Institute for Market Economics: Public expenditure should fall below 40% of GDP, with zero deficit

Bulgaria should aim to contain public expenditures to below 40% of GDP and eliminate the deficit in the medium term. This transpired from a presentation by Lachezar Bogdanov and Petar Ganev from the Institute for Market Economics (IME) during a presentation of the think tank’s alternative budget at Sofia’s Millennium Hotel on 4 November.

The discussion was attended by Fiscal Council member Lyubomir Datsov, former deputy prime minister Nikolay Vassilev, Open Society Institute senior economist Georgi Angelov, former UniCredit CEO Levon Hampartzumian.

Before the pandemic, the budget spending was at an average of 36-37% of the country's GDP, but after the pandemic, spending has steadily exceeded the 40% mark, Petar Ganev said.

"The deficit after the pandemic is because of the expenditure side of the budget," he said.

Between 2004 and 2023 Bulgaria recorded 11 years of budget deficit and 9 years of budget surplus, with the highest level of recorded deficit being in the post-pandemic period - an average of over 3% for the entire 5-year period.

In Ganev's words, the announced BGN 18 billion increase in spending before the elections means that measures are needed when adopting next year's budget if the goal is a consolidated budget.

He said that some decisions require revision as they increase budget expenditures for next year, including the rules for fixing salaries in the Interior Ministry, which exceed BGN 2.5 billion for the current year 2024. According to the new rules, a 40-50% increase in the salaries is expected, representing an additional BGN 1.2 billion.

IME chief economist Lachezar Bogdanov said that the judiciary's spending is also expected to rise.

In his words, the nominal growth of labour costs in Bulgaria has outpaced the nominal growth of GDP on average in recent years, while public sector employees are increasing.

Bogdanov said that there is room for cutting expenditures in various areas through reforms. He cited social programmes, which are widely available and distribute funds to a wide range of people, but in small individual amounts. According to him, there are 660,000 with disabilities who receive support from the state.

According to the presentation, in terms of tax policy, it is necessary to eliminate preferences and maintain uniform tax rates.