site.btaInstitute for Market Economics:Budget Surplus Covers Up Overspending

Sofia, February 11 (BTA) - For a second year running, the consolidated fiscal programme (CFP) has shown an annual surplus instead of the expected deficit. The estimated deficit for 2017 was 1,300 million leva, but in reality revenues exceeded expenditures by some 850 million leva. At first glance, this surplus looks like fiscal consolidation, but a breakdown of revenues and expenditures tells a different story, the Institute for Market Economics (IME) writes in an analysis published on February 9. The analyst argues that the Government uses the surplus to cover up excessive spending.

Budget utilization last year revealed a loosening of the purse strings, as expenditures increased by close to 2,000 million leva from 2016, while revenues only grew by some 1,400 million leva.

The higher spending was partly expected, considering the gradual stepping up of payments on EU-funded projects (where the increase was by some 600 million leva), but these items made up only a third of the expenditure growth in 2017, while the rest was due to higher-than-planned allocations from the national budget aimed to raise personal incomes.

Thus, 273 million leva more were budgeted for pensions in 2017. This expenditure item ultimately rose by 635 million leva, which was double the plan as a result of a populist increase of the minimum pension after the parliamentary elections.

The minimum monthly pension was raised twice last year, first from 161.38 leva to 180 leva as from July 1 and then to 200 leva as from October 1.

The formation of the present coalition cabinet was contingent on the higher minimum pension.

The bulk of the growth in expenditure went for personnel costs (wages, additional remuneration and social insurance contributions), which exceeded the target level by over 1,100 million leva. This was the case for a second tear in a row.

And while the increase of the minimum pension was publicly announced in advance, nothing was said about the wages and the increase is only reported at the end of the year.

In the past two years, the Government has demonstrated that you can have your cake and eat it: it increases public spending and, at the same time, closes the year with a surplus.

This has been possible thanks to unrealistically high targets for capital and current expenditures. This seems to be the new fiscal trick: until 2008 the powerholders used to underestimate the revenue side of the budget, which allowed them unaccountable year-end spending without worsening the budget picture. Now they overestimate the expenditure side of the budget, which allows them to make unaccountable transfers of expenditure items from investments and current expenditures to wages and social costs without ruining the budget.

For yet another year, we are witnessing a better-than-planned budget balance with a weak implementation of public expenditures. There is a lasting and worsening trend of underspending on investment at the expense of huge overspending on wages (close to 17 per cent).

By comparison, the average wage increase in the private sector in the first three quarters of 2017 was some 10 per cent.

This raises the question about whether the current fiscal policy can be called prudent - considering the expectations of capital expenditures starting to recover as the ongoing programming period progresses.

What is more, the drive to reform and optimize public spending seems to have disappeared back in 2012, followed by several years of "relaxing" the fiscal policy in the wake of the political crisis in 2013-2014 and the following years of high economic growth which led to better-than-planned tax compliance.

During the crisis politicians cited lack of money as an excuse for the lack of reforms. Now money is available, and the tacit excuse is that reforms are unnecessary.

The fact is that the problems linger beneath the surface, but addressing them cannot be postponed forever for two reasons: first, the problems pile up and with time it get harder and costlier to address and second, economic growth does not last forever and it is better to carry out reforms in good rather than in bad years.