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The Institute for market economy: The excessive spending will turn us into a second Greece

26 June 2010 / 11:06:45  GRReporter
3628 reads

Victoria Mindova


Peter Ganev is an economist at the Institute for Market Economy in Sofia. He is in charge of the problems of the economic freedom, competition and tax policy and has interests in the field of combating climate change and extreme poverty. The economic expert revealed to readers of GRReporter, the main steps that the government of Bulgaria should take to ensure a sustainable type of economic development in the coming years.

What does call of the Institute for Market Economics mean "Stop spending money"in the campaign for the expenses of the Bulgarian state and to whom is it addressed?

The call is addressed to the rulers. In the past years we witnessed a sizable increase in public spendings. It was combined with a rather big positive economic growth and to some extent this was normal. A lot of money went into the economy, an increase in the volume of trade was registered and the government found it to be easy to increase its expenses. A similar thing happened in Bulgaria but also in other countries in Europe and worldwide. This unfortunately provoked great expectations and excessive outlay. These revenues which were generated as a result of the high growth of the global economy, were very easily converted into outlay and into promises of increase of a range of social compensation, pensions, public sector pay and other things that appeal to people.

At the time the crisis hit, however, the revenues responsible for the unbridled economic growth ceased and the promises and commitments by the Government remained. So accordingly appeared and the problems in the budget in almost all countries. The result was the formation of a budget hole which for countries like Bulgaria is very dangerous. The Greek crisis came to show us what is the result of such budgetary holes.

The problem of the shortage in Greece has been accumulated for years, while this problem arose in Bulgaria this year?

Yes, but the final effect is the same - no matter whether we talk about many years of imbalance in revenue and expenditure or a shorter period of time. This is the place that a country reaches when a crisis erupts and it has no sustainable revenue. In our case the path is much shorter, there is no need to spend irresponsibly for ten years to get to the Greek scenario. It is particularly dangerous when we have a small economy and it begins to shrink. In the case of a currency board the opportunities for flexibility in the process of overcoming the crisis are even smaller. We can not afford to lose the confidence of the international investors, ie if Greece had ten years to lose the trust in our case this period is much shorter.

The problem with the expenses has been around for a long time and it is a structural one. This is not outlay which is decided year for year. We are talking about costs in education, healthcare, infrastructure improvements and the municipalities. These are sectors in which it is very difficult to make cuts. So when we can not curtail the volume of expenditures we must renew the system so that it becomes more efficient. We are talking about a reform or optimization in order to reduce these costs and to balance back the budget.

How do you imagine this reform?

In first place should be initiated by reducing government expenditure in the administration. To some extent this is how the government started, by reducing the budgets of the municipal administration, but still this is not fully operational. Anyone who has had some access to the administration knows that there are things to be optimized. However, even if fully implemented the program to reduce municipal expenditures, this can not solve all our problems with the excessive deficit of the country. This will only cover certain needs until the end of the year. The more serious reforms, which should be made are in the field of pension and health insurance, as well as in higher education. Areas where the money goes to those who really need it. A system in which citizens will effectively use the health pathways, and the money to follow the needs of the patient. It is also important to develop new models by which part of the money from pension securities will be saved, not only to be redistributed.

Explain to us a little more in details what do you mean by changes in the pension system?

The system such as it is in Bulgaria until recently has no savings for pensions. A transfer is just made from those who pay retirement benefits to those who now receive pensions. A shift of the pension system is needed towards collection of funds in reserve. Again there will be solidarity and transfer of funds from to active working generation to retirees, but a major role has to play the saving, which is just entering in Bulgaria with a 5% contribution.

What is retirement savings?

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