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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
4267 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?

When we receive our monthly salary, a part of the funds we put into a special retirement account. It also exists to now, but very small part of our contribution actually goes to that account, because most of it goes into the state. In other words, most of these funds are not being saved, but it is spent immediately in order to cover current needs. When we look at what proportion of the budget spending take the pensions we will see that a reform in this sector is essential.

Explain for us in details what do you think are other compelling reforms in the state system?

In the cases of cuts it must be clear that we can not make exceptions. Each administration must contribute its share, which currently doesn’t happen. The government undertook expenditure cuts, but not in all administrations. For example, it has not provided for any cost savings in the Ministry of Defense or the Ministry of Labour and Social Policy. So ministries, which spend almost one billion Euro per year are not affected by the cuts. The call of the Institute for market economy is to correct this and for these ministries also to optimize their budgets, especially the Ministry of Defence. There are still many people in it for who it is not clear what they are doing there. Also it has many real estate properties which the ministry could not operate properly and this absorbs funds.

Other measures that may help the country during a period of crisis is a review of the functions of the state. In other words, not to cut a little bit from each function, but in general to reconsider whether some functions should remain in the state. For example, whether the state should provide employment. It is one thing to provide rules on the labor market, and it is another thing to directly spend money to provide employment, which it actually does extremely unsuccessfully in recent years. A proof of this is the last report of the National Institute of Statistics, which indicates that the active programs for employment provision were ineffective. Many people who have lost their job due to the crisis, and have later returned to the labor market have found themselves the new job opportunities. State policy in this sector has not helped in any way to restore or increase the job positions in the country. Here is an example of a function of the state, for which for years have been spent a lot of money and nothing significant has been achieved so far. Regardless of that it continues to exist.

Such initiatives of the government that cost the country dearly, but have little effect over the years are the programs for encouraging the investments in the economy or encouraging entrepreneurship. Instead the state confining itself to establish a common legislative framework in which these private initiatives to develop (which costs nothing), the state actively spends money without results. It is clear for everyone that entrepreneurship is not happening because of a Programme of the Ministry of Economy, but because of the business environment that exists in the country.

In this line of thought, the state still continues to produce tobacco through Bulgartabac as well as it still transports passengers through BDZ. Both of the activities are presumably not the job of the state. In the tobacco industry things are totally confused. State itself manufactures cigarettes, and then punishes the consumers with the imposition of excise duty. Appart from this it gives subsidies to farmers (additional spending) to produce tobacco. This year 116 million euro of the budget have been allocated to farmers wishing them to make reform themselves and begin to engage in any other occupation. Of course there is always the risk that they collect the money and continue to engage in tobacco because there is no control body.

Do you think that the update of the budget this year will help for the quicker recovery of the Bulgarian economy?

This update actually does not change anything significantly. It was expected that at the moment when established budgetary problems, some measures will be undertaken. These measures will respectively give some result and respectively must be included in new budget. This, however did not happen. By updating today we vote and validate the fact that revenues are anyway going down and costs are going up. These are not new measures, but it is simply legalizing of the reality in the country without taking any actions for a change in a positive direction.

Does this contradict the claims of the representatives of the IMF for Bulgaria that the country this year started to emerge from the crisis?

You could say that to some extent, we are exiting the crisis. Trade began to grow, exports slightly increased, unemployment decreased by around a percentage, perhaps because of seasonal employment, and there is a movement in the economy as a whole. This, however is not sustainable growth. We can not say that we are at the bottom, nor however can we say that we are very high. Our recovery is directly related to the confidence of the foreign markets in the country and in the government policy. The higher is the confidence, the more will be the investments. This currently does not exist in Bulgaria.

Bulgaria has a very good macroeconomic picture - low government debt and public deficit, flat taxes, etc.. Why would the markets not trust us?

Maybe the picture was good up to a point in time, but has already started to deteriorate quite quickly and it happens from a government perspective. At the beginning of this year it turned out that the 2009 budget was not balanced and there was a sizable deficit. This was somehow seen as something accidental and here we are standing in the middle of 2010 and again talking about updates and changes. There appeared also some doubts about the reliability of the data which is not in our favor. Just one after another we started to give bad signals to our European partners and the international markets.

Do you think will win or lose by our involvement in the energy projects Burgas-Alexandroupolis, South Stream and the Belene nuclear power plant?

It is difficult to say what we gain and what we lose, because this issue also has a geopolitical side of it. Obviously, decisions tend to be in favor of Europe rather than Russia. Purely from economic prospective, we are giving up a lot of outlay. For the construction of the Belene project for example we need to invest an amount equal to our total government expenditure for one year. This is an investment that no one else can make but the public sector, so now we will save costs. Bourgas-Alexandroupolis oil pipeline and South Stream are projects that will not load so much the budget, but there is still the question to what extend do we need them and do we have the money and the will to implement them.

What are your alternatives to reduce the deficit?

Immediate cut of the costs of each ministry and government department as well as the waiver of certain state functions and government programs that are clearly ineffective. That would be a precedent, because Bulgaria has not waived any of its programs so far. Such inefficient projects have been restructured, reformed, renamed, but no Bulgarian government has ever renounced any of its programs. Only new programs are opened, and no old ones are closed. Either way EU funds are crucial for rehabilitation and development of the Bulgarian economy, and if there is a market niche, the entrepreneurs will wait for EU funds to offer them programs and will develop themselves the opened opportunity.

The eurozone currently passes through a difficult period. When and under what conditions you think Bulgaria will be ready to adopt the single European currency? How will this help us?

Lev is directly tied to the euro-currency at the moment so any shock that the eurozone lives through will inevitably impact on us. The difference that any currency outside the pact has its hidden risks. They may be both political, and monetary. Whenever we have problems with the budget there is always someone to say that the currency board is threatened and may fall. This scares the people and gives a bad signal to the international markets. The only way to end such speculation is by entering into the eurozone, because besides the financial one there is also a political risk. The board is a decision of the state and there lies also a political risk. The state may say one day that if we keep the international currency board we would have to reduce pensions (for example) in order not to reduce pensions we will waive the board and start to print money. So the entry into the eurozone will solve the problem with these fears.

Tags: EconomyMarketsPolitics
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