Articles ISSN 1313 - 0544

Do Not Raise the Deficit*

Author: Team of Bulgarian macroeconomists** / 02.02.2010
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This week the Bulgarian President became spokesman of the creeping rehabilitation of the "virtues" of budget deficits. It seems that the Prime Minister and his colleagues see political advantages in this idea and are keen on softening the fiscal policy too.

These populist positions have always easily found support in our society and have always led to heavy economic consequences. In today's circumstances they directly undermine the stability of the currency board, which is the single sensible consensual decision in Bulgarian economic policy in decades.

Every Bulgarian citizen benefits from the balanced budget. Here is why:

1. A budget deficit means that the state spends more than it collects. Whether spending money from the reserve (saved in past years), or incurring debt, this policy will damage all of us and even our children.

The reserves accumulated in preceding years serve as a warrant for the economy and its role is not just to spend them but to cover the external debt of the country and to help cover systematic, demographic and structural risks, for example related with the pension system. Under the conditions of currency board the reduction of the fiscal reserve would undermine the trust in the economy in a way which will depreciate even the boldest "successful" government program.

2. The belief that with bigger deficit the government could materially influence the effects of the global crisis is not taking into account how open the Bulgarian economy is. It is illogical to expect that public expenses will compensate for over 7 billion leva*** decline in export or 20 billion leva decline in capital flows, which are the heavy consequences for the economy in the last 12 months. These were the driving forces of Bulgarian growth from the last decade and not the occasional government construction orders or subsidies for loss-making sectors. It is obvious that the insufficient internal demand is not the problem. It is the collapse of the investment optimism and the declining consumption in the developed economies, to which higher state expenditures would not help.

3. Besides that, allowing a budget deficit brings a series of negative effects - more uncertainty and risk for the entire economy, higher interest rates for the citizens and business, less investments and last but not least - delaying our chances for Eurozone membership.

4. If the government has delayed debts, they should be included in this year's expenditures. There is no market economy and rule of law when contracts are not fulfilled. Despite being inherited by the previous government, this burden should be paid by limiting the expenses in other sectors where the ineffectiveness is higher and the reforms are lagging behind.

5. Trust is slow to build - the world investment community remembers the moratorium on the external debt in 1990 and the de facto bankruptcy of the state in 1996. The whole prudence in the period after 1997 could easily be "scratched" if the government now chooses the easy way out - the same as our neighbor Greece, who puts the future of the common European currency in question.

The balanced budget is the only way to high budget responsibility, attracting investments and achieving economic growth in Bulgaria.

 

 

* The article is published for the first time on January 27 2010 in "24 chasa". The original text could be found here.

** Eight of the famous Bulgarian economists submitted this appeal to "24 chasa". Rumen Avramov and Georgi Ganev from the "Center for Liberal Strategies", Svetla Kostadinova and Petar Ganev from Institute for Market Economics, Latchezar Bogdanov and Georgi Stoev from Industry Watch, Georgi Angelov from "Open Society Institute", Vladimir Karolev - municipal councilor in Sofia.

*** 1 Euro = 1,95583 leva