Excessive Deficit: Unpleasant but not Scary

Bulgaria’s government adopted a budget update, which sets a budget deficit of 3.7% for this year against a possible threshold of 3%, plus a new debt of 4.5 billion levs. What may be forthcoming is an EU excessive deficit procedure.

The draft update of this year's budget provides for a deficit of 3.7 percent, which is sum of slightly less than 3 billion levs

"It is possible that proceedings against Bulgaria for excessive deficit be launched. We have no guilt about the badly draft budget for 2014, but we do not want to transfer its failures into next year. There is no way the deficit could be smaller," said Vladislav Goranov after the extraordinary meeting of the Council of Ministers on Tuesday, November 11th. So he answered the insistence of employers that the lack the Treasury would be below 3%, which would enable us to enter into the "waiting room" of the ERM 2 and after two years to adopt the euro. This is an old wish of businesses because thus the state would eliminate currency risk in commercial operations. Bulgarian governments have not been in a hurry about this, because the operation is highly risky and past practice suggests that prices would probably jump and more poverty would be created.

The social partners were offended that the executive power did not pay attention to their agenda. Goranov sent his deputy Kiril Ananiev to see representatives of the Finance Ministry.

"We will explain to our colleagues in Brussels what has created the deficit  and will take the necessary steps as quickly as possible the national public finances to be put back into the framework of not more than 3% deficit, which the Treaty on the Functioning of the EU requires," said Goranov. In another statement, however, he said that the budget for 2015 in the most optimistic scenario may envisage a deficit of 3.2%, which is against beyond the maximum. The Minister explained that a lower gap cannot be expected because European practice indicates that an annual deficit reduction larger than 0.5% is not healthy for the economy.

He gave specific figures illustrating the artificially inflated revenue in the budget of the Government of Oresharski that allowed the past Cabinet to make populist spending. The volume of revenue not to be collected is expected to reach 1.062 billion levs, approximately 1.3% of projected GDP, said Goranov. The biggest impact has the failure in VAT collection – 670 million levs and its greatest gap is the failure of VAT collection on imports. About a month ago the head of customs Vanyo Tanev told the BANKER that this has primarily accumulated from non-payment of VAT on fuel imports, because the electronic system for monitoring fuel had "bugs" during the financial minister Peter Chobanov. "In terms of excise duties the expected shortfall for 2014 is about 318 million levs. From corporate taxes on an annual basis what is expected is around 79 million lev less as compared to the set at end of 2013 growth of this tax, said the Minister.

Revenues were planned in great stress, pointed out Goranov. “At the end of 2013 we warned that budget revenue was planned very optimistically, without regard to trends and the real situation of the economy,” he said.

As is known, each Member State of the European Union must ensure that its budget deficit should not exceed a certain limit under threat of sanctions. The tool for this is the Stability and Growth Pact (SGP) – a framework based on rules for coordination of national fiscal policies in the European Monetary Union. It is designed to ensure sound public finances, which is important for the union to function properly. For this purpose the Pact sets two criteria: the ratio between budget deficit and GDP of up to 3% and the ratio debt/GDP ratio of up to 60%. If a Member State does not fulfill the requirements under one or both of these criteria, the Commission prepares a report.

Currently, the most severe is the situation in France, which will not be able to reduce its large budget deficit by 2017, and this is in total contradiction with the stated rate by Brussels. The gap is total also with the Maastricht criteria, which were invented to make the common currency stable. The 2017-term is by two years later than requested from Brussels for the stabilization of the country. France promised the Eurogroup that it will bring down its deficit below 3% next year, but it became clear that in 2015 it will be as high as 4.3%. This year it is expected to be at the level of 4.4% of GDP.

In late June the EU suspended the excessive deficit procedures against six countries whose deficit has gone below the threshold of 3% of GDP. These were Belgium, Austria, the Netherlands and Slovakia, and the four of them being members of the Eurozone plus Denmark and the Czech Republic, that are not part of it.

This decision reduced the number of countries with an excessive deficit procedure from 24 three years ago to 11 today. Among them are France, Ireland, Poland, Portugal, Slovenia and the UK. Malta needs to bring its deficit in line with EU budget rules this year, while four other states have a deadline until 2016 to do it: Cyprus, Greece, Spain and Croatia.

Excessive deficit procedure has not so far been undertaken against Bulgaria, Germany, Estonia, Finland, Hungary, Italy, Lithuania, Luxembourg, Latvia, Romania and Sweden.



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