Bouncing Back

Economic News

22 Jul 2010
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Pledging more money for education, healthcare and social insurance - coupled with lower direct taxation and a higher minimum wage - the 2005 budget was finally passed by parliament earlier this week. At the same time, the political discussions and negotiations that preceded the vote helped to highlight the differences between the political parties ahead of the June 2005 parliamentary elections. With polls showing a decreasing share of support for the Bulgarian Socialist Party (BSP), many now speculate that the government may be able to hang on to power with the help of right-wing parties.



However, both the left and right expressed their opposition to the budget bill, citing political rather that fiscal reasons. Nevertheless, the two-party ruling minority coalition led by the National Movement for Simeon II (NMSII) emerged victorious, obtaining the necessary support from its junior coalition partner, the predominantly ethnic-Turkish Movement for Rights and Freedoms (MRF), and the dissenter New Time parliamentary group. With 128 votes for and 104 against, the bill was adopted at the first parliamentary reading on November 25.



However, having previously lost its majority in the 240-seat chamber thanks to the New Time group splitting away, the NMSII had to make concessions to these dissenters. New Time insisted on tax relief for corporate expenses on education, and on this sector receiving 5% of GDP. While provoking criticism of behind-the-scenes political dealings, the former political partners reached a compromise which will give an additional 67m euros for education and science, slightly less than New Time's target and bringing total education expenditure up to 4.45% of projected GDP.



More funds were also allocated for healthcare and social insurance, both of which will enjoy an 8-10% increase on last year. Despite fiscal expansion, the government insists this will not affect the wider fiscal framework parameters, which adhere to a tight 0.5% budget-deficit ceiling. The government hopes that higher budget revenues in 2005, estimated at 8.2bn euros, will help to meet the budget targets. Projections are based on improved tax collection, a minimum of 5% economic growth and year-end inflation in the range of 3.6%.



Most economists agree that these are reasonable expectations and that growth will continue in 2005 based on strong domestic demand fuelled by increases in net income, employment and bank credits. Budget revenues will also benefit from increasing import growth, which generates significant revenues for customs authorities.



Yet the opposition parties were not appeased by such assurances, focusing their vitriolic rhetoric on political rather than fiscal matters.



Dimiter Yordanov of the right-wing Union of Democratic Forces (UDF) accused the authors of the bill of "deliberately setting a low revenue target, so their parties will have more money to spend for election campaign purposes". While not recognising the intentional nature of this practice, the IMF has also urged the government to adopt more realistic revenue projections.



Low revenue targets in the past have resulted in budget over-performance, which sparked controversy this year as the opposition parties accused the government of assuming discretionary spending powers over the budget surplus. It also created some friction with the IMF, who recommended that a substantial part of the budget surplus should be saved, to offset the future risk of a widening current-account deficit.



At the same time, representatives from the left-wing BSP argued that in the absence of a clear plan of how to use the fiscal reserve, the bill allowed for public finances to be spent in a non-transparent manner, with no clear plan for how to use the fiscal reserve.
The coalition partners rejected these accusations, arguing that the budget bill was consistent with the government's economic policy, which is aimed at sustainable economic growth and improving living standards.



Meanwhile, with six months to go to the parliamentary elections, most polls are showing that the NMSII is regaining some of its lost popularity - and a left-wing coalition government no longer looks inevitable.



Although the BSP is ahead in the polls - with 21.7% - increased support for the two main right-wing opposition parties has sparked speculation that the NMSII, currently enjoying 11.9% support in the latest polls, may choose to keep the socialists out by lending its support to the right-wing coalition. Together with the MRF, an NMSII-rightist coalition could command 57% of the parliamentary seats.



Although overtly critical of the NMSII record, the right-wing forces seem to be much more at home with the current government, and have vowed to keep the socialists out. With the MRF signalling that they may back this new coalition, this election scenario looks increasingly more likely.



So, despite frequent past predictions of the imminent downfall of the NMSII, it looks as if its political star may not be waning yet. Although the movement, which won half of the seats in 2001, may no longer be in the driving seat of the political process, several government ministers would most probably be able hold on to their jobs if the new right-wing coalition government is formed after the June 2005 election. A lot will depend on how the public will respond to the new budget and whether prudent economic policies, acclaimed in international circles, will finally strike a chord with ordinary voters.



Increased spending on education, health and social insurance and a higher minimum wage may do just that.

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