EN    EN EN 
EN    EN  EUROPEAN COMMISSION 
Brussels, 6.7.2010 
SEC(2010) 882 final 
  
Proposal for a 
COUNCIL DECISION 
on the existence of an excessive deficit in Bulgaria 
EN 2   EN EXPLANATORY MEMORANDUM  
1. T HE APPLICATION OF THE STABILITY AND GROWTH PACT IN THE CURRENT CRISIS 
SITUATION  
Many EU countries are presently facing genera l government deficits above the 3% of GDP 
reference value set in the Treaty. The often stro ng deterioration in the deficit as well as the 
debt positions must be seen in the context of the unprecedented global financial crisis and 
economic downturn in 2008/09. Several factors are at play. First, the economic downturn 
brings about declining tax revenue and rising social benefit expenditure (e.g. unemployment 
benefits). Second, recognising that  budgetary policies have an impor tant role to play in the 
current extraordinary economic situation, the Co mmission called for a fiscal stimulus in its 
November 2008 European Economic Recovery Plan (EERP), endorsed by the European 
Council in December. The Plan explicated that  the stimulus should be timely, targeted and 
temporary and differentiated across Member States to reflect their different positions in terms 
of public finance sustainability and competitiveness and should be reversed when economic conditions improve. Finally, severa l countries have taken measures  to stabilise the financial 
sector, some of which have impacted on the debt  position or constitute a risk of higher deficits 
and debt in the future, alt hough some of the costs of th e government support could be 
recouped in the future. 
The Stability and Growth Pact  requires the Commission to in itiate the excessive deficit 
procedure (EDP) whenever the deficit of a Me mber State exceeds the 3% of GDP reference 
value. The amendments to the Stability and Gr owth Pact in 2005 aimed at ensuring that in 
particular the economic and budgetary background was taken into account fully in all steps in 
the EDP. In this way, the Stability and Growth Pact provides the framework supporting 
government policies for a prompt return to so und budgetary positions taking account of the 
economic situation, and thereby ensuring long -term sustainability of public finances. 
2. P
REVIOUS STEPS IN THE EXCESSIVE DEFICIT PROCEDURE  
Article 126 of the Treaty on the Functioning of the European Union lays down an excessive 
deficit procedure (EDP). This procedure is further specified in Council Regulation (EC) No 
1467/97 “on speeding up and clarifying the im plementation of the excessive deficit 
procedure”1, which is part of the Stability and Growth Pact. 
According to Article 126(2) of the Treaty, th e Commission has to monitor compliance with 
budgetary discipline on the basis of two criteria,  namely: (a) whether the ratio of the planned 
or actual government deficit to gross domestic  product (GDP) exceeds the reference value of 
3% (unless either the ratio ha s declined substantially and co ntinuously and reached a level 
that comes close to the reference value; or, a lternatively, the excess over the reference value is 
only exceptional and temporary an d the ratio remains close to the reference value); and (b) 
whether the ratio of government debt to GDP exceeds the reference value of 60% (unless the 
ratio is sufficiently diminishing and approachin g the reference value at a satisfactory pace). 
                                                 
1 OJ L 209, 2.8.1997, p. 6. The report also takes into account the “Specifications on the implementation 
of the Stability and Growth Pact and guidelines on the format and content of stability and convergence 
programmes”, endorsed by the ECOFIN Counc il of 10 November 2009, available at  
http://ec.europa.eu/economy_finance/sgp/legal_texts/index_en.htm. 
EN 3   EN Article 126(3) stipulates that, if a Member St ate does not fulfil the requirements under one or 
both of these criteria, the Commi ssion has to prepare a report. Th is report also has to “take 
into account whether the government deficit ex ceeds government investment expenditure and 
take into account all other relevant factors, including the medium-term economic and 
budgetary position of the Member State”. 
On the basis of the data notified by th e Bulgarian authorities in April 20102 and subsequently 
validated by Eurostat3 and taking into account the Commi ssion services’ spring 2010 forecast, 
the Commission adopted a report under Ar ticle 126(3) for Bulgaria on 12 May 20104. 
Subsequently, and in accordance with Article 126(4), the Economic and Financial Committee 
formulated an opinion on the Commission report on 27 May 2010. 
3. T HE EXISTENCE OF AN EXCESSIVE DEFICIT  
According to the data notified by the Bulg arian authorities in April 2010, the general 
government deficit in Bulgaria reached 3.9% of  GDP in 2009, thus exceeding the 3% of GDP 
reference value. The Commission report under Artic le 126(3) considered that the deficit was 
not close to the 3% of GDP reference value but that the excess over the reference value can be 
qualified as exceptional within the meaning of th e Treaty and the Stability and Growth Pact. 
In particular, it results from a severe economic  downturn in the sense of the Treaty and the 
Stability and Growth Pact, as the global economic  and financial crisis hi t hard the economy of 
Bulgaria and the negative a nnual GDP volume growth reached 5% in 2009. Furthermore, the 
excess over the reference value could be cons idered temporary. According to the Commission 
services’ spring 2010 forecast, based on a no-policy change assumption, the general 
government deficit will fall below the reference value already in 2010 with  the stabilization of 
the economy and as a result of the fiscal  consolidation measures announced by the 
government at the end of March 2010. In a notification submitted on 22 June 2010, the 
Bulgarian authorities further revised the pla nned deficit for 2010 to 3.8% of GDP, above and 
not close to the reference value. The defi cit criterion in the Treaty is not fulfilled. 
The data in the April 2010 EDP notification sh ows that the general government gross debt 
remains well below the 60% of GDP referen ce value and stood at 14.8% of GDP in 2009. The 
Commission services’ spring 2010 forecast projec ts the debt ratio to increase over the 2010-
2011 period, but to remain below 19% of GDP.  In a notification s ubmitted on 22 June 2010, 
the Bulgarian authorities further revised the planned debt for 2010 to 15.3% of GDP. The debt 
criterion in the Treaty is fulfilled. 
In line with the provisions in the Treaty and the Stability and Growth Pact, the Commission 
also analysed in its report “relevant factors” . According to the Stability and Growth Pact, 
these can only be taken into acc ount in the steps leadi ng to the decision on the existence of an 
excessive deficit if the deficit satisfies the doubl e condition of closeness and temporariness. In 
                                                 
2 According to Council Regulation (EC) No 479/2009, Member States have to report to the Commission, 
twice a year, their planned and actual government deficit and debt levels. The most recent notification 
of Bulgaria can be found at:  
http://epp.eurostat.ec.europa.eu/portal/page/portal/g overnment_finance_statistics/excessive_deficit/edp_
notification_tables. 
3 Eurostat news release No 55/2010 of 22 April 2010.  
4 All EDP-related documents for Bulgaria can be found at the following website: 
 http://ec.europa.eu/ec onomy_finance/sgp/defic it/countries/index_en.htm. 
EN 4   EN the case of Bulgaria, the double condition is no t met. Considered on their own merit, the 
relevant factors in the current case on balance seem to be favourable.   
The opinion of the Economic and Financial Co mmittee in accordance with Article 126(4) of 
the Treaty is consistent with  the assessment in the Commissi on report under Article 126(3) on 
the existence of excessive deficit.  
The Commission, having taken into account its report under Article 126(3)  and the opinion of 
the Economic and Financial Committee under Arti cle 126(4), is of the opinion that an 
excessive deficit exists in Bulgaria. Th is opinion, adopted by the Commission on 12 May 
2010, is herewith addressed to  the Council according to Ar ticle 126(5). The Commission 
proposes that the Council shall decide accordi ngly, in conformity with Article 126(6). In 
addition, the Commission is submitting to the Council a recommendation for a Council 
Recommendation to be addressed to Bulgaria with a view to bringing the situation of an 
excessive deficit to an end according to Article 126(7). 
4. R ECOMMENDATIONS TO END THE EXCESSIVE DEFICIT SITUATION  
According to Article 3(4) of Counc il Regulation (EC) No 1467/97, the Council 
recommendation under Article 126(7 ) has to establish a deadline of six months at most for 
effective action to be taken by the Member State concerned as well as a deadline for the correction of the excessive deficit, which “sho uld be completed in the year following its 
identification unless there are sp ecial circumstances”. Article 2(6) of the Regulation implies 
that the “relevant factors” considered in the Commission report under Article 126(3) of the 
Treaty have to be taken into account in deciding whether specia l circumstances exist. Article 
3(4) of the Regulation specifies  that the Council has to recommend that the Member State 
achieves a “minimum annual improvement of at  least 0.5% of GDP as a benchmark, in its 
cyclically adjusted balance net of one-off and temporary measures, in order to ensure the 
correction of the excessive deficit within the deadline set in the recommendation”. 
In the case of Bulgaria, the relevant factors, as  clarified in Article 2(3) of Regulation (EC) No 
1467/97 and examined in the Commission’s report under Article 124(3) , were considered 
favourable. However, they do not suggest the ex istence of special circumstances warranting a 
departure from the standard deadline for corr ecting the deficit. In particular, in the 
Commission services' spring 2010 forecast, follow ing the severe contraction in 2009 as a 
result of the global economic and financial crisis , real GDP growth is projected to gradually 
recover and reach 2.7% by 2011. In the April 2010 EDP notification the Bu lgarian authorities 
expect the general government budget deficit to fall below the reference value to 2% of GDP 
in 2010 underpinned by a recovery in real GDP gr owth to 1% and the additional consolidation 
package to the tune of 2¼%  of GDP from 31 of Marc h 2010. The Commission services' 
spring 2010 forecast projects the general government budget deficit to improve to 2.8% of GDP in 2010 and to 2.2% of GDP in 2011, based on a no-policy change assumption, on an expected gradual improvement in the growth  outlook, and on a prudent assessment of the 
budgetary impact of the announced consolidation measures. In J une the Bulgarian authorities 
undertook a mid-year revision of the 2010 budget and increased their planned government 
deficit to 3.8% of GDP. The revision was in itiated as a result of a significant downward 
adjustment of projected government revenues, in the wake of very weak tax data in the first 
few months of 2010. It aims at ensuring the prop er functioning of automatic stabilizers and a 
more accurate reflection of the domestic and in ternational economic challenges. On the basis 
of the Commission services’ fo recast and the latest budgetary  and economic developments, 
EN 5   EN the Bulgarian authorities should avoid a deteri oration of the 2010 deficit beyond 3.8% of GDP 
and correct the excessive defici t by 2011 at the latest, implyi ng a structural consolidation 
effort of around ¾ percentage poi nts of GDP in that year.  
The deficit surprise in 2009, in addition to th e negative budgetary impact from the downturn, 
appears also to be related to procedural  weaknesses with expenditure planning and 
implementation control on an accrual basis. The large payment commitments uncovered under annexes to contracts signed by the pred ecessor government ahead of the July 2009 
elections were not planned in the budget and led to additional deterioration of the budgetary 
position. The negative outcome reflects also the fact that the recent economic good times were 
not fully used as an opportunity to undertake substantial reforms to improve the efficiency of public spending. In the pre-crisis period Bulgar ia has benefited from  significant revenue 
windfalls resulting from buoyant activity and a very  tax-intensive growth structure. However, 
part of these revenue windfalls, instead of be ing fully saved, have been used to finance 
relatively high ad-hoc pension increases and public sector wage increases, far above 
productivity gains, as well as for ta x and social security rate cuts.  
The non-binding nature of the medium-term fis cal framework in the three-year budgetary 
planning horizon and the lack of effective spen ding control mechanisms and expenditure rules 
have prevented the fiscal position from becoming  even stronger, thus further cushioning the 
negative impact from the downturn on public finances. In addition, the existing budgetary 
framework allows for certain discretionary  spending powers of the government which 
undermines fiscal transparency and accountabilit y. The lack of reforms in the healthcare 
sector has repeatedly led to accumulation of  hospital arrears and subsequent expenditure 
overruns. Successive reduction of pension contri bution rates combined with pension increases 
and the absence of offsetting reform measures ha ve brought about a substantial rise in pension 
spending, posing risks to the sust ainability of the system. Furt hering reforms in the education 
system and public administrati on would contribute to improving administrative capacity and 
the level of skills and to increasing the effi ciency of public spending thus achieving the 
needed budgetary consolidation. 
Enhanced surveillance under the EDP, which seems necessary in view of the deadline for the 
correction of the excessive deficit, will requir e regular and timely monitoring of the progress 
made in the implementation of the fiscal consol idation strategy to ensure  the correction of the 
excessive deficit. In this context, until the abrogation of the excessive deficit procedure a separate chapter in the update of the Bulgarian convergence programme, could usefully be 
devoted to this issue. 
EN 6   EN Key macroeconomic and budgetary projections 
  2007 2008 2009 2010 2011 2012 2013 
Real GDP 
(% change) 6.2 6.0 -5.0 0.0 2.7 n.a. n.a. 
Output gap1,2 
(% of potential GDP) 4.3 5.0 -2.9 -4.8 -4.0 n.a. n.a. 
General government balance 
(% of GDP) 0.1 1.8 -3.9 -2.8 -2.2 n.a. n.a. 
Primary balance 
(% of GDP) 1.1 2.7 -3.1 -2.0 -1.4 n.a. n.a. 
Cyclically-adjusted balance1 
(% of GDP) -1.5 0.0 -2.8 -1.1 -0.8 n.a. n.a. 
Structural balance3 
(% of GDP) 1.8 0.0 -2.8 -1.1 -0.8 n.a. n.a. 
Government gross debt 
(% of GDP) 18.2 14.1 14.8 17.4 18.8 n.a. n.a. 
Notes : 
1 Output gaps and cyclically-adjusted balances from the programmes as recalculated by Commission services on the 
basis of the information in the programmes. 
2 Based on estimated potential growth of 3.4%, 3.1% and 2.9% 2009-2011. 
3 Cyclically-adjusted balance excluding one-off and other temporary measur es. There are no one-off and other 
temporary measures in the most recent programme and Commission services’ autumn forecast. 
 
Source : 
Commission services’ spring 2010 forecasts (C OM); Commission services’ calculations. 
 
EN 7   EN Proposal for a 
COUNCIL DECISION 
on the existence of an excessive deficit in Bulgaria 
THE COUNCIL OF THE EUROPEAN UNION, 
Having regard to the Treaty on the Functioning of the European Union, and in particular 
Article 126(6) thereof, 
Having regard to the proposal from the European Commission, 
Having regard to the observations made by Bulgaria, Whereas: (1) According to Article 126 of the Treaty on the Functioning of the European Union 
Member States shall avoid ex cessive government deficits. 
(2) The Stability and Growth Pact is base d on the objective of sound government finances 
as a means of strengthening the conditions fo r price stability and for strong sustainable 
growth conducive to employment creation. 
(3) The excessive deficit procedure (EDP) under Article 126 of the Treaty, as clarified by 
Council Regulation (EC) No 1467/97 on  speeding up and clarifying the 
implementation of the excessive deficit procedure
5 (which is part of the Stability and 
Growth Pact), provides for a decision on the existence of an excessive deficit. The Protocol on the excessive deficit procedur e annexed to the Treaty sets out further 
provisions relating to the implementation of the EDP. Council Regulation (EC) No 
479/2009
6 lays down detailed rules and definition s for the application of the provision 
of the said Protocol.  
(4) The 2005 reform of the Stability and Growth Pact sought to strengthen its 
effectiveness and economic underpinnings as we ll as to safeguard th e sustainability of 
the public finances in the long run. It aimed at ensuring that in particular the economic 
and budgetary background was taken into account fully in all steps in the EDP. In this 
way, the Stability and Growth Pact pr ovides the framework supporting government 
policies for a prompt return to sound budge tary positions taking account of the 
economic situation. 
(5) Article 126(5) of the Treaty requires th e Commission to address an opinion to the 
Council if the Commission considers that an ex cessive deficit in a Member State exists 
or may occur. Having taken into account it s report in accordance with Article 126(3) 
                                                 
5 OJ L 209, 2.8.1997, p. 6.  
6 OJ L 145, 10.6.2009, p. 1.  
EN 8   EN and having regard to th e opinion of the Economic and Financial Committee in 
accordance with Article 126(4), the Commission  concluded that an excessive deficit 
exists in Bulgaria. The Commission theref ore addressed such an opinion to the 
Council in respect of Bulgaria on [6 July 2010]7. 
(6) Article 126(6) of the Treaty states that the Council should consider any observations 
which the Member State concerned may wish to make before deciding, after an overall 
assessment, whether an excessive deficit exis ts. In the case of Bulgaria, this overall 
assessment leads to the following conclusions. 
(7) According to the data notified by the Bulg arian authorities in April 2010, the general 
government deficit in Bulgaria reached 3.9%  of GDP in 2009, thus exceeding the 3% 
of GDP reference value. The deficit was not  close to the 3% of GDP reference value 
but the excess over the reference value can be qualified as exceptional within the 
meaning of the Treaty and the Stability and Gr owth Pact. In particular, it results from 
a severe economic downturn in the sense of  the Treaty and the St ability and Growth 
Pact, as the global economic and financial cr isis hit hard the ec onomy of Bulgaria and 
the negative annual GDP volume growth reached 5% in 2009. According to the 
Commission services’ spring 2010 forecast, th e general government deficit would fall 
below the reference value alr eady in 2010 with the stabilization of th e economy and as 
a result of the fiscal consolidation meas ures undertaken by the government. However, 
on the basis of the revised deficit target  for 2010 (3.8% of GDP according to the 
notification of 22 June 2010 by the Bulgarian authorities) , significantly above the 
Commission services’ spring fo recast of 2.8% of GDP, the breach of the reference 
value may not remain temporary. The defic it criterion in the Treaty is not fulfilled.  
(8) According to the data notified by the Bulgarian authorities in April 2010,  the general 
government gross debt remains well below th e 60% of GDP reference value and stood 
at 14.8% of GDP in 2009. The Commission se rvices’ spring 2010 forecast projects the 
debt ratio to increase over the 2010-2011 period,  but to remain below 19% of GDP. In 
a notification submitted on 22 June 2010, the Bu lgarian authorities further revised the 
planned debt for 2010 to 15.3% of GDP. The debt criterion in the Treaty is fulfilled.  
(9) According to Article 2(4)  of Council Regulation (EC) No 1467/97, “relevant factors” 
can only be taken into account in the st eps leading to the Council decision on the 
existence of an excessive deficit in acco rdance with Article 126(6) if the double 
condition - that the deficit remains close to the reference value and that its excess over 
the reference value is temporary - is fully  met. In the case of Bulgaria, this double 
condition is not met. Therefore,  relevant factors are not take n into account in the steps 
leading to this decision, 
                                                 
7 All EDP-related documents for Bulgaria can be found at the following website: 
 http://ec.europa.eu/ec onomy_finance/sgp/defic it/countries/index_en.htm. 
EN 9   EN HAS ADOPTED THIS DECISION: 
Article 1 
From an overall assessment it follows that  an excessive deficit exists in Bulgaria. 
Article 2 
This decision is addressed to the Republic of Bulgaria. 
Done at Brussels,  
 For the Council 
 The President