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Viewing cable 08SOFIA1411, 2008 BUDGET CONTINUES CONSERVATIVE FISCAL POLICY

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Reference ID Created Released Classification Origin
08SOFIA1411 2008-01-04 05:29 2011-08-26 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Sofia
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 
 
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