Brimming with enthusiasm and energy in the first weeks after taking office, Bulgaria’s Finance Minister Simeon Dyankov was confident that his plan to cut VAT fraud and tax evasion would yield quick results, boosting Budget revenues to avoid a year-end deficit.

Seven months later, the optimism has dimmed and the economic outlook is gloomy – the task of balancing the books in this year’s Budget has Government agencies scrambling to find ways of increasing the state’s revenue to avoid missing this year’s deficit target. Rarely a man to shy away from making bold statements, Prime Minister Boiko Borissov described Bulgaria’s economy as being in the worst state for 60 years.

Bulgaria’s 2009 deficit was 499 million leva, about 0.8 per cent of projected gross domestic product (GDP), enough for Dyankov to praise the resilience of the Cabinet’s fiscal policies and the European Union’s record-low deficit.

It won the former World Bank economist wide praise, most recently from the International Monetary Fund mission that carried out a regular review of Bulgaria’s economy in February, which described Dyankov’s efforts as a "timely and welcome correction of fiscal policy".

But the Fund’s mission questioned the Government’s ability to meet its Budget target for this year, set at 0.7 per cent of GDP. "On the revenue side, projections seem optimistic, in particular given the shortfalls in the second half of 2009," the Fund said, projecting a cash deficit of 1.8 per cent of GDP for 2010.

As the Cabinet’s critics and industry groups often point out, the cash deficit announced by the Cabinet is misleading in that it does not take into account the amounts that the Government owed the private sector for work already carried out, nor the hundreds of millions of leva in overdue VAT refunds. An official tally is not available, but the state’s debt is estimated to be more than two billion leva.

January figures put consolidated Budget revenues – including social security and health care contributions – at 1.75 billion leva, or 867 million leva short of the same month of 2009. VAT, which is the single largest source of revenue for the state Budget, was down to 475 million leva, about 396 million leva less than the amount collected in January 2009.

The 13 per cent exports growth in January, touted by Dyankov as a small green shoot of economic recovery, is less impressive than advertised, given that much of Bulgaria’s industry was paralysed by the halt in gas deliveries, caused by the price war between Moscow and Kyiv.

Seeking to increase revenue, the National Revenue Agency said on February 24 that small-business owners would have to start paying separate social security contributions for each activity they performed in their company, not just as its managers. The public outcry caused by the decision prompted the agency to beat a hasty retreat on March 9.

The Cabinet will go ahead with plans to increase health care contributions by two percentage points, to a total of 10 per cent, which is expected to compensate, by the end of the year, for the 300 million leva transferred to the National Health Insurance Fund to cover the costs of medical services.

Health care and social contributions in January were 380 million leva, while spending was 840 million leva.

The Budget’s outlook was so bad that some economists in Borissov’s party, GERB, proposed raising the flat tax rate by two percentage points to 12 per cent, according to one media report on March 8. A day later, however, Deputy Finance Minister Ana Mihailova denied the claim as baseless.

On the spending side, the Cabinet decided on March 10 to postpone for several weeks a proposal to freeze state administration salaries. However, progress on another of Dyankov’s early initiatives – reducing state administration staff numbers – remained unknown.