06.08.2013

In connection to the possible President's veto of the Law Amending the 2013 State Budget of the Republic of Bulgaria Law we would like to note the following:

The revision of the Law Amending the 2013 State Budget of the Republic of Bulgaria Law passed by the National Assembly is related to both the unfavourable development of the key macroeconomic indicators since the start of the year and to the risks for the execution of the revenue side of the budget, especially tax revenue, despite the urgent measures taken by the Government to improve the work of the revenue administrations in order to minimize the negative budget revenue implications resulting from low collection and from the existing improper smuggling and illegal economy practices.

At the same time, there is no flexibility in the revenue side of the budget as an option to respond to the pressure on the budgetary stance resulting from the expected revenue underperformance. Furthermore, the analyses show the pro-cyclical nature of the fiscal policies which finds expression in the strong limitation of expenditure leading to a further contraction of collective consumption and to a negative impact on the country's low economic growth as it is.

The absence of expenditure buffers and of any possibilities for limitation and restructuring of expenditure beyond the middle of the year requires the urgent increase in expenditure for the most pressing needs such as repayment of arrears and provision of additional resources for social assistance activities and for unburdening electricity consumers from the renewable energy charges.

The repercussions of the expected negative revenue and expenditure effects for the budget balance under the consolidated fiscal programme require an adjustment of the budget stance, with the deficit reaching 2.0% from the forecasted GDP but remaining within the statutory limits for this indicator and not jeopardizing the fiscal stability.

A delay of the decision for budget revision at this stage and awaiting the autumn of this year would have a negative impact both on this year's budget and on the 2014 budgetary procedure, i.e. the preparation of the 2014 state budget and the update of the medium-term budget forecast for the period 2014-2016, all the more that even the reduced fiscal targets and indicators in the proposed budget revision are difficult to achieve and there are non-performance risks.

Possible after-effects of a veto

If a veto is imposed and the revision is delayed or suspended, this would lead to enormous difficulties for the budgetary process. The responsibility for covering any urgent social needs and making regular payments to businesses would be transferred to the Presidency. Any interference with the budgetary policy would give rise to an impossibility for implementation of the Government's programme and to an impossibility for living up to social expectations, some of which being particularly sensitive and important.

First, the overriding of a possible veto may be expected in September, which suggests that revised budget would become effective as early as October.

If the planned additional funds of BGN 40 million are not approved, there is risk for the implementation of the MLSP budget for 2013 and for the payment of social allowances by the end of the year. These funds are needed to secure the social payments to the most vulnerable groups.

The shortfall of funds for financing the rights of persons with disabilities as regulated by the Integration of Persons with Disabilities Law and the Rules for Implementation thereof is the greatest. The provision of extra funds is an effort of the Government to guarantee these rights and to ensure the social and economic protection of the most vulnerable group of persons. In addition to that, the refusal to approve the revision will stop the increase of the monthly allowance for children with lasting disabilities from BGN 189 to BGN 217 as from 1 August 2013. Thus, 22,000 children and their families will be prevented from receiving an increase of BGN 28 per month for this type of allowance, which means at least a lack of additional support of BGN 56 per child for August and September. If the veto is not overridden, they will not receive BGN 140 per family by the end of the year and will be unjustly deprived of this kind of support.

The policy of the previous government to freeze such utterly needed social payments for a fourth successive year will continue.

Second, workers and employees will not receive food vouchers which were cut by BGN 40 million in the 2013 budget. They need this kind of support in view of the forthcoming autumn and winter when their costs grow bigger. The quota is currently depleted due to ill-planned budgeting. This will make the employers unable to fulfill their solidarity and corporate responsibility intentions.

Third, the vulnerable unemployed, who are a risky contingent, will not receive additional BGN 8 million under the employment programmes. Young people, persons with disabilities and persons in pre-retirement will be deprived of this support.

Fourth, the state will not be able to become a correct payer to the business again for there are no funds budgeted for payment of the arrears to businesses. Under this hypothesis, it seems likely that we witness the same situation as in 2009 when the state did not pay out its sizeable liabilities to the businesses, which resulted in a deterioration of the budget stance on accrual basis and in the opening of an excessive deficit procedure against the state.

Fifth, it will not be possible to refund the late VAT which amounted to BGN 320 million at the beginning of the term of office and burdens the budget with unnecessary interest expenditure. The businesses will not receive the invigorating gulp of liquidity to think of investment and development.

Sixth, the 2014 budgetary procedure will be blocked due to the lack of a reliable base for setting sustainable fiscal targets in the preparation of the 2014 state budget and in the update of the medium-term budget forecast for the period 2014-2016.

Seventh, given the expected low fiscal reserve buffer and the exhausted option for a new issue of debt in the current year, there will be liquidity difficulties in the first months of 2014 related to debt repayments of around BGN 450 million and advance direct payments of over BGN 1 billion.

If the new debt limit is not increased from BGN 2 to 3 billion, we run the risk of having a fiscal reserve below those BGN 4.5 billion regulated in the 2013 State Budget Law at the end of the year. Upon preserving the current new debt limit, the Ministry of Finance expects that the fiscal reserve will be BGN 3.9 billion at the end of the year and around BGN 1.6-3.5 billion in Q1 of 2014, which will necessitate the demand of urgent financing in 2014 in order to keep resources from autonomous funds in the fiscal reserve, for example the Silver Fund. This in turn will lead to an increase in the debt service costs for a debt issued at higher interest rates.

The increase of the new debt limit from BGN 2 to 3 billion will not lead to a higher debt level than the BGN 14.6 billion at the end of 2013 given the repayment in August of the issue of BGN 800 million 6-month bonds. The main reason for increasing the new government debt limit is the issue of BGN 800 million which was not planned in the issue calendar of the Ministry of Finance and which exhausted the options for any flexibility with the budgetary debt financing.

The provision of the new §14а of the Transitional and Final Provisions of the 2013 State Budget of the Republic of Bulgaria Law allow an option for diversification of the markets where new government debt may be placed by using an optimal combination of debt instruments of up to BGN 1 billion or their equivalent in another currency. Taking additional debt financing may thus take place on both the domestic and the international market or in combination of the two. The option for issues on international markets has existed in all annual budget laws since 2001 (as well as during the years of budget surpluses) save 2009 and 2013.

A possible veto will deprive the Government of the possibility to use debt financing instruments and may lead to critical levels of the fiscal reserve.

Eighth, as to the Structural and Cohesion Funds, the European Commission has a commitment to refund within the relevant calendar year any expenditure requested (certified) by the Member State by the end of October of that same year. This commitment is however conditioned on the fact that the European Commission has the available financial resource to make these payments. In the spring of this year we received a joint letter from several Commissioners, including the Commissioner of DG Budget, informing us that the European Commission will probably be unable to keep its commitments to refund the funds certified in the two months' period due to serious liquidity problems. The partial revision of the 2013 budget of the European Commission has minimized the risk non-payment of the certified expenditure by the end of October but it still exists.

There is far greater risk of a failure to refund the expenditure which Bulgaria will certify by the end of November. Traditionally, in the previous three years the European Commission refunded the expenditure certified by Bulgaria in November, although there is no such formal commitment.

The possible delay of EU refunds may further deteriorate the budgetary indicators, namely the revenues and the fiscal reserve.

To sum up, this revision of the State Budget of the Republic of Bulgaria Law is necessary and timely and it does not contradict the constitutional and statutory provisions in the Republic of Bulgaria. It is not a precedent in the budgetary practices, but a veto, if imposed where appropriate and inspired by purely political reasons, will be a precedent.