Economic Policy Review ISSN 1313 - 0544

How Much Further Can the Fiscal Reserve Shrink?

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The latest data shows that the fiscal reserve has shrunk to 4.683 billion lv. at the end of April. Recently, the minister of finance claimed that there has been a slight increase to around 5 billion lv.

It is obvious that the fiscal reserve has shrunk by more than 60% since its 12 billion lv. peak in October 2008. This downward tendency has been in motion since the end of 2008. Still, the 2011 budget suggests that the fiscal reserve should amount to no less than 4.5 billion lv., although there are no legislative restrains in place to prevent it dropping below that level, as long as the final goal is met at the end of the year.

What is interesting however, is what part of this reserve is in fact available to the government at any given time. As it turns out, only 1.12 billion out of the 4.68 billion lv. in reserves are “available” to the state budget at the end of April. There are 1,767 billion lv. also considered a part of the state budget reserves, which are in fact funds allocated to the so called “Silver Fund” (created to support the national social security system, by generating profits that will be used to raise state pensions in the future). Under the so called Silver Fund Law, these funds can only be allocated to the National Social Security Institute (NSSI) Pensions Fund (with the mandatory mediation of the Ministry of Finance), but this can be done no sooner than 10 years after the law came into power in 2008. I.e. if the government decides to use this money, even with the justification of transferring them to the NSSI in order to raise pensions, it will first have to amend this law. In addition, the transfer itself should be included in the annual budget law. All these requirements make the eventual use of the Silver Fund as a source of budget financing extremely difficult and unpopular, and in this sense – highly unlikely.

Except for the Silver Fund and the state budget reserves, the rest of the money in the fiscal reserve is being distributed between several other funds. Until recently the National Health Insurance Fund (NHIF) reserve was also part of the fiscal reserve but was transferred to the state budget reserve to be used to finance budget expenses. The biggest fund outside the state budget is the so called National Fund in the Ministry of Finance – at the end of April it had 1.08 billion lv in it. This Fund manages pre-accession EU programs, structural and cohesion funds. It is not clear whether money from the National Fund may be transferred to the budget reserve when a need arises and at the discretion of the minister of finance. Most probably not, but experience with the transferred reserve of the NHIF confirms that nothing is impossible.

The other more significant  extrabudgetary fund is  the Agriculture Fund, which serves the payments under the Common Agricultural Policy (plus national payments to farmers) and SAPARD. Its balance was 301 million at the end of April. The money in this fund is targeted for concrete programs, although the government probably could have delay 1-2 months a payment of subsidies, if decided. But here we are talking about a relatively small amount, so these 300 million will not make a serious difference for budget financing.

Тhe experience with the NHIF reserve is quite interesting. A substantial part (1.32 billion lv.) was transferred to the state budget reserve in December 2010 and just 4 months later it has been almost drained out (except for meager 170 million lv.) and we are back where we started from. It looks like that filling budget gaps with money for other purposes is only a temporary solution.

In the end, the only disposable reserve which the government can actually make use of is the one included in the state budget (1.12 billion lv. at the end of April). At the same time, the deficit under the consolidated fiscal program for the first four months is 552 million lv. or 0.72% of the official government GDP forecast. The overall forecasted deficit for 2011 amounts to f 2.5% of GDP or 1.926 billion lv. In other words, the deficit should not exceed 1.354 billion lv. for the remainder of the year.

The disposable fiscal reserve will not be enough to finance this year’s deficit and the government is certain to issue debt or seek additional revenue through privatization. Privatization revenue, however, is of an uncertain value. Several sizable privatization projects have gained momentum in the last couple of months, including the conclusion of the 100 million euro deal for Bulgartabac, but it remains unclear whether those revenues will be sufficient to cover the deficit. If this doesn’t happen, the government will have to issue debt. Bearing in mind that the disposable fiscal reserve is already at its functional minimum, and there are no plans for major privatization campaigns in the coming years, Bulgarian governments are likely to start issuing bonds more and more often and in ever increasing quantity, at least in the medium term. That is, if they fail in their attempts to balance the budget (or achieve surpluses), which looks highly unlikely at present.



Source: Ministry of Finance