27.10.2016

The Ministry of Finance has published the draft 2017 State Budget of the Republic of Bulgaria Law and the updated medium term budget forecast for the period 2017-2019, which presents the arguments standing behind the Law.

The updated medium-term budget forecast for the period 2017-2017 presents the medium-term economic outlook and priorities of the government as well as the key parameters of the budget framework for the next year. The 2017 Budget framework and the parameters of the forecast until 2019 have been prepared on the basis of the updated macroeconomic forecast, the main underlying assumptions and realistic revenue estimates, with the rate of expenditure growth being limited by relative containment of national expenditure.

The updated medium-term budget forecast for the period 2017-2019 includes the required under the Public Finance Law comparison of the updated macroeconomic forecast of the Ministry of Finance to that of the European Commission; it is for the first time that it also includes a comparison of the forecast of the Ministry of Finance to the forecast of the European Commission on the General Government indicators.

Real GDP growth is expected to stay at relatively stable levels over the forecast period, while slightly slowing down to 2.5% in 2017 and gradually speeding up to 2.7% in the period 2018-2019. Domestic demand will be the key driver of growth in terms of both consumption and investment.

The medium-term outlook is tied to the defined priority of maintaining the stability of public finances and is expressed in pursuing the already set goals for further fiscal consolidation and adherence to the consolidation steps according to the spring medium-term budget forecast for the period 2017-2019. Taking into account the one-off effect on the budget balance for 2016, the current forecast keeps the deficit targets for the period 2017-2019 at 1.4%, 1.0% and 0.5% of GDP, respectively, as laid down in the spring medium term budget forecast.

Revenues, grants and donations under CFP for the period 2017-2019 are in the range between 38.4% and 37.7% of GDP. The trend of a slight decrease over the years, with an expected growth for 2017 as compared to the expected revenue performance for 2016, results from the measures to improve tax revenue collection, the changes in the social security policy and the shifting to 2017 of non-tax revenue estimated in the programme for 2016.

Total CFP expenditures in the medium term show a tendency to decrease from 39.8% of GDP in 2017 to 38.2% of GDP in 2019.

The key objective for the period 2017-2019 is to implement a tax policy aimed at increasing budget revenue and reducing the share of the informal economy. The government is following a policy of keeping the low levels of taxation in relation to direct taxes and shifting the tax burden from direct to indirect taxes. The achievement of the budget revenue performance objective is related to maintaining a sustainable level of revenue while keeping the burden of taxation unchanged and expected positive effects of the enhanced actions relating to revenue administration.

The updated medium-term budget forecast for the period 2017-2019 provides for an increase in the minimum salary to BGN 460 as from 1 January 2017 and keeping it at this level in 2018 and 2019.

The social insurance policy in the 2017-2019 period provides for a retention of the social security and insurance contribution rates to the public social security funds. The social security contribution to the PSS Pension Fund increases by 1 percentage point for 2017 and 2018, the purpose being to cut the shortage of PSS budget funds and to subsidise it from the state budget. The contribution to the Pensions Fund for the persons pursuant to Article 69 of the Social Insurance Code is planned to increase by 20 percentage points as from 2017.

The pension policy provides for a gradual increase as from 1 January 2017 in the weight of each year of contributory service in the pension formula by a percentage equal to or higher than the percentage set under the provision of Article 100 of the Social Insurance Code. For 2017 the percentage for each year of contributory service is 1.126 (a 2.4% increase). As from January 2017 the required contributory service for an entitlement to pension increases by 2 months each year until reaching 35 years and 8 months for women and 38 years and 8 months for men in 2019.

The 2017 budget priorities focus on measures promoting education reforms, maintaining up-to-date and efficient military forces and developing the country's defensive capacity, better functioning of the healthcare system, as well as implementing the National Programme for Energy Efficiency of Multi-Family Residential Buildings.

In order to implement the priorities in the area of education, integrated measures and actions will be performed to ensure equal access to quality education and vocational training and growth based on knowledge and science and development of young people, and to attract young teachers to the system of secondary education.

The requirement for the defence funds for next year not to be lower than the approved minimum for the defence sector in line with the decision of the National Security Council to the President held on 27 April 2015 has been met, with the resources for aviation equipment and multifunctional module patrol ships for the naval forces being secured.

The priorities in the healthcare sector continue being targeted at emergency care, e-healthcare, maternal and child care, medical establishments for hospital care and medicines policy.

The national energy efficiency programme is targeted at the renovation of multifamily buildings and aims to provide better living conditions to citizens, heating comfort and a greater quality of the living environment through energy efficiency measures.

Resulting from the fiscal consolidation, the public debt level is stabilised at a sustainable low level, far from the EU and euro area average and from the Maastricht debt-to-GDP criterion, with no new debt envisaged to be issued in 2017 under the Global Medium-Term Note Programme for debt issuance on the international capital markets.

Based on the assumptions and the projected net debt financing for the 2017-2019 period, the government debt-to-forecast GDP ratio is expected to be around 25% at the end of the period, which is conditioned by the country's improved budget stance.