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“Shot on the duck’s head!” – Labor

The government began to harm the Bulgarian economy

The cabinet had to be replaced

They wanted to spend irresponsibly to future generations

For the first time in modern history, a government was overthrown after a successful no-confidence vote. In fact, the opposition claims that the government has just disintegrated and they have only helped make this fact official. The political party “There is such a people” with leader Stanislav Trifonov terminated its participation as a coalition partner of the PP We Continue Change, Democratic Bulgaria and the Coalition for Bulgaria (Bulgarian Socialist Party). Even the split of the ITN parliamentary group did not help the government gather enough support to stay in power.

The break-up of the ruling coalition is due to some purely economic reasons that deserve attention. They fall partly within the scope of the disputes that have erupted between the former coalition partners, and in particular between ITN and “We continue to change” – fiscal policy, the delayed issuance of government debt on international markets and supply policy. natural gas from Russia.

The reason for the title of the article gives me a song from the past with the participation of the leader of ITN, which figuratively describes what happened in the end to the current government. This song mentions (borrowing from a very famous text by Dobri Chintulov) “while the snake is tiny”. In fact, this corresponds well with the actual situation – the government with its economic policy began to clearly harm the Bulgarian economy and therefore even before the lasting consequences had to be changed.

Fiscal policy

The government has indeed brought about change. The Minister of Finance Vassilev stated that the policy pursued over the last 25 years of low budget deficits and close to a balanced budget is the reason why Bulgaria is in last place in terms of income per capita in the EU. In fact, not only is this not true, it is one of the most important prerequisites for purchasing power not to be significantly lower than it is now. However, his statement is a summary of the overall (wrong) public finance policy of the outgoing government.

Yield on 10-year government securities on average for the euro area

Source: Yahoo Finance Charts

Only a few days ago, the German Minister of Finance praised Bulgaria (not Minister Vassilev) for the good results of the conducted fiscal policy – one of the lowest amounts of government debt relative to gross domestic product. However, this achievement has nothing to do with the policy of the current government. What it has tried to do in recent months is to show Bulgarian citizens what participation in the eurozone would mean – without following rules, without fiscal discipline, without responsibility to future generations, without a long-term vision.

The government has demonstrated a willingness to spend the maximum amount of money here and now without a convincing analysis of the economic effects of these actions. The minister’s convictions were more important than economic theory and practice, established tradition, and a reasonable consideration of causal relationships in the economy. The reluctance to listen to opposition councils and researchers outside the government showed only a lack of capacity to manage public finances, but not a desire for reform.

The changes that were proposed and adopted were fragmentary and inconsistent with the treatment of taxes as a whole system. The use of permanent budget deficits, regardless of the state of the economy, which resulted in a steady increase in government debt in absolute terms and relative to gross domestic product, was presented as the only possible and correct policy. At the same time, however, the government’s expectations were for an increase in net government debt by over BGN 25 billion over the next 3 years, while economic growth is not accelerating. That is, the government itself did not expect a positive result from its own policy, but nevertheless insisted on it.

The proposed update of the state budget has gone even further in the pursuit of deficit and debt generation. It does not envisage an increase in revenues to finance the increased costs of pensions, either in the current or in the coming years. However, the additional costs resulting from the adoption of this measure are significant – in 2022 – about BGN 1.4 billion, in 2023 – about BGN 3.7 billion, and in 2024 and beyond – about BGN 4.2 billion. In order to finance this measure through income from social security contributions, the rates should be increased by at least 5 percentage points and at the same time the amount of the maximum social security income should be significantly increased, just to maintain the current amount of the deficit of the state social insurance.

Such a shock is unacceptable neither for people who rely on income from work, nor for entrepreneurs who maintain jobs and pay salaries. Unfortunately, people do not even think about the immediate results of certain measures, but what is left for results after a few months, until they affect them personally and in a negative direction. The problem is that these spending increases have already been proposed, another government will be responsible for their implementation and elections are coming up, so the most likely result is that they will be adopted. Moreover, the previous update in such circumstances showed that even bidding could be expected over the proposed measures, which could put public finances in an extremely difficult position in the coming months and years.

The delay in the issuance of government debt

Government debt management is part of fiscal policy, but deserves special attention. Even when the 2022 budget was adopted, it was clear that at the end of March the nominal value of previously issued government bonds would be repaid. As the government did not have the necessary resources to repay, the liabilities had to be refinanced by issuing on the international capital markets. The beginning of the year was missed due to the unnecessarily delayed adoption of the budget. The draft prepared by the caretaker government was eventually adopted with minor adjustments, but was presented as a product of the present.

Then the war broke out in Ukraine, which worsened the situation, but did not close the financial markets, as claimed by the Ministry of Finance. In fact, by the end of April, the situation was relatively favorable for an international issue.

Meanwhile, interest rates have been gradually rising, with market participants already calculating the European Central Bank’s intention to tighten monetary policy when setting the required rate of return. This applies even to benchmark German government securities, whose yields have also increased.

The vote of no confidence in the government means that it can no longer enter international markets. This task is also impossible for a possible caretaker government. This means that this action can be taken at the earliest in October, if a new regular government is formed. This puts at risk the very execution of the state budget, as there is a risk of a lack of liquidity given the expectation of increased costs and reliance on the internal market, which may not be able to provide the necessary resources.

In addition, servicing new issues will be significantly more expensive due to higher interest rates.

Natural gas policy

The government has decided not to accept Gazprom’s proposal to change the method of payment for Russian natural gas supplies. As a result of this decision, which contradicted the provision in Russia for the supply of such resources, they were suspended. This fact was presented to the local public by the Bulgarian government as a unilateral act by Gazprom, but when the coalition disintegrated it became clear that this actually happened after several calls from the other side and ultimately the decision was the Bulgarian government. The aim was to demonstrate Russia’s policy as part of sanctions against the invasion of Ukraine. The explanation was not to contradict the decisions taken at European Union level. However, companies from other EU countries decided that the change in the method of payment did not contradict the sanctions and continued to receive gas.

In fact, the contract with Russia for the supply of natural gas expires at the end of 2022. This means that the suspension of supplies would happen by itself from the beginning of 2023 and this would not have any legal consequences for Bulgaria. In the meantime, however, the agreed quantities could be used to meet current natural gas consumption and to fill the Chiren gas storage facility, so that quantities are available for next year.

In the current situation, deliveries by the end of the year are not guaranteed. The two liquefied gas tankers agreed by the government from the United States are extremely insufficient. Expectations to complete the gas interconnection with Greece and provide access to the agreed quantities of Azerbaijani gas are possible for July or beyond, but they will not be enough to cover all consumption by the end of the year.

That is, the decision to abandon Russian gas did not achieve diversification, security of supply or reduction of prices. In addition, there are questions about the implementation of certain clauses of the contract, which require the payment of certain quantities of gas, even when they are not actually consumed (take it or pay it). Due to this clause, it is possible in the future to pay penalties, which will further increase the actual price of natural gas for Bulgaria.

The considered aspects of the financial and economic policy of the government do not exhaust all the problems, but they are indicative of what has happened in the last 6 months. As for the intention of “We continue the change” to try to form a new government – Kiril Petkov does not consider Asen Vassilev suitable for prime minister. The problem is that neither he nor Vassilev were suitable for the positions they held in the government of the quadruple coalition.

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