Advantages and Disadvantages of Fiscal Discipline in Bulgaria in Times of Crisis

The global economic crisis of 2008 has posed serious challenges to the Bulgarian economy and was reflected in worsened macroeconomic indicators. The subsequent sovereign debt crisis in Europe further aggravated the situation and blocked its path to recovery. In line with the overall sentiment in the European Union (the EU), Bulgaria made maintaining fiscal stability a priority that it set out to accomplish by following a policy of austerity. The country managed to achieve the desired effect relatively quickly. It became one of the best performers in terms of budget deficit and government debt as a share of GDP (which are among the lowest in the EU). These accomplishments underlie international institutions’ greater confidence in Bulgaria, which has led to an increase in its credit rating. Nevertheless, the state has not managed to reap the maximum benefits that this type of policy offers. Fiscal sustainability was accomplished at the expense of economic growth, the slow pace of which was accompanied by impoverishment of the population, high unemployment, restricted consumption, and operational difficulties faced by real-sector companies. These problems fueled doubts about the adequacy of strict budget discipline, especially in times of crisis. They provoked the author to examine in greater depth the benefits and the drawbacks that such a policy ultimately offers to Bulgaria. The results show that the strict fiscal measures have put additional pressure on the already fragile economic growth and have a high social cost as well. All this justifies the need for the government to take on a new course to achieve economic recovery by means of more active state support that would stimulate a pickup in consumption and production activity.

economic development in the current situation in Bulgaria.

Background to the Problem
The global economic turmoil of 2008 inflicted severe damage on economic development in the EU. The significant decline in production and investment activity, as well as the mounting unemployment, gave rise to the need for more government support. Many Member States have turned away from the principles of neoliberalism and shifted towards active government intervention to cope with economic difficulties. According to Razin (2012), the initial response of strong Eurozone members was to treat the disorder as a liquidity problem occasioned by the shock of the American financial crisis. The expansionary fiscal policy, however,

The Road to Strict Fiscal Discipline
The recession of 2009 put a heavy burden on Bulgaria's budget balance. The surplus, which was 1.7% of GDP in 2008, turned into a deficit of as much as 4.3% of GDP. This deterioration was caused mainly by the dynamics of budget revenue, which fell by 8.7%.
Total proceeds from taxes and social contributions contracted by 11.1%, with VAT receipts shrinking the most (by 18.3%). The unfavorable international market environment, the dire straits of Bulgarian companies, the decreasing purchasing power of the population, and restricted consumption have resulted in a drastic downturn in import volume, which in turn, triggered a fall in VAT revenue. The recession in Bulgaria was the reason behind the deterioration in the financial state of enterprises operating in the country, which is also obvious in the drop in the money collected from taxes on the income or profits of corporations in 2009 (by 20.7%) that continued at the same pace in the next year as well (20.5%). In addition to shrinking revenue, public expenditure also slowed down considerably (to 6.4%) compared with the prior two years (it grew by 32.5% in 2007 and 12.8% in 2008).
In 2009 the level of Bulgaria's budget deficit as a percentage of GDP seemed relatively good compared with the other EU countries (in some of them it reached double-digit values). Nevertheless, the pace of its deterioration (by 6.0 percentage points), which was faster than in Greece (by 5.8 percentage points -from -9.8% to -15.6% of GDP), was a cause for worry. This situation certainly called for preventive measures against further widening of the negative budget balance of the country and justified the adoption of a fiscal consolidation policy. It was what made it possible for Bulgaria to contain expansion of the deficit and even slash it to -0.8% in 2012. This progress stemmed mainly from the improvement in budget revenue and the more moderate rise in expenditure over the last two years.
In 2010, the actions of the Bulgarian government were fully in line with the aim of achieving fiscal stability that resulted in a contraction of budget expenditure by 6.8% compared with the crisis year of 2009. These steps were in sharp contrast to the general trend in the EU where public expenses increased by 3.6%.
The majority of the Member States followed this trend, and only five countries (besides Bulgaria) curbed their government spending in 2010: Greece (-8.3%), Estonia (-6.9%), Latvia (-3.3%), Lithuania (-2.1%), and Italy (-0.8%). In the EU as a whole, all elements of budget expenditure registered growth, which was most pronounced in the field of social protection and economic affairs. Thus, both the private sector and European citizens received support. Bulgaria, unlike the EU, slashed a large part of its budget expenditure, especially spending on general public services (by EUR 1,316.4 million or 50.6%), education (by EUR 140 million or 9.3%), environmental protection (EUR 139.5 million or 35.4%), housing and community amenities (EUR 114.3 million or 23.9%), and public order and safety (EUR 90 million or 8.6%). As observed in Chart 2, after 2009 budget expenses (as a share of GDP) contracted much more sharply and significantly in Bulgaria than in the EU.
The state's involvement in the economy has declined gradually, payments to businesses have been delayed, the actions taken to address escalating unemployment have been insufficient, and a number of structural reforms were postponed.
These factors have had a detrimental impact on Bulgarian economic growth and raised the question whether austerity measures are the right option for the country and whether they might be too much for the economy to endure, putting an additional burden on economic development. It was these concerns that provoked the author to outline the positive and negative aspects of fiscal consolidation in Bulgaria to assess its ultimate effects on the economy.

Positive Aspects of Fiscal Discipline
While Bulgaria has not managed to reap the maximum benefits from strict fiscal discipline, its positive sides

Negative Aspects of Fiscal Discipline
Fiscal consolidation is a good decision when the stability of public finances brings sustainable economic growth and a more predictable economic environment. The desire to follow such a policy is justified until the moment it becomes overemphasized and turns into an end in itself, thus leading to a situation in which fiscal stability is achieved at the expense of eco- to EU funds. The state might provide support by giving funds, at least, to the municipalities whose projects have been approved. Furthermore, ways to support private companies should also be sought because finding the funds required for project implementation is the last serious obstacle to absorption that businesses usually face. In this regard, the government might consider securing the necessary financial resources by a bond issuance through a special state fund and thus transfer liquidity to the real sector.
In addition to limited demand, consumption, and investment, Bulgarian companies suffer also from the lack of timely repayment of the government's obliga- the EC adopted a directive that provides certain reliefs for SMEs. Public authorities are obliged to pay for the goods and services that they procure from such com- issuing bonds and using the raised funds to pay back state debts to business. Thus, Bulgaria will be able to benefit from the low interest rates its government securities have registered in the last few years as well as from the strong domestic demand, especially from the banking sector, which stands out with its high stability.
The repayment of obligations to private companies will allow them to use the money for a timely payment of salaries, which in turn, will contribute to higher consumption. Later, all of these processes will reflect in improvements on the revenue side of the budget as a result of higher proceeds from taxes and social security contributions. The payment of BGN 800 million to Bulgarian farmers was a successful approach to boosting business activity because the money was raised precisely by a bond issuance.

Change of the Budget Restrictions Course
Despite the aforementioned advantages of the fiscal discipline, which Bulgaria has maintained strictly, the disadvantages seem to outweigh the advantages. The Undoubtedly, the government's desire to repay its obligations to business more rapidly and, in time, provide support to Bulgarian residents is in the right direction because these measures will boost consumption. Thus, the reforms will bring about the desired effect of economic growth and will also increase budget revenues from taxes. Furthermore, the concerns that spread in public space that these reforms will hinder the financial and fiscal stability of the country are groundless.
In this regard, a comparison between the fiscal stability and economic growth indicators of Bulgaria and the other Member States from Central and Eastern Europe can very well be used as proof (Table 1). As already mentioned, the country is among the best performers in terms of maintaining low budget deficits and low levels of government debt. The credit rating agencies' evaluations are also positive and, despite the tense political climate in the country, have not been revised down. However, business activity in Bulgaria has developed in a different direction, and in the past year, it did not manage to reach even 1%. In contrast, some of its EU peers from the CEE successfully maintained moderate debt levels and considerably larger economic growth. For example, Standard & Poor's (2013) has giv-en the same credit rating and outlook to Bulgaria and Lithuania. Yet, Bulgaria's sovereign debt and budget deficit are several times smaller, and the government's cost of financing is lower. At the same time, the level of economic activity is considerably higher in Lithuania, with growth rates of 3.7%, which can be considered a success against the backdrop of the uncertainty hovering over the EU economy. The situation in Latvia, Poland, and Slovakia is quite similar. These countries have a significantly larger negative balance and public indebtedness as well as a higher yield on long-term government bonds, yet their growth is considerably faster than that of Bulgaria.
All things considered and given the current levels of its budget deficit and government debt, Bulgaria can afford to update the budget without lingering worries over the health of its finances. Nevertheless, in the future, Bulgaria should also consider the much-delayed reforms in health care and education and take measures to boost employment that will have a long-term

Conclusion
The analysis shows that the controversial character of austerity policy is obvious not only in most EU members, but also in Bulgaria. The country is among the Member States with the lowest budget deficit and public debt and has earned the high trust of international institutions, which can also be observed in the favorable cost of financing of the government -indisputable evidence of fiscal stability. Fiscal stability provides the foundations for creating a predictable economic environment in Bulgaria and is a prerequisite for significant growth. Nevertheless, the country remained plagued by subdued production and consumption activity, anemic demand at home and abroad, disturbingly high unemployment, and impoverishment of the population, all of which are an apparent hindrance to economic development. In the end, it turns out that strict fiscal discipline contributes to deterioration in the economic and social environment, as the implementation of a restrictive policy to maintain a balanced budget in times of crisis caused by limited demand is not the right approach. To overcome these difficulties, the government should focus its efforts on improving the business environment and reducing the administrative burden even at the expense of a moderate and reasonable increase in the public debt and the budget deficit. These are steps that the government can afford without worrying about the stability of the fiscal system.