A truly heated controversy sparked the article mine from Tuesday comparing the chosen approach to budget problems today with the one that Plamen Oresharski chose 16 years ago when he was finance minister and Bulgaria entered the recession that followed the global financial crisis. The bulk of the criticism contains two claims. The fiscal situation is not that serious and a tax on the excess profits in the banking sector is really needed to punish the banks for their greed - they make a lot of money, keep high interest rates on business loans, charge no interest on deposits, thus not paying depositors and all above, they continue to raise their fees, even though the advancement of technology suggests the opposite.
This is what Stefan Antonov commented on "Voices".
The first part of my argument is related to the fiscal situation and the state of the economy. As a reaction to the 2009 recession and its aftermath, the GERB government took out loans to finance the deficits. In terms of GDP, they were respectively 2% in 2010. and 1.3% in 2011.
Given that the economy is growing at a decent pace compared to other European countries, both in 2022 and 2023, and in this year as well, Bulgaria realizes budget deficits close to three percent of the gross domestic product. For this year, it is not yet known whether it will be limited below the three percent limit, and for next year it is almost certain that it will be exceeded several times.
Although, in theory, the state thus contributes to the overheating of the economy and competes with the private sector in terms of remuneration offered, in 2022, in the presence of economic growth, but again with a deficit, newly drawn loans are equal to 4% of GDP. Last year (again with decent growth) they were 2.4% of GDP for the year, and this year new loans are already 5% of GDP (again with decent growth).
Depending on which date we choose for the beginning of the crisis, we can also see with what ultimate buffer in the face of the fiscal reserve, it is met. As of September 30, 2008, two weeks after the bankruptcy of “Lehman Brothers” the fiscal reserve is BGN 11.9 billion, which is almost 20% of GDP. As of December 31, when the real economy is already shrinking, our reserve is BGN 8.3 billion, or 13% of GDP. In their main part, these are funds that the state can freely dispose of.
Today, we are getting ready for a European-wide year of trial, and for Bulgaria in particular, due to the looming huge gap between income and expenditure – up to 9% of GDP. The fiscal reserve as of October 31 is BGN 11.9 billion, or as much as in September 2008. But since then the economy has tripled in size and the reserve is now just 6% of gross domestic product. Half of it is funds that either the law does not allow to be used, or fiscal prudence requires, even if they are used, to be recovered within a month.
There is a clear pattern of new borrowings varying between 2.5% and 5% of GDP each year, and the tendency is for them to grow by even greater absolute and relative values. Our ultimate buffer – the fiscal reserve is three times smaller in relation to GDP, and half of it should be used only for purposes that have nothing to do with anti-crisis measures. Under these realities, to claim that the situation is not alarming is pure manipulation and burying the head in the sand. It's wishful thinking and diplomacy, but let's also take reality into account.
In February, even the World Bank published a report according to which, if the current demographic trends are maintained and no reforms are undertaken in public finances, Bulgaria will triple its indebtedness by 2045 and pass the debt-to-GDP threshold of 60 percent. By 2050, indebtedness will be almost 80 percent of GDP, whereas at the beginning of this year it was only 21% and we are the second least indebted country in the European Union.
The low debt-to-GDP ratio is due to all governments from 1997 to 2021, as well as high inflation and nominal GDP growth in 2022, but this cannot continue indefinitely. And when in one year you have to borrow twice as much as in the previous year, and the markets see that for three years you have already borrowed several percent of your gross product, it is very likely that the capital markets will punish you with huge interest rates. So huge that knocking on the door of the IMF seems reasonable.
The overtaxation of bank excess profits
In a normal country, the bank meets two requirements – to be stable so that depositors' savings are secure, and to be profitable so that it makes sense for shareholders to create it. For the first, the central bank establishes the criteria, supervises them, and when necessary helps them with refinancing operations. If it can't, then they go bankrupt.
Because of the systemic collapse of 1996, under currency board conditions our central bank no longer helps banks if it sees them in difficulty, but only enforces stability standards and supervises them. Thus, Bulgarian banks meet one more requirement. To be secure, to earn and in the event of a shock to be resilient, even without help from the central bank.
Because the Eurozone has been in the state of Bulgaria since the mid-1990s, some of the European banking groups use their branches here as cash cows and withdraw up to two-thirds of their profits as dividends. The withdrawn dividend (as a ratio, not as an amount) exceeds many times that which the same parent banks pay out to their ultimate owners and illustrates the desire to withdraw money from Bulgaria to strengthen capital positions abroad. And in practice it shows another requirement for the native financial institutions. Every Bulgarian bank, if it wants to survive, in addition to the other requirements, needs to earn so that even the dividends to the mother do not interfere with its capitalization here.
To all these requirements from the banks is also added that they manage to maintain lending, so that the economy does not freeze completely. Banks are the transmission that turns savings into investment. We don't have a capital market, so banks are the only transmission mechanism – savings – deposits – investment loans. In order to increase lending, banks must have higher capital. In the last seven years, investments relative to GDP have been at the level of 1997-2001 between 15 and 20%. With this hunger for investment, for anyone to suggest that banks risk their status as a transmission in the economy to inject an amount of money that is insignificant to the looming problem, but enough to compromise their capitalization efforts, shows a misalignment of priorities.
How exactly can banks meet the requirement of being fundamentally sound, sound, self-sustaining, sound also because of their mothers who grind them for dividends, and maintain lending, and keep their heads “above water&rdquo ;. Interests provide income with which to provide for the credit risk for the entire service cycle of a loan. Fees are cash from yesterday to today. Naturally, banks will need both. And profits are taxed anyway.
Banks can easily start charging interest on deposits. But this means raising interest rates on loans. Including those already allocated. Are the people who see only the low interest rates on deposits sure that if our banks start giving them interest, and raise those on loans, that bad loans will not increase and ultimately affect the security of their own deposits?
On the madness and fear of doing the right thing
Running away from the right decisions and reaching for those that haven't sunk in yet becomes standard practice. Similar to the law to tax excess profits in the banking sector at home, the Labor government in the UK has decided to introduce an inheritance tax on farms and agricultural land. Any farm worth more than a million pounds will now be transferred between generations in return for tax. For reference, even in northern England, where prices are the lowest, houses with 30 acres of attached land are worth that much. There is a clear pattern of new borrowings varying between 2.5% and 5% of GDP each year, and the trend is for them to grow by even greater absolute and relative values.
The attack on the classes who would bear, however painfully, the new taxation reflects slavery to the taboo of not raising taxes. Apparently, it is a very powerful brake, since even the Labor Party, which in its first year in power and after a landslide victory against the Conservatives, does not dare to look at more significant measures.
The growing populism of recent decades has shifted towards pitting some strata against others. It targets those who have money regardless of what the fiscal difficulties are, what the crisis is – of demand or supply, is it structural or temporary? It shows a reluctance to face reality. Tax changes are becoming chaotic, not based on a new philosophy, but contrary to the imposed one. It is even worse when the measures do not have the necessary scale to solve the problems. Then the difficulties remain and the disbelief grows.