2004 state budget adopted

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Bulgaria's state budget for 2004 was adopted in December 2003. The key objectives are to maintain macroeconomic stability, create conditions for sustainable economic growth and improve living standards. The social partners were consulted on a number of aspects of the budget.

The 2004 National Budget Act was adopted by the National Assembly on 18 December 2003 and promulgated in the State Gazette, issue 114/2003

The state budget for 2004 was drawn up on the basis of projected economic growth for the year of 5.3%, average annual inflation of 4.0% and an exchange rate of BGN 1.8 to the US dollar. Employment is expected to rise by 1%-2%. Based on the economic development assumptions, the public current account deficit is expected to drop to 6.2% of GDP and the deficit in the trade balance to 10.7% of GDP. In view of the positive trend in recent years, the overall budget deficit for 2004 is planned to remain at the consolidated base level of 0.7% of GDP.

Tax policy and revenues

The 2004 budget's tax policy is aimed at providing conditions that encourage investments and economic growth. Certain legislative changes have been adopted in line with the medium-term strategy of the government, notably including:

• a reduction in the corporation tax rate from 23.5% to 19.5%;

• an increase in non-taxable income for individuals (to the level of the national minimum wage) and a cut in the lowest income tax rate from 15% to 12%;

• an exemption from VAT for deliveries under projects funded directly through grants under international agreements with the EU;

• changes in transport and environmental fees for liquid fuels ;

• increased excise rates for fuel and cigarettes; and

• replacement of the road tax with a toll system.

Tax revenues are estimated to grow by 8.8% on the 2003 figures, with revenues from indirect taxation growing most (by over 14%). In terms of direct tax revenues, the contribution of social security contribution is highest (64%), followed by personal income tax (19%) and corporation tax (17%). Tax administration capacity and the compliance rate are also expected to grow.

Revenues from social security contributions will rise at a moderate pace of 4.3% due to: retention of the minimum social security income and and increase of the maximum social security income by 20%; the transfer of 1% of pension fund contributions to the mandatory supplementary pension insurance system (BG0308101F); and an increase in the number of insured people.

Expenditure

Budget expenditure in 2004 must to correspond to objectively proven needs with an accent on three key priorities: health and judiciary reform; development of education; and Bulgaria’s accession to the North Atlantic Treaty Organisation (NATO) and the EU.

Current expenditure in 2004 will rise by 8.8% compared with 2003, with provisions including the following:

• pay expenditure in the public sector will grow by nearly 12%, due primarily to new staff and structures related to European integration, strengthening of the judiciary and improvements in the field of training and education. Estimates envisage a single 8.5% public sector pay increase by the middle of the year;

• limited sectoral subsidies are envisaged (for energy and transport);

• there will be social subsidies providing free or reduced-rate transport for some social groups and covering the costs of transporting bread deliveries to remote or high mountainous areas;

• there will be financial compensation to the national postal operator to guarantee universal postal services in economically unprofitable areas;

• funding from the Agriculture Fund and Tobacco Fund will aid agricultural producers; and

• pension expenditure will grow by more than 10% due to the annual uprating of all pensions (by 5.8% in June) and an increase in the maximum pension from BGB 200 a month to BGN 420.

Capital expenditure will grow significantly in 2004, with its real 2003 level (as a % of GDP) maintained. State capital expenditure is mostly targeted on infrastructure projects of national significance. A significant allocation of investment subsidies from such programmes as PHARE, ISPA and SAPARD is also envisaged. Funding will go towards implementation of projects such as transit roads, electrification of the Plovdiv-Svilengrad railway, the extension of Sofia airport, a new Danube bridge, regional waste depots and waste water plants.

Under the policy of increased spending in priority fields, expenditure on education will be significantly increased (by over 16%) due to the introduction of mandatory pre-school education and the addition of a 13th school grade. Some changes will be made in health financing with fund allocation based on the health service provided. A significant part of social expenditure will be centralised in the Ministry of Labour and Social Policy - ie universal and targeted social assistance, disability benefits, child allowances and active labour market measures. Reserve funds will be provided for unforeseen urgent expenditure related to structural reforms in the field of health and social security.

The precise definition of expenditure coming under the responsibility of the municipalities will continue through further development of the principle of clear differentiation of spheres between those with complete state responsibility and those where only a certain amount of support is envisaged. So-called 'delegated' state activities will be fully financed and the capacity of local government to establish and pursue its own financial policy will be enhanced.

Risks and reform

The possible risks which may affect the 2004 state budget were outlined and commented on at the planning stage in order to provide 'buffers' against any negative effects. Any possible changes in the economic parameters have been taken into consideration, such as the exchange rate and international and domestic interest rates. In terms of expenditure, the municipal budget remains uncertain due to delays in debt payment and failure to pay instalments to the national budget. Some problems are expected with regard to the financial status of the hospitals. There is some reliance, though not fully open, on planned budget revenue surpluses during the year.

Some new elements have been developed in the 2004 budget, as a result of a current budgetary reform process. Thus, the introduction of programmed and 'outcome-based' budgeting continues and three 'pilot' budgets have been developed and approved - those of the Ministries of the Environment and Water, Labour and Social Policy, and Transport and Communication. Better prioritising of individual programmes at national level and within Ministries is to be achieved, the coordination of tasks performed by different institutions improved and cost flexibility enhanced, while more possibilities are provided for the measurement of outcomes.

Expenditure standards (on staff numbers, for example) have been developed and applied to municipal budgets in the sectors of education, health, culture and social assistance. A transparent mechanism for the central/municipal budget relationship has been introduced, involving supervision only of transfer expenditures for state activities, with the local authorities free to manage their own revenues from local taxes, fees etc.

Debates and discussions

In accordance with the relevant regulations, at the end of the budget procedures final discussions were held between the Ministry of Finance and all primary spenders of budget funds to streamline budget expenditure, including that identified from additional revenue sources.

Consultations were held with the nationally representative trade union and employers' organisations within the National Council for Tripartite Partnership (BG0307204F). The matters discussed included: the tax decisions and concessions for both business and individuals; the amount of the budget deficit; the scope of redistribution in the consolidated budget; pay dynamics in the public sector; some social benefits; the role and amount of subsidies; and changes in the financing of individual activities.

The draft budgets of the National Health Insurance Fund (NHIF) and State Social Security (SSS) were approved by their tripartite governing bodies. Preliminary bipartite discussions of some key parameters of the SSS budget were held between the national trade union and employers' organisations. Opinions and arguments were exchanged with the aim of reaching compromise solutions on the new maximum amount of pensions, the new levels of some benefits, the abolition of the employers' obligation to pay for the first day of sickness absence, and the absence of social security contributions levied on food and other benefits in kind provided to workers. The agreements reached were used in the process of preparing the final draft budget of SSS and seeking a better balance of revenues and expenditures (BG0308101F and BG0309201N).

The positions of the national trade union and employers' organisations were heard during discussions on the draft budget in the relevant commissions of parliament and parliamentary groups.

Commentary

Independent experts and opposition politicians have described the 2004 budget as 'not stressful and easy to implement', arguing that the planned tax revenues have been underestimated, which implies that they will be exceeded (a consistent practice over the past five or six years). Concerning expenditure, there have been negative comments on so-called 'under the line' expenditure equalling close to BGN 900 million beyond the expenditure set out by function. These funds are intended to finance nationally significant activities (building highways, state investment loans with trade companies as end beneficiaries, the Agriculture Fund etc).

Traditionally, consultations on the budget with the social partners take place only at the final stage when no substantial changes to individual revenue elements and expenditure areas are possible. On this occasion, the employers pleaded for more tangible tax concessions and changes conducive to increasing the financial resources available to economic actors for investment and development. The trade unions stressed the limited growth in the national minimum wage and in public sector pay, the high tax and social security burden and insufficient subsidies for sectors and vulnerable groups in the population.

Strategies, programmes and national plans were developed and adopted by the Government in the course of the budget procedure and with the participation of the social partners, to address such issues as employment, combating poverty and social exclusion, and equal opportunities for people with disabilities (BG0311203F and BG0310202F). Their implementation in 2004 will in large measure be ensured financially by the 2004 budget and targeted funds under donor projects and other forms of co-financing. Some major prerequisites were laid down for the further development of industrial relations and an increased role for Ministry of Labour and social policy and the social partners.

Some positive outcomes of the intensive negotiations and consultations with the social partners on the 2004 budget are the tangible reduction of corporation tax, the maintenance of workers' rights (ie in terms of sickness benefit), increased non-taxable income, and a reduced tax rate for the lowest earners. (Nedka Koleva, Institute for Social and Trade Union Research)