The mystery of the Bulgarian budget surplus

By Krassen Nikolov

By the end of May Bulgaria had record budget surplus. Revenues are €1.5 billion higher than planned. This is not much for developed European economies, but for Bulgaria it is a huge sum. The country’s projected gross domestic product for 2019 is about €59 billion. Why is the poorest country in the EU not spending fully its planned budget? One of the main official explanations is the public consensus against external debt accumulation.

Bulgaria went bankrupt twice in the first years of its transition from totalitarianism to democracy. In 1991, the Bulgarian government declared a moratorium on repayment of the country’s huge foreign debt to foreign trade banks. At that point, its debt was $11 billion and was much higher than the gross external product of the economy. Thus the country was on the verge of bankruptcy. The society paid a very high price since there were no goods in the shops. Only five years later, Bulgaria was in hyperinterlation and was forced to abandon its independent monetary policy by introducing a currency board.

Nearly 28 years after the first bankruptcy, Bulgaria’s external debt is about $11 billion again. But the economy is six times larger. Bulgaria is already in the top 3 of the EU countries with the smallest foreign debt after Estonia and Luxembourg.

In 2015, the second government of Boyko Borissov decided to take loans for €8 billion. Bulgarians strongly disagreed with that. The subject was used by the opposition to attack the government. The political attack was not stopped by the explanation that much of the money was taken at favorable conditions to repay old foreign debts, and the external debt would not be increased significantly. Since 2016, the government has begun to accumulate budget surplus so that it could decrease the foreign debt. And the topic was closed.

Bulgaria’s policy of accumulating surplus is sustainable from 2002 to 2008. There is a break from 2009 to 2015 due to the global economic crisis. After the stabilization of the economy in 2016 and the BSP’s political attack, this policy was renewed. The voice of the people that lobby for taking reasonable amounts of external debt to strengthen the under-funded social sectors are too weak. The Bulgarians strongly oppose each and every idea for tax increase.

Bulgaria is not the only EU country that pursues a reasonable economic policy. The maintenance of low levels of external debt and the accumulation of budget surplus has been practiced by Luxembourg, Estonia, Sweden and Germany over the last five years. The largest European economy gives an example that a sound financial policy is needed to keep the eurozone away from risk. Greece that faced a severe economic crisis has also been forced by international creditors to save money, and it has managed to do this since 2016.

Controversial spending of the surplus

The problem in Bulgaria is that part of the accumulated budget surplus is spent to finance many controversial government projects. This is possible because the surplus can be spent by the executive power without parliamentary oversight. In 2016 and 2017, the government spent a large part of the money on a tainted by corruption programme for the external renovation of the old panel buildings. These buildings were the main urban housing type in the totalitarian era. They are tens of thousands across the country and many Bulgarians still live in them. The GERB government spent €1 billion of budget surplus on renovating a small part of these buildings. The reconstructions quality was very poor, and its prices were well above market rates. Thus the government was accused of corruption. Consequently the programme was suspended.

The government maintained a large surplus by last December. Prime Minister Boyko Borissov then decided to spend nearly €700 million without a public procurement procedure to complete the “Hemus” motorway in Northern Bulgaria. The money was given to the state-owned company “Avtomagistrali”. There are doubts that the state-owned company will hire some of the private construction companies that are close to the ruling party.

The President Rumen Radev criticised the non-transparent spending of the budget surplus. He demanded a law change that would ban the government from spending money without the permission of parliament. The president’s appeal was ignored by the government. In 2019, the budget surplus is likely to be spent on financing military deals worth nearly €2 billion.

In an interview with this website, economist Kaloyan Staykov from the Institute for Market Economics (an economic policy think tank in Bulgaria) says the Bulgarian government is pursuing a responsible fiscal policy compared to most of the countries of Western Europe.

The economist admits that the accumulated surplus in Bulgaria is also spent for entirely political purposes, including in pre-election times. However, he disagrees with the thesis that this is the only intention of the country’s fiscal policy.

“For the last three years serious deficits were planned in the Bulgarian budget. But it ended with a surplus. This means that the government has had even better opportunities to spend the money but has not done it”, the economist says.

He criticises mostly the relatively bad planning of the government. He explains that the Ministry of Economy regularly makes overly conservative revenue forecasts that eventually turn out to be far from reality. This is one explanation for the large budget surplus. The other is that many of the planned state projects are simply not being realized.

“What we see in Bulgaria is that very big government investments are regularly planned. Then they are not carried out and the money goes to social payments or to cover daily expenses. This is a problem. Bulgaria has a problem with program budgets”, Staykov explains. But he wants to clarify: “There should be improvement. But Bulgaria’s fiscal policy is far more responsible than Western European.”

Despite Bulgaria’s responsible fiscal policy, its economy is failing to grow rapidly enough to catch up with Western economies. In comparison, high economic growth is achieved by most of the EU countries that need to reach the Western economies – Romania, Hungary, Poland, Latvia and Slovakia. They all have large budget deficits.