Identifier
Created
Classification
Origin
08SOFIA1411
2008-01-04 05:29:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Sofia
Cable title:  

2008 BUDGET CONTINUES CONSERVATIVE FISCAL POLICY

Tags:  EFIN ECON ENRG PGOV SOCI BU 
pdf how-to read a cable
VZCZCXRO4438
PP RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHSF #1411/01 0040529
ZNR UUUUU ZZH
P 040529Z JAN 08
FM AMEMBASSY SOFIA
TO RUEHC/SECSTATE WASHDC PRIORITY 4631
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHDC
UNCLAS SECTION 01 OF 02 SOFIA 001411 

SIPDIS

DEPT FOR EUR/NCE MTURNER

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EFIN ECON ENRG PGOV SOCI BU
SUBJECT: 2008 BUDGET CONTINUES CONSERVATIVE FISCAL POLICY

REFS: A) 07 Sofia 962 B) 07 Sofia 1262

UNCLAS SECTION 01 OF 02 SOFIA 001411

SIPDIS

DEPT FOR EUR/NCE MTURNER

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EFIN ECON ENRG PGOV SOCI BU
SUBJECT: 2008 BUDGET CONTINUES CONSERVATIVE FISCAL POLICY

REFS: A) 07 Sofia 962 B) 07 Sofia 1262


1. (U) Summary: Bulgaria's 2008 state budget continues the
Socialist-led ruling coalition's tradition of conservative fiscal
planning. Targeting realistic revenues and expenditures and GDP
growth of six percent, the budget envisions a three percent surplus
and introduces a 10 percent flat tax on income, bringing personal
income and corporate taxes into alignment. Defense spending will
drop to 2.1 percent of GDP (from 2007's 2.55),while the healthcare
and education sectors will receive moderate increases. Center-right
opposition parties criticized the projected surplus as excessive,
while the IMF commended the GOB for its continued fiscal discipline
and stressed the need to keep a watchful eye on the growing current
account deficit (which reached 20 percent of GDP in 2007) and
inflation (which averaged just over 7 percent in 2007). End Summary.



2. (U) The Bulgarian parliament passed the 2008 State Budget Act
on December 20. The budget envisions BGN 27.2 billion (USD 19.4
billion) in revenues, or 44.1 percent of projected 2008 GDP.
Planned tax revenues are in the amount of BGN 22.1 billion (15.8
billion USD),up 21 percent from last year, mainly due to projected
improved collection of VAT and excise taxes. Expenditures total BGN
25.4 billion (18.1 billion USD),or 41.1 percent of projected 2008
GDP, including Bulgaria's BGN 660 million (471 million USD)
contribution to the EU budget. To rein in expenditures, the
government plans to reduce the number of state employees by 12
percent in 2008 (NB: a dramatic drop that will be a real test). As
a result of expected higher revenues over expenditures, a surplus of
BGN 1.8 billion (1.3 billion USD),or 3 percent of GDP, will be
pursued - a fifth consecutive annual budget surplus. In 2008
government agencies will be able to spend their entire budgets. In
previous years, ministries were allowed to spend the last 10 percent
of their allocations only if the current account deficit stayed
under a certain level.

INCOME TAX RATE NOW A FLAT TEN PERCENT



3. (U) The 2008 budget implements the decision made by the ruling
coalition in summer 2007 to replace the four-bracket progressive
income tax with a 10 percent flat rate (Ref A),bringing personal
income and corporate taxes into alignment. The Finance Ministry
believes the new flat income tax will reduce the number of
Bulgarians working in the grey economy, increase household income,
and, eventually, contribute to an increase in tax revenues.
INCREASES IN EDUCATION, HEALTHCARE AND PENSION SPENDING

4. (U) When presenting the budget draft to parliament, Finance
Minister Plamen Oresharski announced that structural reforms in
education and healthcare sectors will dominate the ruling
coalition's economic agenda in 2008. The new budget allocates BGN
2.6 billion (1.85 billion USD) for education, a 22 percent increase
from last year. In October, the socialist-led cabinet of PM Sergei
Stanishev agreed to increase teacher salaries, following a teacher
strike that closed schools for a month (Ref B). The healthcare
sector -- also plagued by strikes in 2007 -- will receive a 16
percent increase. Both the ruling coalition and the opposition
agree that the education and healthcare sectors need to be
restructured to allow for more private-sector involvement and higher
quality services.


5. (U) The government will spend a total of BGN 8.3 billion (6
billion USD) on social policies and subsidized labor programs in

2008. Following two hikes in pensions last year, the new average
monthly pension will be BGN 184 (131 USD) with another increase
planned for July 2008.

DEFENCE SPENDING FALLS; BARELY WITHIN NATO GUIDELINES


6. (SBU) The Defense Ministry's budget will increase by 11 percent
in absolute terms to BGN 1.1 billion (790 million USD) in 2008.
This represents approximately 2.1 percent of GDP, a decline from
2.55 percent in 2007. While these cuts will not put Bulgaria below
the NATO-required minimum of two percent of GDP, any further cuts
could jeopardize Bulgaria's ongoing military modernization process
and MOD support for deployments, since personnel costs for missions
such as Iraq and Afghanistan must be paid directly out of MOD
coffers. The MOD battled fruitlessly against the reduced budget.
The Embassy pushed for retention of a greater percentage, but the
Prime Minister's office noted that with a growing economy the
Defense Ministry would still have 300-400 million leva more in 2008
than in 2007. The key, according to the PM's office, is sensible
MOD restructuring.

COALITION DECIDES NOT TO PUSH TAX BREAKS FOR CASINOS

7. (SBU) The ruling three-party coalition discarded originally
proposed tax breaks on gambling establishments after leading think
tanks and commentators -- spurred to action by public comments made
by the Ambassador -- asserted that these breaks were designed to

SOFIA 00001411 002 OF 002


benefit a handful of individuals with shady ties. Pursuant to this
decision, the gambling tax will remain at 10 percent for casinos and
12 percent for all other games of chance.

OPPOSITION CRITICIZES, IMF LAUDS

8. (SBU) Opposition leaders criticized the budget for its overly
conservative approach. Martin Dimitrov, an MP from the opposition
center-right UDF party and a Deputy Chair of the Budget and Finance
Committee, argued that authorities were holding back economic growth
by targeting a budget surplus as large as three percent of GDP. The
leader of the center-right Democrats for Strong Bulgaria (DSB) Ivan
Kostov noted that predictions on budget revenues should have been
less conservative, and more support should have been given to
employees in the healthcare and education sectors. The opposition
also criticized as opaque and nontransparent the government's
decision to set aside BGN 1.2 billion (860 million USD) as a state
guarantee for the new nuclear power plant at Belene (north-central
Bulgaria),which will be built by the Gazprom-led company
Atomstroyexport.


9. (U) Commenting on the budget, the Board of Directors of the IMF
praised the GOB for its continued prudent budget policies that have
allowed it to accumulate a fiscal reserve of 9 billion leva (6.7
billion USD). At the same time, the Fund urged the GOB to continue
fiscal discipline, maintain control of income growth, and spur
structural reforms in order to maintain economic stability. The
IMF's main concern is the high current account deficit which reached
20 percent of GDP in 2007.


10. (SBU) Comment: Apart from the introduction of the flat income
tax, the 2008 budget does not depart dramatically from any of its
recent predecessors. The government commendably continued fiscal
restraint in the face of rising inflation and mounting pressure for
wage increases, especially in the healthcare and education sectors.
The ruling coalition now has a very limited window to introduce
meaningful structural reforms in these and other public sectors to
avoid strikes and political marksmanship similar to -- or worse
than -- that seen in 2007. The government will require considerable
political will to implement these needed, but in many cases
unpopular, structural reforms. With 2009 parliamentary elections
looming, 2008 will be a defining year for economic growth and budget
discipline. End Comment.
KARAGIANNIS