel to a workplace in another populated place - many of these people suffer a serious blow to their household budgets, and there is no measure aimed and adapted to them and their employers.

It probably doesn't sound good to compare "need" or "suffering", but in reality the state works with limited resources and a way must be found how with every penny of social spending to achieve the relief of the most severe needs of the most vulnerable. In this debate, however, there is a proposal for a practically new "Swiss" - because it will no longer be such - rule for updating pensions, taking the value of the higher index from inflation and the growth of the insurance income. Here's another few hundred million thrown at all pensioners next year - again the accepted axiom mantra that pensioners are the poorest in society.

People's representatives with great enthusiasm set out to realize their tax populism. Here it is good to recall that we repeatedly warned the GERB government in 2020 that once it opened the topic of preferences, different rates and exceptions, going back would be difficult. In short, the crisis is over, but the so-called temporary anti-crisis measures remain and are being expanded. The tax office is losing revenue from the 9 percent VAT rate, prices have not fallen much - evident from the NSI data by groups of goods and services - and at the same time, it is not clear what goal is being achieved. It doesn't seem to encourage investment, it doesn't seem to encourage raising wages, it doesn't seem to achieve a social effect for vulnerable social groups. In other countries, similar measures are summarized as "free lunch for the rich / middle class".

It is proposed that the tax relief for children be increased by 50% - in practice, a tax-free minimum of BGN 9,000 for one child and BGN 18,000 for two. It sounds good, but in reality an additional 200 million BGN will be used mainly by people with good incomes (there is no way to use this relief if you do not work, if you are disabled and with a low income, etc.). At the same time, it is proposed to raise the insurance ceiling from BGN 3,400 to BGN 4,200 - clearly as a measure to collect money from the "rich", without an assessment of the effect on industries, for future investments, etc. But more importantly - you take with one hand, you give with the other with tax preference for children and food vouchers (which will probably become a second currency with this pace of expansion and tax-free status).

So, Parliament's attempt to take over the budget seems likely to have two consequences. First, we will have additional costs of an unclear number of billions - the Ministry of Finance in mid-November estimated them at between 3.6 and 4.8 billion - enshrined in law and beyond the possibility of correction by the executive branch. And since we have not submitted a budget with detailed accounts, we only know how much we inflate the deficit, but we are debating how much it will be final after all ideas are accepted. Second, and probably more important in the medium term, much of the deterioration of the fiscal framework will not be as well thought out and directed towards achieving the most pressing goals, including those of supporting the poorest and raising incomes, as they actually were argued and "sold" to the audience.



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