Budget 2008 is the test for tenacity of the Finance Ministry’s vision for how to fiscally navigate Bulgaria through its final period of transition.

As often noted in the past couple of months, this last period requires the most sophisticated – and, thus, the slowest to implement – set of reforms, in the public sector and governance.

The Finance Ministry has no less the challenging task to rein in the negative implications from Bulgaria’s entry to the European Union on the fiscal framework. Soaring internal demand over growing salaries, easier loan taking and the spike in EU duty-free imports have seen the country’s current account deficit reaching the EU’s highest at 20 per cent of the GDP. In addition, inflation went to the double digits for the first time in a decade, despite that the general explanations have been one-off phenomena such as seasonal increase in foodstuffs.

What is more, Bulgaria is now committed to comply with the Maastricht criteria starting 2009 to effectively join the Eurozone in 2012, the tentative deadline set by Finance Minister Plamen Oresharski. And the public budget needs to be tailored so that inflation, the current account deficit and public debt be within prescribed limits.

All the more, the draft Budget introduces large-impact novelties such as the flat tax and comes during the first stage of tax decentralisation.

Within this complicated set-up, it is no wonder that debate on the 2008 Budget Bill in Parliament has become an apposite opportunity to put forward for discussion radical budget innovations. It no less tests the extent to which draft Budget figures correspond to the Finance Ministry’s commitment to tighter fiscal discipline, as well as reforms in the education and health care sectors.

That debate on the Budget Bill is hardly to be over is indicative from the fact that the draft piece of legislation passed first-reading parliamentary approval with the opposition’s concerted “no”.

The concerted opposition comes amid strikes staged by workers in unreformed sectors – teachers, doctors, pharmaceutical workers. Debate in Parliament took place amid protests outside the parliamentary building asking for budget increases to European levels.

Representatives from both public sectors are lamenting their budgetary allocations at a time when the Finance Ministry has increased total expenditures for 2008 by 20 per cent, opposition MPs said, thus questioning the expediency of such a huge one-time increase and the relevant distribution of spending mark-ups across Budget items.

The opposition also paid due note to the fact that the Finance Ministry relies on an excessive – 27 per cent – increase in revenue collections next year.

The Budget Bill and the planned introduction of the flat tax also prompted the first signs of disunity in opinion among MPs of the ruling Bulgarian Socialist Party (BSP).

Vesselin Bliznakov, a BSP MP, overtly challenged the expediency of the flat tax, saying it would further exacerbate wealth disparity by transferring the tax burden onto the poorer strata of society. The “budget of poverty” line has also been taken up by opposition MPs from all parties in Parliament.

Criticism also arrived from the business circles. At a joint news conference, all employers’ organisations, including the Confederation of Employer and Industrialists in Bulgaria (CEIB), the Bulgarian Chamber of Trade and Industry, Bulgarian Industrial Association and the Vuzrajdane Club, said the bill was not sufficiently reform-oriented.

In the first place, it does not provide for as radical downsizing and reform of public administration. Instead of a 12 per cent cut, it should be 25 per cent, CEIB head Ivo Prokopiev said, adding that the slow and inefficient public service had sent Bulgaria down the worldwide business climate rankings.

Furthermore, the bill does not provide for sufficient decentralisation and all the more, has not set minimum local tax thresholds as a cushion against the proliferation of the tax tourism phenomenon. All the more, the Finance Ministry does not envisage yet another decrease in the level of social security contributions.

Despite all the criticism, however, the Budget Bill is likely to pass the approval both at second and third readings. As the Finance Ministry argued, it cannot mend all problems at one time, yet it can mend the most pressing problems – public infrastructure and the social sphere.

The pros and cons always being around, proponents and opponents of the current Budget Bill are united in one thing – Bulgaria is in need of urgent public sector reform. The single difference in this unity is the array of opinions on what should be tackled first and how.