Economic Policy Review ISSN 1313 - 0544

Simpler and Clearer Fiscal Rules

Author: Petar Ganev / 06.04.2011
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Last year discussions for introduction of the so-called fiscal board in Bulgaria led to a project of the “Financial Stability Pact" prepared by the Ministry of Finance and presented by Simeon Djankov (see here). The pact provides for fiscal rules which cannot be bypassed by a simple majority in parliament – probably with their enrollment in the Constitution.

The rules cover the traditional areas – deficit, debt, expenditures and revenues. The idea is good, but in this case the details are important: 

  • To limit the redistribution (public spending) to 37% of GDP – this does not include the contribution to EU budget and costs for backing up the EU assistance. This means that national co-financing of EU programs is not covered by the proposed budget rule. This automatically adds 2-3 percentage points to the 37% and in the coming years with increasing use of funds will grow the costs for EU assistance (i.e. national co-financing). In other words, the rule, written that way, allows government expenditures over 40 percent of GDP – this limit exist as an unwritten rule at the moment.
  • To guarantee the budget position and not to allow budget deficit above 3% of GDP – the definition of the budgetary position in this case depends on the size of the consolidated public debt. This rule is not just laid out, as the budget balance is determined on the basis of accounts on forecasted real GDP growth. So in the basis of this rule will fall a prediction that can get away with reality for many reasons – not only uncertainty and forecasting difficulty, but also purely political interference.
  • Direct taxes to be changed by a majority of two thirds of all MPs – this is obviously targeted at the 10 percent corporate and income tax. But which taxes are classified as direct ones remains an open question. For example, dividend tax and tax for sole traders are also included in this category – their possible reduction is discussed each year. In practice, property taxes are also included in the category of direct taxes, although they are designed as local.

The debate on these proposals lies ahead, but in the beginning ​​a few comments could be made:

  • The rule for state expenditures should cover all public expenditure, including contribution to EU and national co-financing. The percentage can be discussed but the focus must fall on the consolidated public expenditure without any exceptions;
  • Separate rule for debt should be written – In this moment debt is discussed to be included in the rules, but it is not in a separate article and therefore it is not clearly laid down. It is good idea to be written separately and to be considered the consolidated public debt and government guaranteed debt;
  • Simple rule for the budget balance should be written – for example, stating that no deficit or deficit above 3% of GDP is allowed and that’s enough. Exceptions may be provided with the vote by a majority of two thirds of all MPs that must be corrected in the following year – thus some flexibility is given in exceptional circumstances, while retaining the simplicity of the rule;
  • The rule for taxes should be defined as not to leave any room for doubt which taxes fall within the rule and which does not. The introduction of new taxes may also be addressed – to be accepted by a majority of two thirds of all MPs. The local taxes issue is important and should be discussed – there are specific moments in the process of decentralization and it should proceed with caution;
  • It could be given some thought on introducing rule on additional spending of the state, including surpluses at the end of the year – for example, it should be decided by a majority of two thirds of all MPs and only after presentation of clear estimates.

In the following weeks IME will continue to discuss the topic and will present a formal opinion on the subject.