Банкеръ Weekly

Briefs

2005 BUDGET IS A GOOD CONTINUATION OF TRADITION

Dimiter Kostov, Chairman of ACB Management Board and Executive Director of Allianz-Bulgaria Bank, former finance ministerMr. Kostov, as the author of several budgets how would you comment the Government's financial calculations for 2005?- The long-term horizon for comparing budgets is difficult and suggests quite an extensive analysis. But if we consider the last six or seven years since Bulgaria has been in a currency board and has clear perspectives for joining the European Union (EU), it could be said that the 2005 budget is a good continuation of the tradition. Does that mean there is nothing revolutionary in the Cabinet's draft budget for next year?- It is dangerous to undertake revolutionary steps in the sphere of budgeting. The budget itself reflects long-term processes in the economy. Although each annual budget is something individual and independent. There is a problem if it is not synchronized with the entire cycle in which an economy lives. All in all the 2005 budget is in compliance with the state of the economy and the perspectives for its development. Its most valuable quality is that it is well-balanced. And this is a must for achieving macroeconomic growth. Are the projects for a 5-5.5% growth in 2005 realistic? And is that growth sufficient in order to render Bulgaria's economy competitive?- Yes, I believe the parameters in the macro frame of the budget allow to achieve such levels of economic growth.Bulgarian economy, however, needs most of all stable development. Higher growth could be sought, but it would be at the expense of stability. The stability of the process is very important for the business. If higher growth is followed by a steep decline, that would certainly not be the healthiest thing for the economy. The problem has its external dimensions, i.e. everything connected with the balance of payment, the current account stability, and the inflows for refinancing it. It also has internal dimensions, such as stability of financial flows to the budget and money supply. Social stability should not be ignored either. It should be guaranteed by the budget. Could it be claimed that the budget reflects sufficiently the problems which the country faces with regard to the current account of the balance of payment?- The 0.5 % deficit is a reflection of the development of the current account of the payment balance. It is true the economy cannot be restructured without certain periods when the current account deficit is higher. But is is also true that the deficit should be managed somehow. And its should be in compliance with the development of economic potential, i.e. investment activity, as much as possible. In that sense, by the balanced budget the Government tries to create conditions for reducing the huge current account deficit without impeding the growth of investments. Is there a new attitude in the way of budgeting in recent years? - Of course, there are things in the concreteness of the budget which have undergone a development. For instance, the way of drafting it, its realization, and achievement of a synchrony between the various levels of individual budgets, fiscal decentralization included. Problems arise from the fact that some steps have not been made decisively enough. That makes me think that restructuring in the budget sphere has been again postponed for the future. That becomes evident from the discrepancy between the demands of budget organizations at the stage of drafting the budget and the possibilities, allowed by the budget framework. This is quite a serious problem. It has been existing for five or six years and should not be ignored by politicians. What financiers from the Cabinet are doing at present shows it has not escaped from their attention. Isn't that in fact well-known bargaining, i.e. ministers want more money and the finance minister gives less?- It is neither bargaining between individual ministries and the Finance Ministry, nor budget voracity. The possibilities of the State should be taken into consideration as well as what is assigned to budget institutions, either through legislative solutions, or through public expectations. If they go apart, it is obvious there is a problem. And discrepancies will exist till the budget sphere is entirely restructured, which, however, could not be done quickly and at once. Speaking the truth, some reasonable steps have been already made, directed to rationalizing the entire process of managing budget interrelations. Could you specify?- A medium-term budget forecast is already presented and this is a positive development. Moreover, an attempt has been made to draft the budget with an attitude oriented towards the results. That transformation in the way of budgeting deserves further attention, because it is how the way of spending the money becomes clearer. What is important is not spend more money by creating more public services, but to achieve the maximum possible compliance between spent money and achieved result.Were budgets drafted that way when you were in charge of them?- As a matter of fact, they weren't. That practice became popular in some countries around the world in the middle of the 90s. The reason was exactly the idea that there should be a balance between results and expenses. This entire budgeting transition goes through different stages. First, based on the determination of expenses, and second, on the amount of services. Budgeting on the basis of results was only adopted in the end of the 90s. Some countries had success, others failed. Therefore, by accepting the budgeting trends Bulgaria should not repeat other countries' mistakes.Is there tension in the calculations of the revenues and expenses that the Treasury is going to make next year? Some experts claim that the Government's accounts contain sufficient reserves and a budget surplus for the next year can be predicted even now.- The great tension results from the need to attain the planned level of expenditures the budget systems can meet their requirements within these expenses.Another challenge is the current accumulation of defaults in some budget units. Municipalities are most frequently subject to comments in that aspect. However, there are also large debts accumulated by the healthcare sector that accompany the restructuring of the system. The liabilities of the social insurance have become chronic, too. In fact, it is hard to make a clear assessment of the different items. In the past few years the draft budget was presented without a detailed analysis of the current implementation. I think that this is one of the reasons for the overfulfilment of the budget revenues. According to the information that we have, the level of revenues is realistic. And there are not so many hidden reserves. But the potential for overfulfilment within the above mentioned revenue items is compensated by quite ambitious goals in others.Are unpredicted circumstances the only possible reason for failure of the 2005 budget?- The budget itself pays special attention to all risks that could appear in the meantime. There are sufficient reserves that can compensate possible risky events. That is the well known practice of not giving the departments part of their budget resources until it becomes clear that the planned revenues will not be collected. Seven per cent of the subsidy to departments will be kept in 2005 according to that principle. Of course, it would be much better if the mid-term Government's programme could be implemented. Politicians and trade-unions, as well as representatives of the business criticize the budget for the State's redistribution role. According to most financiers outside the ruling majority, the Government uses the budget to enforce its interference in the economy. Are there reasons for that criticism?- Part of it is due to quite a gratuitous interpretation of the situation. I do not agree that the State increases its redistribution role. One growing illusion is that the budget also takes into account the turnovers between budget organisations. The brightest example are the social insurance payments of those employed in the budget sphere - these funds amount to 1.3% of the GDP. But these are turnovers, i. e. these social insurance payments are first made from the taxes collected. Then they turn into a revenue into the relatively independent budget of the social insurance. In fact, the pensions of state officials remain the only final expense. That is a kind of a repeated counting which is inadequately presented as a redistribution function of the State.The Government complains that the chances for manouvring within the different items are too limited. The main reason is that the expenses for pensions, social assistance, etc. are too high. Is there a way to evade these expenses of the Treasury?- With the scale of the economy that we have achieved, the problems with redistribution of the revenues cannot be ignored. This is also valid for the problems that relate to the poverty and the support to the poorest layers of the population. But it happens all over the world.The budget has two main functions. One of them is social - it is directed towards the poor social strata. The other is related to the launching of public services. Whether or not they are efficient is another question. As to the public services, if we want to become part of the EU we should invest in their growth, too. That cannot be done without money.

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