(Not)Unnecessary Budget Questions*

There is a well-known truth that, when you are spending someone else's money you are not interested in effectiveness, which is different from the case, when you are spending your own. This is the reason why when we are talking about spending the budget surplus it is best to ask several questions.

The most fundamental is: Why is there a budgetary surplus?

It turns out that, the Bulgarian Governments since 2003 up to now could not calculate properly or do not want to make the efforts to be closer to reality. Data about the budget indicates that, in five consecutive years the Government is collecting more money from the tax payers than it needs for the planned expenditures.  It must be mention that, the budgetary expenditures are growing, in other words, even when the expenditures are growing every year again more money is collected.

The reasons for the high level of collection are various – certain taxes are reduced and as a result the people and the companies are paying them; due to the reforms the economy is developing well, investments are attracted, which expands the base on which taxes are levied. Simultaneously with that, the Government underestimates the expectations for revenue, for various reasons – forecasting is difficult; does not believe in the stimuli which affect the taxpayers when taxes are reduced; it is not confident that, it will perform the reforms, which lead to more payments and more investments, etc.

Whatever are the explanations, it is important that, for five years they could "guess" less and less accurately the budget surplus at the end of each fiscal year.

Budgetary Surplus

Million levs

2003

2004

2005

2006

2007

Forecasted surplus/deficit

– 262.8

– 284.2

-195.6

0

385.6

Actual – surplus

0.9

656.4

1 333.7

1 747.6

3 353.6 *

Source: Ministry of Finance; *data is from September 2007

The most important question is: Do we agree, as taxpayers, our money to be spent for the proposed activities?

In order to answer this question, we have to know exactly how is spent part of the surplus. The information at present indicates the following:

1.       Infrastructure – roads, railroads and ecological – expenditure for activities already done and not for new investment projects. Most analysts claim that, investments in infrastructure are probably the best way to spend the surplus. There are however, contradictions in the explanations of the Minister of Finance – he claims that the money will be spent for activities already done, in other words things that should have been already in the budget and which must have received funding.   On the other hand, stands the question: is it possible that these expenditures should not come from the budget, but from the private sector? If the process for granting concessions was fast, transparent and with clear rules, up till now a significant part of the infrastructure could have been built or improved. Unfortunately both variants for building the infrastructure are strongly compromised – the Government is extremely ineffective, while granting concessions is associated mainly with corruption.

2.       Interest free loans to the municipalities, related to completing of euro-projects – this also sounds logical, but only at first glance. The problem with the European money is that, with them there is also highly motivated ineffectiveness and when it is necessary part of that ineffectiveness to be financed from the budget that now is a problem.

3.       The implementation of telephone 112 – this project became notorious with its delays and the threats of sanctions by the EC. When the budget for 2008 was being prepared there was a request for over 300 new staff for its implementation, fortunately not satisfied by the Ministry of Finance, and more than 60 million levs in additional financing. It is not clear how the additional funding will insure the successful start and whether or not it will become the second Company Register or the information system of the National Agency for Revenues, which with the same problems are still not operational. In all cases, it is mandatory to present an analysis of the causes, which lead to the delays in successful completion, the measures, which have been taken not to repeat the same mistakes and responsibility which must be sought.  

4.       The silver pension fund – it must guarantee the stability of the pension system and will receive the remaining from the surplus after spending the 1 billion lev under discussion and placing up of 3% (1,6 billion levs) in the fiscal reserve. This may be the most sensible idea to utilize the budget surplus. It not clear however why do you provide funding for a reform, which is not clearly seen in the proposed budget for 2008. It is written, that premium for the mandatory pension contribution of 5%, for those born after 1959 will remain the same up 2011 and it is not intended to have a new reduction of the contribution. In other words, all who are working will continue to pay the pensions of the current pensioners without any prospective in subsequent years to get a larger portion of their payments to enter neither their personal account, nor the pensioners will get a significant increase of their pensions. During 2006 only 46% of the revenue in the National Social Security Institute are payments from the private sector, in other words at present the State provides a larger portion of the amount for pensions, mainly from the tax revenues collected again from the working people. The logic of the Silver Fund is that in 10 years, there will be a strategic reserve to cover the permanent deficit in NSSI. This is happening however now and for that reason a radical approach is necessary by reduction of the contributions and that they are entered into personal account. In that cense the Silver Fund is a good solution, if it is used to reform the system, and not for filling wholes in the present model, which is bound to fail. 

The next question which we must ask is still: What could be done with the surplus, which anyway already exists?

The best option is to actually start the second phase of the pension reform. Our proposal is to reduce payments of labor.

Instead of the current 33% social security payments we propose that people pay only 10% social security from their gross salaries into private pension fund. The other payments for – unemployment, health, and maternity are dropped completely, while the Government covers the costs for these cases from the general revenues of the budget, as it is at present.

With respect to the health care contributions, we propose they are dropped, where everybody selects alone his private health fund, while the Government defines the minimum package for health services, provided by these funds. The competition between the funds will lead to improved quality, will offer a choice and will insure market negotiation between the health funds, the hospitals and the medical professionals. The State will continue to finance the payments for the retired, the children, the unemployed, the poor and thus will fulfill its social function.

* This article was published for the first time in the 24 hours newspaper on 26th November 2007.


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