Desislava Nikolova: Increased public expenses pose long-term risk to the country’s state budget

Photo: Kapital

Bulgaria’s new cabinet has promised to make a series of expenditures related to the minimum pensions, the minimum salary and the teachers’ salaries. Other public expenditures, including those in the defense field are also to increase in 2017. The big difference between the various types of expenses is whether they are planned and calculated in the state budget or not, chief economist from the Institute for Market Economics Desislava Nikolova told Radio Bulgaria and added:

“The expenses made for defense and the purchase of military equipment for instance are calculated in the current state budget. These are long-term expenditures which do not pose any risk to the country’s budget whatsoever. However, there are many expenses which were not calculated in the current budget such as the big expenditures that will be made for the increase of the minimum pension and the salaries of the Bulgarian teachers. The problem is how the state authorities would finance those higher expenses. Currently, the economic situation in Bulgaria is quite favorable, which supports the state budget. After a long period of deflation, inflation was again registered in Bulgaria, which is good news for the state budget, because inflation supports tax revenues. This situation reduces to some extent the risks related to the sharp increase of the public expenses, but the big question is what will be the long-term effects of those decisions, because in this case we are not talking about single costs, but rather of engagements which will remain in place after 2017.”

According to Desislava Nikolova, the biggest risk to the state budget is linked with the time when the economic cycle will reverse, because a possible economic drop would mean a sharp decrease of the tax revenues. Meanwhile, the authorities will not be able to cancel the pay rise in the public sphere, because it would mean political suicide for the party that makes such a decision:

“The risks to the state budget are not immediate, but are in place in the medium and long run, because the promised increase in the minimum pensions is likely to be followed by an increase of all pensions, so that justice in the pension system is preserved. The lack of similar increase of the higher pensions would mean a nail in the coffin of the pension system, because it would mean that regardless of whether you pay social security contributions for a short period of time or for longer, your pension will not change significantly. Thus, people will be discouraged to pay pension contributions based on their real incomes.”

In Desislava Nikolova’s view, the government will be forced to make a parallel increase of all state pensions sooner or later, which would mean additional expenditures.

“In other words we are missing an excellent opportunity to improve the country’s public finance and stop making deficits, because the current economic situation in Europe is quite favorable. Last year we registered a substantial surplus on a cash basis, but the authorities are planning a deficit in this year’s budget again. Currently our state budget is balanced, but the surpluses must be used as financial buffers and spent in times when our economy will start to deteriorate, which will inevitably happen in the long run. When this happens the state budget may literally collapse and the budget deficit will skyrocket.”

In Desislava Nikolova’s view, the policy related to the minimum monthly salary must be completely altered. That salary must not be determined by the state institutions. It should be rather set on a market principle. If a given employee does not have the necessary skills, qualification and education he cannot expect that his employer would raise his wages on a regular basis, because that employer has to invest huge financial recourse and time to train the personnel. Salaries are not raised with a magic wand. It depends on the labor productivity. If Bulgaria’s government wants to contribute to the future increase of the salaries, it should work towards a better business environment and hope that more foreign investors will decide to do business in this country.

English version: Kostadin Atanasov


More from category

2017 has been very successful year for the Bulgarian housing market

The Bulgarian property market has had the most successful year in the past decade. We have witnessed such high positivism on the real estate market in Bulgaria’s capital Sofia, the big cities and the holiday property segment for the first time..

published on 12/8/17 1:27 PM

Bulgaria’s rating climbs higher as no new debts envisaged, investors pleased

Two of the biggest credit rating agencies have recently raised their ratings for Bulgaria. Fitch revised its rating removing the minus from the BBB rating. Standard&Poor's have upgraded Bulgaria's long-term and short-term credit rating in..

published on 12/5/17 2:11 PM

S&P upgrades rating of Bulgaria

Standard & Poor's have upgraded Bulgaria's long-term and short-term credit rating in foreign and local currencies to "BBB- / A-3" from "BB + / B".  The raised rating reflects strengthening of the country's external position as a result of the prolonged..

published on 12/2/17 1:50 PM