Bulgarian lawmakers approved the first mid-year Budget revision in 13 years in the early hours of July 9, after nearly 12 hours of debate on the parliamentary floor that brought no changes to the Cabinet's draft.

The bottom line will show no change in tax rates, whether direct or indirect, while pensions and mandatory social contributions paid by employees and employers remained unaltered, Finance Minister Simeon Dyankov said in Parliament on July 8.

In his address, Dyankov focused on familiar recurrent themes, praising the Cabinet's "appropriate" fiscal policies and the difficulties posed by the wastefulness of previous governments.
The Cabinet plan envisioned a sharp cut in expected Budget revenue, cost savings in most ministries, but not the three with the largest allocation, and an increase on spending.

MPs approved a consolidated target deficit of 3.26 billion leva, with the original Budget envisioning a shortfall of only 466 million leva. The new target is the equivalent of 3.8 per cent of gross domestic product (GDP), as calculated by the European Union, while the cash deficit, the benchmark traditionally used by Bulgarian government, is expected to rise to 4.8 per cent of GDP.

EU extension
Bulgaria initially reported a 0.8 per cent of GDP deficit for 2009, but a revision of contracts signed during the last months of the socialist-led tripartite government pushed the figure to 3.9 per cent.

After a verification by European Union's statistics body Eurostat confirmed the new deficit figure, the European Commission opened an excessive deficit procedure for Bulgaria on July 6.

The EC recommended that Bulgarian authorities bring the general government deficit below three per cent of GDP, the bloc's benchmark rate under the Stability and Growth Pact, "in a credible and sustainable manner by 2011 at the latest".

To this end, Bulgaria was asked to "take necessary measures to avoid deterioration of the 2010 deficit beyond the planned 3.8 per cent of GDP, ensure a fiscal effort of at least 0.75 per cent of GDP in 2011, and specify and implement the measures that are necessary to achieve the correction of the excessive deficit by 2011".

And to prevent a relapse, Bulgaria should strengthen its fiscal governance and transparency by reinforcing the Finance Ministry's spending controls, strengthening the binding nature of its medium-term budgetary framework as well as improving the monitoring of Budget execution throughout the year, the EC said.

The Cabinet was expected to report on the progress made in the implementation of EC's recommendations in a separate chapter in the forthcoming updates of the convergence programme until the abrogation of the excessive deficit procedure and were "encouraged to improve the efficiency of public spending by fully implementing the planned structural reforms in the area of public administration, health care, education, and pensions".

Dyankov, asked by Bulgarian media for comment on the EC opening the excessive deficit procedure, which the Cabinet had hoped to avoid by shifting the blame for the erroneous statistics on its predecessors, said: "We have to do this and will do it. The concrete proposal of the European Union was to have a fiscal deficit of 2.7-2.8 per cent of GDP. In our main economic budget projections, the expected deficit is below that level."

The Ecofin council of EU finance ministers approved the recommendations at its July 13 meeting in Brussels.

Making ends meet
The revised Budget envisioned 24.55 billion leva in revenue this year, two billion leva short, or 7.5 per cent, of the estimates in the original Budget framework.

The main reason was lower tax collection, with tax revenue estimated in the revised Budget to reach 19.26 billion leva for the year, about 1.83 billion leva short of earlier expectations. Value-added tax receipts, which account for about a quarter of all Budget revenue, were expected to be 940 million leva less than initially envisioned.

Total spending, including Bulgaria's contribution to the EU budget, would increase by three per cent to 27.81 billion leva. Parliament approved a total 1.14 billion leva in new spending, most of it, 660 million leva, going to pay debts owed by Cabinet to the private sector.

The other additional spending would go to infrastructure projects (180 million leva), social benefits (142 million leva), subsidies to tobacco growers (116 million leva) and an additional subsidy to the National Rail Infrastructure Company (45 million leva).

Some of the extra spending would be offset by 410 million leva in savings from cuts in ministry budgets. The Health Ministry saw the biggest cut in absolute terms, with 134 million leva less allocated by the Budget revision. The Regional Development Ministry's budget was the most reduced in relative terms, its allocation cut by 20 per cent to 248 million leva.

The three ministries that were due to receive the most funds – Interior (956 million leva), Defence (890 million leva) and Transport (799 million leva) – were spared any cuts.

Bulgaria has the one of the highest numbers of police officers per capita in the EU, but calls for redundancies and cost-cutting have been staunchly opposed by law enforcement agencies, who decry their insufficient funding as the largest obstacle in fighting crime and corruption.

Dyankov said on July 12 that cost cuts in the public administration would continue, with all ministries scheduled to present reports on how to streamline operations "within 10 days".

"It is possible to optimise the Interior Ministry further, but with the continued economic crisis, the fight against organised crime and corruption, the Interior Ministry is one of the busiest state institutions right now," he said, as quoted by Bulgarian news agency BTA.

Most of the extra spending would be funded with money from the fiscal reserve, which Bulgaria must maintain to guarantee the stability of the lev's peg to the euro. The revised Budget allowed the Cabinet to spend 1.8 billion leva from the reserve, while the limit for foreign and domestic borrowing this year was increased from 1.31 billion leva to 3.48 billion leva.

The borrowing limit increase, however, was not a prelude to a loan from the International Monetary Fund, the Finance Ministry said in a statement on July 8.