Bulgaria

   

Economic Policies

#30
Key Findings
Despite some considerable gains, Bulgaria receives comparatively low scores in international comparison (rank 30) with respect to economic policies. Its score on this measure has risen by 0.9 points relative to 2014.

The country’s economy is on a visible upswing, with economic growth accelerating and unemployment rates falling. Employment levels have reached a 20-year high. Macroeconomic imbalances persist, but reflect the stresses of catching up with the more highly developed EU. Attracting foreign investment remains difficult.

Labor-market reforms increasing hiring flexibility in the agricultural sector and providing training for un- and underemployed may be bearing fruit. Secondary-level education reforms aimed at addressing a long-term skills mismatch have been announced.

The tax system is heavily VAT-dependent. Rising income from direct and indirect taxes have enabled balanced budgets for several years. The shadow economy and corresponding degree of tax evasion are shrinking, but remain large. Debt levels are low by EU standards and declining. R&D spending is minimal, with recent increases proving short-lived.

Economy

#31

How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?

10
 9

Economic policy fully succeeds in providing a coherent set-up of different institutional spheres and regimes, thus stabilizing the economic environment. It largely contributes to the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 8
 7
 6


Economic policy largely provides a reliable economic environment and supports the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 5
 4
 3


Economic policy somewhat contributes to providing a reliable economic environment and helps to a certain degree in fostering a country’s competitive capabilities and attractiveness as an economic location.
 2
 1

Economic policy mainly acts in discretionary ways essentially destabilizing the economic environment. There is little coordination in the set-up of economic policy institutions. Economic policy generally fails in fostering a country’s competitive capabilities and attractiveness as an economic location.
Economic Policy
6
Macroeconomically, the performance of the Bulgarian economy is visibly improving, with economic growth increasing and unemployment falling consistently over the last three years. The monetary regime (which is a currency board arrangement) and the government’s fiscal program have both performed reasonably. Despite these favorable developments, the European Commission continues to consider Bulgaria as featuring excessive macroeconomic imbalances. This contrast can be attributed to the fact that Bulgaria is a relatively poor economy integrating and catching up to a highly developed common market such as the European Union. While this process is bound to generate temporary or even persistent imbalances, this does not necessarily mean that the process is unsustainable.

Microeconomically, the business environment in Bulgaria continues to lag behind the business environment in neighboring countries and the economy attracts very little foreign investment with a tendency for Bulgarians to export capital abroad. This can be attributed to high administrative burdens, a legal system that often fails to protect property rights and enforce contracts, and significant skills mismatches in the labor market. With the exception of education, no significant structural reforms were launched in 2017.

Citations:
European Commission (2018): Country Report Bulgaria 2018 including an In-Depth Review on the prevention and correction of macroeconomic imbalances. SWD(2018) 201 final, Brussels (https://ec.europa.eu/info/sites/info/files/2018-european-semester-country-report-bulgaria-en.pdf).

Labor Markets

#34

How effectively does labor market policy address unemployment?

10
 9

Successful strategies ensure unemployment is not a serious threat.
 8
 7
 6


Labor market policies have been more or less successful.
 5
 4
 3


Strategies against unemployment have shown little or no significant success.
 2
 1

Labor market policies have been unsuccessful and rather effected a rise in unemployment.
Labor Market Policy
5
In 2017, the level of employment reached a 20-year high. Unemployment has fallen significantly since 2013. The labor-market reforms of 2015, creating more flexible hiring in the agricultural sector and starting a program for free language and computer literacy courses for the unemployed and underemployed, may be bearing fruit. While the serious long-term problem of a skills mismatch continues, some reforms to secondary education claiming to address this problem have been announced. Among the employed, many occupy jobs which are below their level of education and skill. The employer organizations have demanded revisions of social security thresholds and a regional differentiation of the minimum wage, but these proposals have not been taken up by the government.

Citations:
European Commission (2018): Country Report Bulgaria 2018 including an In-Depth Review on the prevention and correction of macroeconomic imbalances. SWD(2018) 201 final, Brussels, 30-34 (https://ec.europa.eu/info/sites/info/files/2018-european-semester-country-report-bulgaria-en.pdf).

Taxes

#23

To what extent does taxation policy realize goals of equity, competitiveness and the generation of sufficient public revenues?

10
 9

Taxation policy fully achieves the objectives.
 8
 7
 6


Taxation policy largely achieves the objectives.
 5
 4
 3


Taxation policy partially achieves the objectives.
 2
 1

Taxation policy does not achieve the objectives at all.
Tax Policy
7
Government revenue in Bulgaria is dominated by indirect taxes centered on a flat-rate 20% VAT for all products except tourism packages, social security contributions (mostly pension and health care contributions) and a relatively small share of direct taxes that are based on a very broad base with low rates. With its low rates, and uniform and broad tax base, Bulgaria’s tax system fully achieves the objective of horizontal equity and creates relatively good conditions for improving competitiveness, though this is limited to some extent by red tape and a highly bureaucratic tax administration. At the same time, the flat income tax rate and the low direct-tax burden limit the extent of vertical equity. As a result, the difference between income inequality before and after taxes and benefits is relatively small.

Tax revenues have continued to increase significantly in 2017 with boosts from both direct and indirect taxes. This has allowed the government to plan a balanced budget for the second year in a row. While the size of the shadow economy and the extent of tax evasion are decreasing, their levels remain relatively high.

Citations:
European Commission (2018): Country Report Bulgaria 2018 including an In-Depth Review on the prevention and correction of macroeconomic imbalances. SWD(2018) 201 final, Brussels, 21-22 (https://ec.europa.eu/info/sites/info/files/2018-european-semester-country-report-bulgaria-en.pdf).

Budgets

#4

To what extent does budgetary policy realize the goal of fiscal sustainability?

10
 9

Budgetary policy is fiscally sustainable.
 8
 7
 6


Budgetary policy achieves most standards of fiscal sustainability.
 5
 4
 3


Budgetary policy achieves some standards of fiscal sustainability.
 2
 1

Budgetary policy is fiscally unsustainable.
Budgetary Policy
9
Bulgaria has featured sound budgetary policy for most of the last 20 years. The fiscal stance worsened in 2009 – 2010 due to the economic crisis, and in 2013 – 2014 due to a combination of expenditure expansion and the failure of a major bank. But in both cases, budgetary discipline was swiftly restored. The budget was balanced in 2016 and is projected to remain so in 2017. After an increase in 2014, due to the necessity to cover guaranteed deposits in the failed bank, public debt was held in check and began to decline in 2017, with projections over the medium term predicting a low level of 20% of GDP.

Fiscal rules, including a medium-term balanced budget target, a public spending ceiling at 40% of GDP and a public debt ceiling of 60% of GDP, are in place and have helped make budgetary policy sustainable. Adherence to these rules is observed by an independent fiscal council. The council, in operation since 2016, has already published a number of opinions and recommendations, including a review of the Bulgarian Convergence Program for 2016 – 2019, the medium-term budget forecast for 2018 – 2020 and the 2018 draft budget.

Citations:
European Commission (2018): Country Report Bulgaria 2018 including an In-Depth Review on the prevention and correction of macroeconomic imbalances. SWD(2018) 201 final, Brussels, 10, 23 (https://ec.europa.eu/info/sites/info/files/2018-european-semester-country-report-bulgaria-en.pdf).

Research and Innovation

#39

To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?

10
 9

Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
 8
 7
 6


Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
 5
 4
 3


Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
 2
 1

Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
R&I Policy
3
Bulgaria ranks among the lowest in the European Union in terms of spending on R&D, and the substantial increases in R&D outlays in 2014 and 2015 have not been sustained. Research and innovation have suffered from a strong separation of the public and the private sector, and a far-reaching institutional fragmentation. Participation in and implementation of EU-funded programs have been low. The new National Strategy for Development of Scientific Research 2017 – 2030 (“Better Science for a Better Bulgaria”), approved by parliament in June 2017, has sought to address part of these issues.

Citations:
Todorova, A., Slavcheva, M. (2018): RIO Country Report Bulgaria 2017. Luxembourg: European Union (https://rio.jrc.ec.europa.eu/en/country-analysis/Bulgaria/country-report).

Global Financial System

#37

To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?

10
 9

The government (pro-)actively promotes the regulation and supervision of financial markets. It demonstrates initiative and responsibility in such endeavors and often acts as an international agenda-setter.
 8
 7
 6


The government contributes to improving the regulation and supervision of financial markets. In some cases, it demonstrates initiative and responsibility in such endeavors.
 5
 4
 3


The government rarely contributes to improving the regulation and supervision of financial markets. It seldom demonstrates initiative or responsibility in such endeavors.
 2
 1

The government does not contribute to improving the regulation and supervision of financial markets.
Stabilizing Global Financial Markets
4
As a member of the European Union and the European System of Central Banks, Bulgaria participates in the discussions on the regulation of international financial markets. However, the country has not been among the proactive promoters of changes, even though the 2014 banking crisis in Bulgaria has somewhat increased interest in the issue. While successive Bulgarian governments have been interested in securing the country’s membership in the European banking union, they have not paid much attention to the actual architecture of this union.
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