BULGARIA: LEAN 2010 BUDGET AIMED AT ERM-II/ EUROZONE ENTRY

UNCLAS SECTION 01 OF 02 SOFIA 000712

DEPT FOR EUR/NCE TKONDITI
SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EFIN ECON PGOV BU
SUBJECT: BULGARIA: LEAN 2010 BUDGET AIMED AT ERM-II/ EUROZONE ENTRY

REFS: (A) SOFIA 698, (B) SOFIA 694, (C) SOFIA 666

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1. (SBU) SUMMARY: After successfully stabilizing a ballooning
deficit in 2009, the Bulgarian government proposed a conservative
2010 budget in hopes of bolstering its credentials for ERM-II and
eurozone membership. Approved by the Parliament on December 4, the
government's final 2010 budget expects to run a 0.7 percent deficit
based on a two percent drop in GDP, the lowest projected deficit in
the EU. Overall revenues are expected to increase 1.7 percent over
2009 thanks to improved customs/tax enforcement, EU funds, and new
taxes on cigarettes and gambling. Expenditures are set to rise 3.7
percent, but will be recalibrated to reflect national priorities.
Expecting a continued rise in unemployment, the 2010 budget
allocates more spending for social programs. EU funds will be
channeled to large-scale public infrastructure and environmental
projects. State administration and defense are slated for the
largest cuts. Preliminary feedback from the IMF is positive. END
SUMMARY.

New Government Stabilizes Unexpected 2009 Deficit
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2. (SBU) After five straight years of budget surpluses and a
projected surplus in 2009, the previous socialist-led government
publically acknowledged the need to cut back on spending in early
2009 as aftershocks from the global financial crisis began to hit
the Bulgarian economy. In reality, the government increased
spending by over 500 million leva (USD 345 million) in the month of
June alone as a last ditch effort to prevail in the July national
elections. A fed-up and skeptical electorate was ultimately not
convinced, and voted the center-right GERB party into power.
Claiming it inherited an 11 percent deficit, the new government
implemented supplementary measures to stabilize the budget,
including freezing government salaries, downsizing government staff,
suspending public contracts, and introducing customs and tax reforms
to rein in spending and boost revenues. As a result, the government
now expects to finish 2009 with a 0.8 percent deficit, projected to
be lowest in the EU in an October 2009 European Commission report.


2010 Budget Maintains Fiscal Discipline
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3. (SBU) Despite signs pointing to a global economic recovery,
Finance Minister and former World Bank official Simeon Dyankov took
a conservative approach in formulating the government's 2010 budget
proposal. Approved by Parliament with little modification, the 2010
budget projects a 0.7 percent deficit (467 million leva or USD 322
million) based on a two percent drop in GDP. The European
Commission expects Bulgaria to be the only EU country to post a
deficit below three percent of GDP in 2010 (one of the four main
Maastricht criteria). Menda Stoyanova, Chair of the Parliamentary
Budget and Finance Committee, told us the strategic goal of the
budget is to provide financial stability so that Bulgaria can join
ERM-II and the eurozone as soon as possible.


4. (SBU) Compared to its revised 2009 budget, the government expects
to increase revenues 1.7 percent to 26.4 billion leva (USD 18.2
billion) through strengthened customs/tax enforcement, improved
absorption of EU funds, and higher taxes on cigarettes and gambling.
Expenditures will rise 3.7 percent to 26.9 billion leva (USD 18.5
billion). If the economy performs below official expectations in
2010, the budget legislation allows the Council of Ministers to
further restrict national and municipal administrative costs.


5. (SBU) The budget passed parliament with the support of GERB's
informal coalition partners, the Blue Coalition and Ataka. The main
opposition parties, BSP and MRF, voted against the budget on the
grounds that it was too conservative. They specifically argued that
the government had underestimated economic growth in 2010 to the
detriment of spending on social programs. They also criticized the
government's budget for lowering revenues and expenditures compared
to the former government's original 2009 budget.

Priorities: Social Programs, the Environment, and Infrastructure
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6. (SBU) Anticipating a rise in the unemployment rate to 11.5
percent, the government has budgeted a 7.8 percent increase in
spending on social programs. That said, funding for some employment
programs has been cut by 13.8 percent and pension payments will only
increase if a surplus materializes in the second half of 2010. Also
considered priorities, education and health care spending will see
nominal increases and remain constant as a measure of GDP. If EU
structural funds are successfully absorbed, spending on
environmental protection will jump 20 percent to 990 million leva
(USD 680 million). EU assistance will also be used to increase
spending on major infrastructure projects such as three
international highways (Ref A).

Losers Include State Administration and Defense
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7. (SBU) Continuing the revised 2009 budget's strategy, the
Bulgarian government plans to further downsize administration costs,
especially for government staff. The defense ministry will be
particularly hard hit with an expected 10.3 percent cut compared to
the revised 2009 budget. In other terms, Bulgaria's 2010 defense
spending will drop to 1.4 percent of GDP, well below the NATO target
of two percent.

COMMENT
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8. (SBU) The IMF's local representative privately assessed revenue
and spending expectations as reasonable, and in line with next
year's growth projections. The IMF plans to release an official
analysis of Bulgaria's budget before the end of the year. This
budget, bordering on austere, shows that the new government is
serious about putting Bulgaria's fiscal house in order and focusing
on what it calls its number one foreign policy priority, early
acceptance to ERM-II and the eurozone.