Bulgaria plans balanced budget to offset risks from C/A deficit

SOFIA – Bulgaria plans to run a balanced budget next year to reduce the risks tied to its swelling current account deficit, a draft budget, which was cautiously welcomed by economic analysts, showed yesterday. The country’s two-month-old Socialist-led government is expected to pass the draft with no major changes on Monday and submit it for Parliament’s approval, a senior government source who asked not to be named told Reuters. The EU aspirant plans to keep spending capped at 40 percent of GDP – near this year’s projected levels in accordance with plans to end 2005 with a surplus of 1.0-2.0 percent of GDP, the draft, obtained early by Reuters, showed. «The 2006 balanced budget takes into account the high deficit in the current account, helps further reduce state debt and increases financial discipline and stability of public finances,» it said. Analysts, who had originally expressed concern at promises made by the Socialists ahead of elections held in June to raise spending, were cautiously optimistic but said the government needed to keep spending under control due to the large external shortfall. «What the market is looking for is tight fiscal policy, understood as a balanced budget with some potential for a surplus,» said Agatha Urbanska, a market analyst with ING Bank. Bulgaria has maintained one of Europe’s tightest monetary policies in recent years due to a currency board which keeps its lev pegged to the euro and restricts central bank operations. This straitjacket leaves fiscal policy as one of the few tools it has to control external risks. «With the given estimates for inflation and growth, I do not think spending levels are inappropriate,» Urbanska said. Healthy growth The draft expects healthy economic growth of 5.5 percent next year, from 5.8 percent in 2005. It sees inflation staying at a stubbornly high 4.9 percent at the end of 2006 due to hikes of excise duties on cigarettes and alcohol, which will jump by an average of 55 and 18 percent respectively. The new administration, which won the June elections on pledges to hike healthcare and education spending, and raise low public salaries by 20 percent, has instead opted for a 6 percent wage hike as of July and a 5 percent rise in pensions. However, it plans to ease the income tax burden by raising the minimum monthly taxable salary by 38 percent to 180 levs ($111.7). It will also try to boost business by cutting social security contributions by six percentage points to 36.6 percent of gross salaries and shifting more of the burden to employees, the draft said. With an average monthly pay of just around 160 euros per month Bulgaria is one of the poorest countries among EU members or candidates. The draft set both revenues and spending at 18.258 billion levs ($11.33 billion) next year, up from initial 2005 targets by around 12 percent in nominal terms. It expects 2005 revenues to outperform by 8.0 to 9.0 percentage points to around 17.7 billion levs, but the government will keep spending in check due to the external shortfall, forecast to expand to 13.5 percent of GDP this year. The cabinet plans to increase spending for healthcare, environment, and defense and security, and lightly cut spending for education and construction in terms of percentage of GDP.