Bulgaria

   

Economic Policies

#31
Key Findings
Despite notable progress in recent years, Bulgaria receives comparatively low scores in international comparison (rank 31) with respect to economic policies. Its score on this measure has risen by 0.7 points relative to 2014.

The country’s economy continues to show positive gains, with economic growth remaining strong. Employment levels have reached a record high, nearing EU averages, while unemployment rates have hit a record low. However, real capital formation growth rates are low, and the industrial sector has shown lackluster performance.

Monetary stability has boosted overall performance, and fiscal policy has been sound. Businesses complain about judicial-system problems that result in property-rights and contract uncertainties, state corruption, and the lack of skilled labor. Regional development is very uneven, and R&D spending is relatively low.

The tax system is heavily VAT-dependent, with direct taxes a comparatively small share of government revenues. Personal and corporate-income taxes are set at a flat 10% rate. The government has maintained small fiscal surpluses for several years. Public debt levels are low and declining, at about 20% of GDP. The country is making preparations to join the European banking union.

Economy

#29

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
Since 2015, Bulgaria has maintained per capita economic growth rates in the range of 4% to 5%, with unemployment rates in 2019 at record-low levels since measurement started in 1991. In 2019, increasing exports contributed to a current account surplus, while the inflationary pressure noticeable in 2018 decreased. These positive developments have been countered by relatively low growth in real capital formation, lackluster performance within the industrial sector and rising expectations within the business community of a coming recession.

Economic performance has benefited from the stability of macroeconomic policy. The currency board, which has existed since 1997, has provided monetary stability, and fiscal policy has been sound. As for the microeconomic environment, businesses continue to complain about several problems that have not been adequately addressed by the government. One is the state of the judicial system, and the resulting uncertainty in the area of property rights and contracts. Another problem is the difficulty in dealing with the state due to rampant corruption and the unpredictable behavior of public administrators. A third is the lack of an adequate supply of qualified labor.

In the 2018 – 2019 period, Bulgaria underwent a strict review of its financial system by the European Central Bank (ECB), while the OCED reviewed the country’s state-owned enterprise governance and insolvency framework. The checks were part of the requirements for Bulgaria to join the European Exchange Rate Mechanism II and the European banking union. While the results may be considered as generally positive, specific problems were identified with specific banks, and Bulgaria has not yet received approval to apply for membership in ERM2 and the banking union. Major outstanding questions for 2020 are whether this approval is issued, and whether the rising recessionary expectations will be fulfilled.

Citations:
European Commission (2020): Country Report Bulgaria 2020. SWD(2020) 501 final. Brussels (https://ec.europa.eu/info/sites/info/files/2020-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 2019, employment levels in Bulgaria reached a record high, approaching EU averages. Unemployment rates fell to their lowest point since measurement started in the early 1990s. Both developments have primarily been due to the continuing economic growth. By contrast, more specific labor market policies such as activating inactive groups within Bulgarian society, addressing the growing skills mismatch persistently reported by businesses, and closing the gap between educational curricula and the requirements of a modern labor market have been far from successful.

The weak labor market policy is increasingly undermining the sustainability of economic growth. 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. If the expectations of a coming recession prove justified, the severity of these problems will intensify.

Taxes

#24

How effective is a country’s tax policy in realizing goals of revenue generation, equity, growth promotion and ecological sustainability?

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
6
Bulgaria’s government revenues are a mix of direct taxes, indirect taxes and social security contributions. Direct taxes, both personal and corporate, constitute a relatively small component of overall tax revenues, and are based on a strategy of very low rates spread uniformly over a very broad tax base. Both the personal and corporate taxes use a flat 10% rate, with a very limited set of exemptions. The system of indirect taxes is centered on a value-added tax with a flat rate of 20% for all products except tourist packages. Excises are the other important component of indirect tax revenues. Here Bulgaria follows the requirements of the European Union, imposing rates at the low end of what is allowed by its membership obligations. While the tax structure is simple, tax filing is extremely cumbersome for businesses due to extensive red tape and an unfriendly bureaucracy. Moreover, the share of foregone tax revenues is rather high.

Bulgaria has been successful in collecting sufficient revenues to finance public expenditures, with the country posting budget surpluses or small deficits in nearly every one of the last 20 years. At around 30% of GDP, the tax-to-GDP ratio is relatively low.

With its low rates, and uniform and broad tax base, Bulgaria’s tax system fully achieves the objective of horizontal equity. 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 rather small.

The low corporate-income tax makes the Bulgarian tax system highly competitive. However, this competitiveness is reduced by the cumbersome nature of tax filing.

Bulgaria has a relatively large share of environmental taxation as a share of total tax revenue. This is mainly due to high energy-consumption levels rather than a strict environmental-tax policy and appropriate level of taxation. Bulgaria is the most energy- and greenhouse-gas-intensive economy in EU, with coal being the main source of energy. The country lacks a clear environmental-tax policy orientation, with the relevant taxes being considered purely as revenue generators rather than as tools to influence incentives for firms and individuals. The implicit tax rate on energy is the second-lowest in EU.

Citations:
European Commission (2020): Country Report Bulgaria 2020. SWD(2020) 501 final. Brussels, 24-25 (https://ec.europa.eu/info/sites/info/files/2020-european-semester-country-report-bulgaria-en.pdf).

Budgets

#6

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. The country has posted fiscal surpluses since 2016. In 2019, the surplus remained above 1% of GDP, exceeding the original government projections of a roughly balanced budget. Public debt presently stands at 20% of GDP, and is set to decrease further.

Fiscal rules (e.g., a medium-term balanced budget target, a public spending ceiling of 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 evaluations of the Ministry of Finance’s medium-term budget forecasts, the public debt management strategy, the 2020 draft budget and the ministry’s 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. The resulting swings in aggregate spending over the course of the calendar year has made economic development less balanced. Moreover, there seems to be a deliberate under-execution of capital expenditures. The resulting underspending on capital formation, including on important economic and social infrastructure, may damage the sustainability of economic growth.

Research, Innovation and Infrastructure

#38

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. Nominally, 2018 R&D expenditures recovered to their 2015 levels, but as a percentage of GDP, they remain markedly below 1%. The structure remains unchanged, with about 22% of spending done by the public sector and 78% by the private sector. Research and innovation activities in Bulgaria are characterized by weak links between producers and relevant research institutions, as well as by far-reaching institutional fragmentation. Participation in and implementation of EU-funded programs has been weak. The implementation of the existing National Strategy for Development of Scientific Research 2017 – 2030 (“Better Science for a Better Bulgaria”) has not yet been evaluated.

Global Financial System

#30

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
5
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 its desire to join the European banking union. Since then, it has adopted a number of policy measures designed to demonstrate the country’s capacity to contribute to international financial regulation and supervision. However, reviews by EU organizations have indicated weaknesses in Bulgaria’s supervisory capacities with respect to money laundering and insurance. In its pursuit of the goal of becoming a member of the Euro area and the EU banking union, the Bulgarian government might become more proactive in the sphere of international financial architecture.
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