Cutting Deficits Bulgarian Experience Petar Ganev, Bratislava, 2012

Policy prior to the crisis Budget surpluses Lowering direct taxation (10% flat tax) Growing fiscal reserve Budget revenues dependent on foreign investments and consumption, not income and profits Severe social security deficits even in the good years

Crisis and recovery

Revenues and spending in the crisis years

Fiscal reserves

Crisis facts Revenues down – tax revenues recovered to the pre-crisis levels in 2012 Spending up – despite the freeze on pensions and salaries Excessive deficits in 2009/2010 Overall BGN 5 billion (EUR 2,5 billion) in deficits in covered with fiscal reserves

Crisis measures – revenue side No major changes (10% flat tax on income and profits; 20% VAT) Excise duties up – catching up on EU Some minor new taxes – on insurance premiums and tourism tax Local and State fees up No major changes in social security contributions

Crisis measures – expenditure side Freeze on pensions after populist increase in 2009 (just before elections) Freeze on salaries in the administration Capital expenditures used as a buffer Some changes in social security (retirement age*) to answer the rising costs Delays in payments to business – including 10% “voluntary” haircut

Roundabout policies “Sacred” funds to be spend: –Healthcare reserve (BGN 1,3 billion) transformed and spend… –Pensions reserve (Silver fund) put into question, but survived… –Private “professional” pension funds – nationalization of BGN 100 million (Constitutional court ruling…) Burden on business –Income policies through private sector – rising minimum wage and minimum social security threshold (employment down as result) –Shifting social security costs to businesses – first three days of illness paid by the employer and not by the respective State fund.

Budget Rules (2011) Consolidated government expenditures can not exceed 40% of GDP Budget deficit can not fall below 2% of GDP Still debated on constitutional level (2/3 votes in Parliament)

Conclusions Austerity = freeze on salaries and pensions (no actual cuts in absolute terms) Deficits = fiscal reserve at critical minimum (no healthcare reserve; just the Silver fund) Income policies shifted to private sector = no recovery in employment As expected spending is again on the agenda in Budget 2013 – rising pensions and salaries

Cutting Deficits Bulgarian Experience Petar Ganev, Bratislava, 2012