BNB: Tax cuts instead of increased state expenditure would stimulate BG economy

The increase in government spending will not accelerate the growth of the Bulgarian economy enough to justify a higher budget deficit and further debts, the Bulgarian National Bank stated in its Economic Review study.

According to the arguments of the central bankers, the Bulgarian economy is small and open, thus the additional payments by the government will generate income that will be spent mainly for the purchase of imported goods. As a result, domestic production will not increase and employment and wages will not be stimulated.

The positive effects will be even fewer if the extra money would be used for the current needs of the government and not for investments which increase productivity and Bulgaria's growth potential.

The analysis was prepared by the BNB back in the spring, however it was not published in order not to intervene with the discussion of the budget update.

One of the main reasons for which President Rosen Plevneliev vetoed the update and the drawing of a new debt was exactly that in his opinion, the money would not be used for policies to ensure growth but rather for fulfilling current state obligations.

According to the study of the BNB, a reduction of the tax burden in the long term would be more beneficial for a country like Bulgaria than the increase in state expenditures. This confirms the previous findings of the International Monetary Fund.

However, experts point out that fiscal consolidation can also backfire if it is not accompanied by policies and reforms. The analysis also shows that the state should seek to improve the structural balance. This requires the government to sustain this level of spending.


13.08.2013, Economy