Will Djankov fail again with Budget 2011?
September 20, 2010
Main news sometime in August 2011:
"The government urgently submitted the draft actualization of the state budget to the National Assembly. Estimates of the cabinet proved wrong again – the economy is growing slower than expected and tax revenues lag behind planned. Finance Minister Simeon Djankov said that the government will seek new loans to finance the growing budget deficit. International markets reacted with increased risk premiums for Bulgaria ... "
Although there was an opportunity to exercise in public finance for more than a year with the state budget for 2010 and the two actualizations - for 2009 and 2010, the former World Bank chief economist in finance and private sector affairs Simeon Djankov is still experiencing excessive difficulties in drawing up a realistic budget.
The most important aspect in the 2011 draft budget is that the deficit will most likely exceed the Maastricht target of maximum 3% of GDP again, and the government debt will grow rapidly.
There are two main risks. The first one is the ridiculously optimistic forecast for 3.6% economic growth based on exports. The reasons why export companies have been doing so well since the beginning of the year are the recovery of the major trading partners and rising commodity prices on world markets (42 percent of Bulgaria's exports are raw materials). Exports, however, don’t have the capacity to pull the economy forward. Domestic demand does. And it's not going to revive, as the level of unemployment is expected to remain high.
In parallel, a new recession looks increasingly likely along with the alarming unemployment numbers in the U.S. and unstable recovery of Europe, which can easily be shaken by the still outstanding problems of Greece and Ireland. In other words, the external environment on which the Government relies so much will hardly be so favorable.
The second risk lays in the projected tax revenue growth, which seems even more inadequate than the outlook for economy growth. Djankov is expecting 330 million leva (169 mil. euro) more from the corporation tax or 24% growth compared to 2010. Given that the tax is levied based on the previous year, i.e. 2010 profits will be taxed in 2011, this optimism strikes me.
Even in this optimistic budget the government plans to issue debt for 1 billion euro and to give state guarantee for 410 million euro loans for the state railway companies – BDZ and NKJI. Debt interest payments are expected to reach 334 million euro in 2011 compared to 257 million euro in 2010.
In the real world, however Mr. Djankov will seek additional funding at a higher cost. He and PM Boyko Borisov will be credited with the new, consequential deterioration in public finance since this is the first time in over ten years when budget deficits and debt accumulation are government policy.
"The government urgently submitted the draft actualization of the state budget to the National Assembly. Estimates of the cabinet proved wrong again – the economy is growing slower than expected and tax revenues lag behind planned. Finance Minister Simeon Djankov said that the government will seek new loans to finance the growing budget deficit. International markets reacted with increased risk premiums for Bulgaria ... "
Although there was an opportunity to exercise in public finance for more than a year with the state budget for 2010 and the two actualizations - for 2009 and 2010, the former World Bank chief economist in finance and private sector affairs Simeon Djankov is still experiencing excessive difficulties in drawing up a realistic budget.
The most important aspect in the 2011 draft budget is that the deficit will most likely exceed the Maastricht target of maximum 3% of GDP again, and the government debt will grow rapidly.
There are two main risks. The first one is the ridiculously optimistic forecast for 3.6% economic growth based on exports. The reasons why export companies have been doing so well since the beginning of the year are the recovery of the major trading partners and rising commodity prices on world markets (42 percent of Bulgaria's exports are raw materials). Exports, however, don’t have the capacity to pull the economy forward. Domestic demand does. And it's not going to revive, as the level of unemployment is expected to remain high.
In parallel, a new recession looks increasingly likely along with the alarming unemployment numbers in the U.S. and unstable recovery of Europe, which can easily be shaken by the still outstanding problems of Greece and Ireland. In other words, the external environment on which the Government relies so much will hardly be so favorable.
The second risk lays in the projected tax revenue growth, which seems even more inadequate than the outlook for economy growth. Djankov is expecting 330 million leva (169 mil. euro) more from the corporation tax or 24% growth compared to 2010. Given that the tax is levied based on the previous year, i.e. 2010 profits will be taxed in 2011, this optimism strikes me.
Even in this optimistic budget the government plans to issue debt for 1 billion euro and to give state guarantee for 410 million euro loans for the state railway companies – BDZ and NKJI. Debt interest payments are expected to reach 334 million euro in 2011 compared to 257 million euro in 2010.
In the real world, however Mr. Djankov will seek additional funding at a higher cost. He and PM Boyko Borisov will be credited with the new, consequential deterioration in public finance since this is the first time in over ten years when budget deficits and debt accumulation are government policy.
Slowly on the way down
March 22, 2010
The government is scared. It does not have any idea how to deal with the imminent danger over public finance; still less does it know how it could give some invigorating impetus to the economy. Two difficult and conflicting tasks. And the saddest-funniest thing is that it has put itself in this ridiculous situation - with the total refusal of the populist Prime Minister Borisov to conduct any reforms or budget cuts and the gradual isolation of the Finance Minister from the decision-making process.
Want to know what happens further on?
Growing budget deficit, rising external debt, negligible foreign investment due to the growing unpredictability of the business environment and slow and painful recovery. No reforms. This would seem to be the GERB testament, judging by all imbecile proposals and boobs of the government representatives in the recent days. Only thus can be characterized the proposals for flat tax cancellation, taxation of the gross income (before social security withdraws), tax on pensions (would additionally squeeze consumption) and so on. The measures that have been agreed with business and unions are no exception in its controversial effect and at times, outright stupidity.
The worst news is that the fiscal stability rescue by cutting spending won’t happen. Since it is not popular to neither lay off public officials nor close hospitals, and generally changing the status quo at all, the government seems to take the easiest (and most dangerous) road supported by the business and trade unions - covering the deficit with loans. In just the first two months of the year the shortage of funds in state coffers will be nearly 2 billion (official + hidden coming from outstanding debts and delayed VAT) and if a bond issue can fill this hole quickly, this will not solve the general problem of rising spending and falling revenues - on the contrary, it will increase the "easy" solutions appetite for future deficits.
Another outrageously silly proposal is the issue of a debt in order to capitalize the Bulgarian Bank for Development (a state bank) and to "facilitate the access to credit resource for businesses”. The problem of the business has not been the squeezed lending but the lack of meaningful projects. Taxpayers' money are not the way to finance projects that cannot win funding on the free banking market. It becomes easily predictable that at some point we will again witness a socialization of losses, as in 1996-7.
Just running through the complete list of anti-crisis measures (although there are some reasonable on this list), a number of proposals are packed inside that completely contradict themselves with regards to the expected result (for example, it is not clear how removing the upper limit to unemployment compensation corresponds to limiting of the government spending). And ultimately the measures remain chaotic with no clear vision in the medium run.
It is unknown why the government's finance team misses the fact that its problems will not end with just this year. The pro-cyclical policy of the cabinet deepens the financial problems of businesses and households and thus prevents the recent recovery of consumption - the only thing that can pull the economy and revenue up. Moreover, with its chaotic actions the Cabinet is on its way to take out Bulgaria from the map of the investors interest as there is no normal person to invest in a country where controversial ideas for the future of the tax system are declared each and every day and where the government refuses to pay its obligations and extorts the companies.
In other words, we are faced with a slow and painful recovery with minimal growth even under favorable external conditions. This in turn means that the government (whatever government it may be) will not operate with much more money over the next 2-3 years than currently available. It will hardly be a fun to be a Finance Minister, especially given that nearly 50 percent of this country external debt (estimated at 3.34 billion euro) is due in the next 1-5 years and this will further complicate the budget expenditures.
Finally, can things get better?
