# EUR-Lex - 52011SC0818 - EN

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# 52011SC0818

**Recommendation for a COUNCIL RECOMMENDATION on the National Reform Programme 2011 of Bulgariaand delivering a Council opinionon the updated Convergence Programme of Bulgaria, 2011-2014 /* SEC/2011/0818 final */**

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Recommendation for a

COUNCIL RECOMMENDATION

on the National Reform Programme 2011 of
Bulgaria
and delivering a Council opinion
on the updated Convergence Programme of Bulgaria, 2011-2014

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the
Functioning of the European Union, and in particular Article 121(2) and 148(4) thereof,

Having regard to Council Regulation (EC) No
1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary
positions and the surveillance and coordination of economic policies[1]
, and in particular Article 9(3) thereof,

Having regard to the recommendation of the European
Commission[2],

Having regard to the conclusions of the
European Council,

Having regard to the opinion of the
Employment Committee,

After consulting the Economic and Financial
Committee,

Whereas:

(1) 
On 26 March 2010, the European Council agreed to
the European Commission's proposal to launch a new strategy for jobs and
growth, Europe 2020, based on enhanced coordination of economic policies, which
will focus on the key areas where action is needed to boost Europe’s potential
for sustainable growth and competitiveness.

(2) 
On 13 July 2010, the Council adopted a
recommendation on the broad guidelines for the economic policies of the Member
States and the Union (2010 to 2014) and on 21 October 2010, adopted a decision
on Guidelines for the employment policies of the Member States[3],
which together form the “integrated guidelines”. Member States were invited to
take the integrated guidelines into account in their national economic and
employment policies.

(3) 
On 12 January 2011, the Commission adopted the
first Annual Growth Survey, marking the start of a new cycle of economic
governance in the EU and the first European semester of ex-ante and integrated
policy coordination, which is anchored in the Europe 2020 strategy.

(4) 
On 25 March 2011, the European Council endorsed
the priorities for fiscal consolidation and structural reform (in line with the
Council’s conclusions of 15 February and 7 March 2011 and further to the
Commission’s Annual Growth Survey). It underscored the need to give priority to
restoring sound budgets and fiscal sustainability, reducing unemployment
through labour market reforms and making new efforts to enhance growth. It
requested Member States to translate these priorities into concrete measures to
be included in their Stability or Convergence Programmes and National Reform
Programmes.

(5) 
On 25 March 2011, the European Council also
invited the Member States participating in the Euro Plus Pact to present their
commitments in time to be included in their Stability or Convergence Programmes
and their National Reform Programmes.

(6) 
On 15 April 2011, Bulgaria submitted its 2011 Convergence
Programme update covering the period 2011-2014 and its 2011 National Reform
Programme. In order to take account of the interlinkages, the two programmes
have been assessed at the same time.

(7) 
The economic crisis interrupted a period of
strong growth fuelled by substantial foreign direct investment inflows and
credit expansion. GDP growth returned in the second quarter of 2010, after
falling cumulatively by 7.1% from peak to trough, resulting in a broadly flat
real GDP for 2010 as a whole. A strong upturn in exports, restocking of
inventories have been the most important growth drivers. The general government
balance moved form a surplus prior to the crisis into a deficit of 4.7% of GDP
in 2009 and 3.3% of GDP in 2010. While output and employment in export-led
industries increased, subdued activity in construction, real estate and retail
has constrained the recovery over the past year. Employment bore the brunt of
the output correction with a loss of about 358.000 jobs since the peak in 2008.
As a result, unemployment increased by several percentage points to 10.2% in 2010,
and employment is not expected to return to its pre-crisis level in the
medium-term.

(8) 
Based on the assessment of the updated
Convergence Programme pursuant to Council Regulation (EC) No 1466/97, the
Council is of the opinion that the macroeconomic scenario underpinning the
fiscal projections is based on more favourable growth projections than those of
the Commission services' forecast. After a considerable and frontloaded
budgetary adjustment of more than 2 percentage points in structural terms in
2010, the fiscal effort in 2011 is well below the recommended adjustment of at
least 0.75% of GDP. Nevertheless, the updated Convergence Programme foresees a
correction of the excessive general government deficit in 2011 in compliance
with the Council Recommendation and further reductions afterwards.. However, the
update does not provide sufficient details of the planned budgetary measures to
achieve the fiscal targets in 2012-14. The downward revised medium-term
objective (MTO) of a structural deficit of 0.6% of GDP, scheduled for 2014, is
still more ambitious than the minimum required level. It reflects the
objectives of the Stability and Growth Pact and it is foreseen to be achieved
by the end of the programme period (2014). However, the envisaged annual average
structural fiscal effort in 2012-14, after the planned correction of the
excessive deficit in 2011, is well below the minimum annual structural
improvement of 0.5% of GDP recommended. In view of the gradually improving
economic outlook, the programme should aim for a faster progress towards the
achievement of the MTO. When assessed against a prudent estimate of medium-term
potential output growth, the projected budgetary expenditure growth in 2012-13 seems
to be on the optimistic side, posing a risk to the structural fiscal position
in the medium term.

(9) 
Correcting the excessive deficit as envisaged by
the end of 2011 will help regain confidence and strengthen the credibility of
government policies. Over the medium term, achieving the objective of a small structural
deficit of 0.6% of GDP is important to ensure that fiscal policy is supportive
to the monetary regime in place. However, fiscal consolidation is hindered by inefficiencies
in the public sector which may lead to considerable expenditure pressures while
budget revenues are likely to be structurally lower than in the pre-crisis boom
years. Ambitious public finance reforms are thus needed in order to carry out
the necessary fiscal adjustment and help secure funding for the implementation
of necessary structural reforms, including the co-financing needed for
EU-supported projects.

(10) 
The Bulgarian fiscal performance was relatively positive
in the favourable economic environment prior to the crisis. Fiscal targets were
consistently met and sizeable fiscal buffers were accumulated. In 2009, under
the impact of the economic crisis; for the first time in many years the budget
went into deficit, and the rule to keep the budget balanced or in surplus and
public expenditure below 40% of GDP was breached. This was partly related to weaknesses
in expenditure planning and control. It further reflected the fact that the
revenue windfalls resulting from the buoyant economic activity prior to the
crisis had been used to finance relatively large increases in ad-hoc expenditure
and cuts in the social security rate. To address these problems, the
authorities undertook several initiatives to improve expenditure control and
monitoring and reporting systems, including the adoption of a comprehensive
legislative package, strengthening the fiscal rules and the medium-term
budgetary framework. It is expected to enhance fiscal discipline and the
predictability of policies, to reduce macroeconomic volatility and to ensure
less a pro-cyclical fiscal policy.

(11) 
The pre-crisis boom years saw a considerable
tightening of the labour market and high wage growth, outpacing the increases
in productivity. Wage growth peaked at an annual rate close to 20% in the
fourth quarter of 2007. Following the downturn, wages have started to
decelerate, although wage growth remained relatively high at close to 10% in
2010 for employees under labour contracts (representing around 65% of the
labour force). Bringing wage growth in line with productivity growth will
facilitate the internal restructuring of the economy towards productive and
export-led sectors.

(12) 
Labour market participation barriers reflect in
part the insufficient provision of properly targeted and tailored active labour
market policies (ALMP), together with ineffective and underfunded Public Employment
Services. The quality of public services in the areas of activation, job search
assistance and retraining is low as is public spending. ALMP coverage is also
limited with only 12% of jobseekers participating in activation measures.
Launching more region-based employment programmes, and European Structural
Funds large-scale training programmes, will have a positive effect in the short
term. However, weak capacity to monitor and evaluate programme results hampers
policy design. As pointed out by a recent report commissioned by the Public
Employment Service ("Evaluation of the net effect of ALMPs in
Bulgaria"), more individualised and better-quality services, as well as
better infrastructure of labour offices, would support more effectively the
unemployed in finding a job.

(13) 
The economic crisis continues to impact the
labour market. The unemployment rate increased from 5.4% in 2008 to 10.2% in
2010, while for young persons (aged 15-24) it reached 23.2% in 2010. The crisis
particularly hit the low skilled (including a large part of the Roma minority)
who represent almost 70% of the unemployed. The share of long-term unemployment
(46% in 2010) is higher than the EU average (2010: 40%), and there may be a risk
of it becoming structural. The youth activity rate has consistently stayed at
less than two thirds of the EU average (2009: 29.5%; EU: 43.8%). The youth
employment rate was 24.8% in 2009 (EU: 35.2%). Bulgaria also has the highest
share of young people who are neither in education or employment (19.5% of persons
aged 15-24). One of the main barriers to youth participation in the labour
market is the shortage of opportunities to combine education and work, in
particular through internships and apprenticeships in their field of study,
which facilitate transition to the labour market.

(14) 
Despite an above average educational attainment,
Bulgaria has over 40% of low achievers in literacy and numeracy. This shows
there is scope for improvements in the education system to better align it to labour
market needs. Building on the positive results of the recent school
decentralisation reform, the upcoming Law on Pre-School and School Education is
expected to provide some solutions which can be further strengthened, i.e. with
respect to financial autonomy, pre-school participation rates and external
evaluation, as well as ensuring accountability. The early school leaving rate
(14.7% in 2009) is close to the EU average, but is particularly high among the
Roma (where it was estimated at 43% in 2008). Tertiary attainment rates (27.9%
in 2009) remain below the EU average (32.2%). Bulgaria has significantly
delayed its higher education reform. The new Higher Education Law, already
tabled in 2010 but subsequently withdrawn, should provide a useful step to
address reform needs.

(15) 
The pension reform decided in 2010 is not linked
to life expectancy or to the situation of the health and long-term care system.
The implementation period is from 2011 to 2026, with most of the measures
taking effect in the second half of the period which could put both the
implementation and the sustainability of the first pillar of the pension system
at risk.

(16) 
Bulgarian citizens experience a greater degree
of poverty in comparison to the EU average (41.9% of the population experiences
severe material deprivation as compared to 8.1% for EU). Around 66% of the
elderly are at risk of poverty, which is considerably higher than the EU
average. There are signs of deteriorating living conditions in the last couple
of years. Given the demographic situation, achieving the NRP targets for
poverty reduction depends to a large extent on the proper design of policies
for older workers and disadvantaged people, as well as on the adequacy of
social transfers. The NRP announces the development of an operational strategy
for Roma integration (estimated at 10% of the population), to address the
multiple barriers faced in the domains of employment, education, health and
housing in a single comprehensive plan.

(17) 
The low efficiency of public services remains an
obstacle to growth. Despite recent streamlining, the public administration
reform has not dealt with upgrading the quality of staff or key functions. Bulgaria
has a very low fixed broadband penetration – at 14.9% it has the second-lowest
figure of the EU, which also limits uptake of all electronically delivered services.

(18) 
The public procurement irregularity rate reaches
60% of all procedures verified and is even higher for large public
infrastructure projects, where the authorities have an obligation of ex-ante
control. The capacity of the Public Financial Inspection Agency has been
reduced substantially and as a result, the agency performed ex-post controls in
only 12% of all public procurement procedures in 2009.

(19) 
The energy intensity of the Bulgarian economy is
one of the highest in the EU. A salient example is household heating, with
poorly maintained multi-apartment buildings accounting for the bulk of the
problem. Recent changes in the eligibility rules create the possibility of
using EU Structural Funds to support energy efficiency investments. Few
investments have been made, whilst revenues from energy and transport taxes
have fallen relative to GDP and also relative to taxes on labour, which are
well above the EU average. Access to the energy market is hampered by reduced competition
and opaque price setting mechanisms.

(20) 
Bulgaria has made a number of commitments under
the Euro Plus Pact[4]. On the fiscal side, the
commitments indicate that the sustainability of public finances will be
underpinned by pension reform measures, action to ensure performance-based pay
in the public sector by freezing pensions and wages until 2013 and
strengthening of the domestic fiscal framework through the adoption of a
Financial Stability Pact, which includes binding numerical fiscal rules. To
foster employment, measures will be taken to reduce the share of undeclared
employment and increase labour participation. Competitiveness measures focus on
reducing administrative burdens and increasing e-governance; improving access
to education and enhancing the performance of the education system.. The above
commitments refer to three out of the four areas of the Pact, leaving out the
financial sector. They represent a continuity of the broader reform agenda
outlined in the Convergence and National Reform Programmes, and step up ongoing
reform projects in the areas of fiscal governance, public administration, and
education. The Euro Plus Pact commitments have been assessed and taken into
account in the recommendations.

(21) 
The Commission has assessed the Convergence
Programme and National Reform Programme, and the Euro Plus Pact commitments[5].
It has taken into account not only their relevance for sustainable fiscal and
socio-economic policy in Bulgaria but also their respect of EU rules and
guidance, given the need to reinforce the overall economic governance of the
European Union by providing EU level input into future national decisions. It
considers that after a considerable and frontloaded budgetary adjustment in
2010, fiscal consolidation plans for 2011 should be implemented as envisaged
and the deficit should be brought below the 3% reference value in line with the
Council Recommendation. The update does not provide sufficient details for
planned budgetary measures to achieve the fiscal targets in 2012-14 and a
faster progress towards the selected medium term objective could have been
ensured. Strengthening of the domestic fiscal framework will anchor fiscal
discipline and provide for predictability and credibility of government policy
in the medium-term. Further steps should also be taken to strengthen
competitiveness, to help people into jobs, to protect the most vulnerable
groups facing multiple barriers, to enhance the capacity of public
administration and regulators, to increase resource efficiency as well as to
open up more opportunities for investment and growth.

(22) 
In light of this assessment, also taking into
account the Council Recommendation under Article 126(7) Treaty on the
Functioning of the European Union of 2 June 2010, the Council has examined the
2011 update of the Convergence Programme of Bulgaria and its opinion[6]
is reflected in particular in its recommendations under (1) and (2) set out
below. Taking into account the European Council conclusions of 25 March 2011,
the Council has examined the National Reform Programme of Bulgaria,

HEREBY RECOMMENDS that Bulgaria should
take action within the period 2011-2012 to:

(1) 
Proceed with effective budget implementation so
as to correct the excessive deficit in 2011. Specify the measures underpinning
the budgetary strategy for 2012-2014 and take advantage of the ongoing economic
recovery to speed up fiscal adjustment towards the medium-term budgetary
objective, primarily by keeping expenditure growth in line with medium-term
potential growth, while increasing the share of growth-enhancing public
expenditure.

(2) 
Take steps to improve the predictability of
budgetary planning and its implementation in particular by strengthening fiscal
governance. To this end, design and put in place binding fiscal rules and a
well-defined medium-term budgetary framework that ensures transparency at all
government levels. Introduce measures to put budget reporting on an accrual
basis.

(3) 
Take steps to speed up the current reform of the
pension system and strengthen measures to help older workers to stay longer in
employment.

(4) 
Promote, in consultation with the social
partners and in accordance with national practices, policies to ensure that wage
growth better reflects developments in productivity and sustain
competitiveness.

(5) 
Take steps to address the
challenge of combating poverty and promoting social inclusion, especially for vulnerable groups facing multiple barriers, by : expanding the market for private job service
providers; modernising public employment services to
enhance their capacity to match skills profiles with labour market demand; and
focusing support on young people with low skills. Advance the educational
reform by adopting a Law on Pre-School and School
Education and a new Higher Education Act by mid 2012.

(6) 
Step up efforts to enhance administrative
capacity in key government functions and regulatory authorities, in order to
make public services more effective in responding to the needs of citizens and
businesses; introduce measures to check public
procurement on the basis of risk assessments, strengthen the capacity of the
authorities to prevent and sanction irregularities, in order to improve quality
and value-for-money in the use of public funds.

(7) 
Abolish barriers to entry, guaranteed profits
arrangements and price controls and ensure full independence of the Bulgarian
Energy Regulator, in order to open up the electricity and gas markets to
greater competition. Introduce incentives to upgrade the energy efficiency of
buildings.

Done at Brussels,

For
the Council

The
President

[1]               OJ L 209, 2.8.1997, p. 1.

[2]               OJ C , p. .

[3]               Maintained for 2011 by Council Decision 2011/308/EU
of 19 May 2011.

[4]               More details on the commitments made under the Euro
Plus Pact can be found in SEC(2011) 711.

[5]               SEC(2011) 711.

[6]               Foreseen in Article 9(3) of Council Regulation (EC)
No 1466/97.