Bulgaria

   

Economic Policies

#32
Key Findings
Despite notable progress in recent years, Bulgaria receives comparatively low scores in international comparison (rank 32) with respect to economic policies. Its score on this measure has risen by 0.8 points relative to 2014.

The country’s economy continues to show positive gains, with economic growth remaining strong. Employment levels surpassed their 2009 level in 2017, and grew further in 2018. Unemployment rates have continued to fall to below the EU average.

However, exports decreased in 2018, and FDI has dropped to the lowest level this century. Inflation is accelerating. Businesses complain about judicial-system problems that result in property-rights and contract uncertainties. Regional development is very uneven, and R&D spending is minimal, with mid-decade increases having proved unsustained.

The tax system is heavily VAT-dependent, with direct taxes contributing about 20% of government revenues. The government has maintained small fiscal surpluses for several years. Public debt levels are low and declining toward 20% of GDP. The country is making preparations to join the European banking union.

Economy

#32

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
The recent macroeconomic performance of the Bulgarian economy has been mixed. On the positive side, GDP continues to grow by a moderately high rate (3% – 4%), the unemployment rate continues to fall for all social groups and government finances are stable following three years of low surpluses in a row. On the negative side, exports decreased in 2018, foreign direct investment has dropped to levels unprecedented for this century and there is a visible acceleration of inflationary processes that are expected to continue into the near future. The European Commission has stressed the positive developments. In early 2018, it changed its opinion about the Bulgarian economy and no longer classifies Bulgaria’s macroeconomic imbalances as excessive.

In terms of the microeconomic environment, businesses complain about several problems that are not adequately addressed by the government. One is the state of the judicial system, and the resulting uncertainty in property rights and contracts. Another problem is the difficulty in dealing with the state due to the unpredictable behavior of public administrators and rampant corruption. A third is the lack of adequately qualified labor.

In the coming year Bulgaria is poised to undergo a strict check on its financial system, state-owned enterprise governance and insolvency framework. The check forms part of the requirements for Bulgaria joining the European Exchange Rate Mechanism 2 and the European banking union. The results will be highly indicative about the state of the country’s governance of the financial system and the monetary regime.

Citations:
European Commission (2019): Country Report Bulgaria 2019 including an In-Depth Review on the prevention and correction of macroeconomic imbalances. SWD(2019) 1001 final, Brussels (https://ec.europa.eu/info/sites/info/files/2019-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, employment levels in Bulgaria surpassed the pre-2009 level and grew further in 2018. The unemployment rate continued to fall and is now below the EU average. These favorable developments have largely stemmed from the sustained economic recovery. By contrast, the modernization of the Employment Agency and an improved targeting of labor market policy have only played a marginal role. Among other groups, employers have complained about a growing lack of sufficiently qualified labor and increasing skills mismatch. This development is increasingly undermining the sustainability of economic growth and has not been adequately addressed by the government. Among employed people, many occupy jobs which are below their education and skills levels. Policies such as the national minimum wage and social security thresholds affect different regions of the country very differently, and are becoming a major cause of the very uneven and unequal regional economic development. Growing disparities are threatening to become unsustainable. Employer associations have demanded policy revisions, but these proposals have not been taken up by the government.

Citations:
European Commission (2019): Country Report Bulgaria 2019 including an In-Depth Review on the prevention and correction of macroeconomic imbalances. SWD(2019) 1001 final, Brussels, 34-38 (https://ec.europa.eu/info/sites/info/files/2019-european-semester-country-repor t-bulgaria-en.pdf).

Taxes

#24

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 and social security contributions (mostly pension and health care contributions). Meanwhile, direct taxes, based on a very broad base with low rates, only contribute about 20% of tax revenues. With its low rates, and uniform and broad tax base, Bulgaria’s tax system fully achieves the objective of horizontal equity. While the tax structure is simple, tax filing is extremely cumbersome for businesses due to extensive red tape and an unfriendly bureaucracy. This weighs on the competitiveness of the Bulgarian tax system.

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 continued to increase significantly in 2018 with boosts from both direct and indirect taxes. This is especially valid for social security contributions, which have risen significantly due to a combination of rapidly increasing wages and a rising number of employed people contributing to the system. Since this portion of general government revenue is highly sensitive to the business cycle, it is unclear whether such a tempo can be sustained under less favorable circumstances. Recent revenues have been sufficient to allow the government to achieve a fiscal surplus for the third year in a row.

Budgets

#3

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. In the two periods when the budgetary position worsened (2009 – 2010 and 2013 – 2014), budgetary discipline was swiftly restored. In 2017 and 2018, small fiscal surpluses were realized. Public debt is well controlled and is gradually decreasing toward 20% of GDP.

Fiscal rules (e.g., 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 published a number of opinions and recommendations, including an evaluation of the medium-term budget forecast for 2019 – 2021, the public debt management strategy, the 2019 draft budget and the Ministry of Finance reports on the implementation of previous years’ budgets.

While the budgetary process and performance in Bulgaria can generally be considered healthy, the Bulgarian government has developed a practice of accumulating a budget surplus in the first three quarters of the year and then spending almost all of the budget in the last quarter of the year. This has happened in each of the last three years. Such a swing in aggregate spending during the calendar year has made economic development less balanced.

Research, Innovation and Infrastructure

#37

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. The share of government spending in total R&D spending is relatively high compared to the EU average, primarily due to low private sector spending in Bulgaria. 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.

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 System
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. In mid-2018, the country expressed a desire to join the European banking union and is now undergoing preparatory assessments. This development may make the Bulgarian government more proactive in the sphere of international financial architecture, although this has not happened yet.
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