The new budget for state investment
Institute for Market Economics, Bulgaria
The state’s investment budget: thus, could the National Recovery and Resilience Plan be simply described, through which the country will receive EUR 6.3 billion in the next few years. Of course, the national budget has a bigger weight and would continue to be the basis of public policy but a few peculiarities of the new plan deserve attention. Traditionally, the state budget has enormous inertia and little space for new ideas, policies and investments. The expenses on the consolidated fiscal program for 2021 are approximately BGN 55 billion, of which only BGN 3.8 billion are capital ones. Half of the investments are financed with European funds so they depend on the phases of execution of the operational programs, rather than the classic budget process.
The country’s dependence on European funding for public investments is nothing new. Traditionally, around half of the capital program of the treasury is financed with European funds. This dependence is particularly strong at the local level as big municipal project are almost entirely intertwined with operational programs. This will remain true during the new program period, which, similar to the Recovery and Resilience Plan, has difficulty avoiding the endless cycle of preparing, contracting and redoing. The buildup of funds from the Recovery Plan on these operational programs however, sets a different scene for the next few years.
If we were to observe the government’s midterm frame for the period 2022-2024 the expected annual capital expenses are in the range between BGN 8 and 12 billion. A sizeable proportion of the investments will go to various projects included in the Recovery Plan. Generally, especially given the way of its creation in Bulgaria, this plan is a midterm program for investment, which otherwise would have never happened. The other new moment is that investments go together with reforms. The plan should not be seen as simply a scheme for spending money but as a midterm program for reforms, backed up by a solid investment resource. The commitment for specific changes in policy is a term for receiving the money – as opposed to operational programs, for which it is sufficient to follow the law so that the funds from the European budget are transferred, this time there will be progress tracking on a number of structural reforms at least twice a year.
The funds from the plan will empower several ministries – the government’s tools for playing a larger role in the economy. The Ministry of Economy and Industry will have the opportunity to develop the industrial parks – according to the new law and with money from the plan. The Ministry of Innovation and Growth will fulfill the program of economic transformation which is one of the biggest in the plan. Both ministries are practically dependent on the plan and on the operational programs so that they have a role in the economy of the country.
From a macro perspective the big issue of the plan is not only its lengthy planning and rewriting but a potential slow start. Many of the projects will only just be entering the stage of preparation so the actual investments will be postponed. The macro model predicts that a large size of the funds will be assimilated by the end of 2024 while the effect on the economy will be primarily during 2023-2025. This, however, is just the intention and is debatable whether it will be employed in practice. The concern about the realism of the desired pace of progress is backed by the Ministry of Finance’s Spring forecast, which predicts a considerably diminished level of growth and no notable effect from the plan not just for 2022 but for the 2-3 following years as well. Key for the macro effect most likely will be the program for economic transformation and support for the development of industrial areas, as the two are most directly interlinked with the added benefit for the economy.
*This document is funded by Active Citizens Fund Bulgaria through the Financial Mechanism of the European Economic Area and Norwegian Financial Mechanism. All its contents are the sole responsibility of Institute for Market Economics and do not represent in any way the views of the Financial Mechanism of the European Economic Area and Norwegian Financial Mechanism and Active Citizens Fund Bulgaria. (www.activecitizensfund.bg)