EN    EN EN 
EN    EN  EUROPEAN COMMISSION 
Brussels, 6.7.2010 
SEC(2010) 883 final 
  
Recommendation for a 
COUNCIL RECOMMENDATION  
with a view to bringing an end to the situ ation of an excessive government deficit in 
Bulgaria 
EN 2   EN Recommendation for a 
COUNCIL RECOMMENDATION  
with a view to bringing an end to the situ ation of an excessive government 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(7) thereof; 
Having regard to the recommendati on from the European Commission; 
Whereas: (1) According to Article 126 of the Treat y Member States shall avoid excessive 
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 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 taki ng account of the 
economic situation. 
(4) The Council has decided on [13 July 2010], in accordance with Article 126(6) of the 
Treaty, that an excessive de ficit exists in Bulgaria. 
(5) In accordance with Article 126(7) of the Treaty and Article 3 of Council Regulation 
(EC) No 1467/97 on speeding up and clarifying  the implementation of the excessive 
deficit procedure
1 (which is part of the Stability a nd Growth Pact), the Council is also 
required to make recommendations to the Member State concerned with a view to 
bringing the situation of excessive defic it to an end within a given period. The 
recommendation has to establish a deadline of  six months at the most for effective 
action to be taken by the Member State conc erned to correct the excessive deficit as 
well as a deadline for the correction of the excessive deficit, which should be 
completed in the year following its identification unless there are special circumstances. In deciding whether special ci rcumstances exist, “relevant factors” as 
clarified in Article 2(3) of  Regulation (EC) No 1467/97 s hould be taken into account. 
                                                
 
1 OJ L 209, 2.8.1997, p. 6.  
EN 3   EN Furthermore, in a recommendation to corr ect an excessive deficit the Council should 
request the achievement of a minimum annual improvement in the structural balance, 
i.e. the cyclically-adjusted balance excludi ng one-off and other temporary measures, of 
0.5% of GDP as a benchmark. 
(6) In the case of Bulgaria, the relevant factor s, as clarified in Article 2(3) of Regulation 
(EC) No 1467/97 and examined in the Co mmission’s report unde r Article 124(3), 
were considered favourable. However, they do not suggest the existence of special 
circumstances warranting a departure from the standard deadline for correcting the deficit. Taking into account both the Commission services' spring 2010 forecast and the authorities' latest EDP notification of June 2010 Bulgaria is recommended to 
correct the excessive deficit by 2011.  
(7) In the years prior to the crisis and in th e context of a very tax-rich growth structure 
Bulgaria has maintained a relatively strong budg etary position and markedly reduced 
the general government gross debt ratio. In 2009, however, the budgetary situation 
deteriorated significantly. Larg e revenue shortfalls resulted  from a fall in GDP of 5% 
(against an expected growth of 4.7% underl ying the budget) and the growth structure 
becoming much less tax intensive with a si zable contraction in domestic demand. At 
the same time expenditure increased becau se in addition to the working of the 
economic stabilizers sizable payment commitments undertaken by the outgoing 
government ahead of the mid-year parlia mentary elections were uncovered in the 
second half of the year. As a result, the budget balance swung from a surplus of 1.8% 
of GDP in 2008 to a deficit of 3.9% of GDP in 2009. Given the need to maintain macro-economic stability under the currency board arrangement, the government did 
not adopt fiscal stimulus measures in re sponse to the downturn. In the April 2010 EDP 
notification the Bulgarian authorities expe cted the general gove rnment budget deficit 
to fall below the reference value to 2%  of GDP already in 2010 underpinned by a 
recovery in real GDP growth to 1% and the additional consolidation package to the 
tune of 2¼% of GDP from 31 of March 2010. The Commission services' spring 2010 
forecast published on 5 May projected th e general government budget deficit to 
improve to 2.8% of GDP in 2010 and further to 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 June the Bu lgarian authorities undertook a mid-year 
revision of the 2010 budget and increased thei r planned government deficit to 3.8% of 
GDP. The revision was initiated 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 prope r functioning of automatic stabilizers and 
a more accurate reflection of the domestic and international economic challenges. On 
the basis of the Commission services’ fore cast and the latest budgetary and economic 
developments, the correction of the excessive deficit in 2011 implies a structural fiscal 
effort of around ¾ percentage points of GDP in that year, assuming that the 2010 deficit target is met.  
(8) The deficit surprise in 2009, in additi on to the 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 predecessor 
government ahead of the July 2009 elections were not planned in the budget and led to additional deterioratio n of the budgetary position. The ne gative outcome reflects also 
EN 4   EN 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 Bulgaria has benefited from significant revenue windfalls resulting from buoyant activity and a very tax-intensive grow th structure. However, part of these 
revenue windfalls, instead of being fully save d, have been used to  finance relatively 
high ad-hoc pension increases and public sector wage incr eases, far above productivity 
gains, as well as for tax and social security rate cuts.  
(9) The non-binding nature of the medium-ter m fiscal framework in the three-year 
budgetary planning horizon and the lack of e ffective spending control mechanisms and 
expenditure rules have prevented the fiscal  position from becoming even stronger, thus 
further cushioning the nega tive impact from the downturn on public finances. In 
addition, the existing budgetary framework al lows for certain discretionary spending 
powers of the government which undermines fiscal transparency and accountability. 
The lack of reforms in the healthcare sector has repeatedly led to accumulation of hospital arrears and subseque nt expenditure overruns. Succ essive reducti on of pension 
contribution rates combined with pension increases and the absence of offsetting 
reform measures have brought about a subs tantial rise in pe nsion spending, posing 
risks to the sustainability of  the system and public finances. Furthering reforms in the 
education system and public administ ration would contribute to improving 
administrative capacity and the le vel of skills and to increasing the efficiency of public 
spending thus achieving the n eeded budgetary consolidation. 
(10) In the past years the government gr oss debt-to-GDP ratio has followed a downward 
trend, decreasing from around 38% in 2004 to 14% in 2008, while at the same time the 
government has accumulated financial assets  that accounted to around 12% of GDP in 
2008. The data in the April 2010 EDP notification shows that  the general government 
gross debt remains well below the 60% of GDP reference value and stood at 14.8% of 
GDP in 2009. The Commission services’ 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 to 15.3% of GDP. 
(11) Enhanced surveillance under the EDP will require regular and timely monitoring of 
the progress made in the implementation of the fiscal consolidation strategy. In this 
context, a separate chapter in forthcom ing updates of the Bulgaria convergence 
programme could usefully be devoted to this issue.  
(12) In general, in the view  of the Council, budgetary conso lidation measures should secure 
a lasting improvement in the general governme nt balance, while be ing geared towards 
enhancing the quality of the public finances and reinforcing the growth potential of the 
economy, 
EN 5   EN HAS ADOPTED THIS RECOMMENDATION: 
(1) The Bulgarian authorities should put an e nd to the present excessive deficit situation 
by 2011 at the latest.  
(2) The Bulgarian authorities should bring th e general government deficit below 3% of 
GDP in a credible and sustainable manner.  Specifically, to this end, the Bulgarian 
authorities should:  
(a) take necessary measures to avoid a deterioration of the 2010 deficit beyond the 
planned 3.8% of GDP;  
(b) ensure a fiscal effort of  at least ¾% of GDP in 2011; 
(c) specify and implement the measures that are necessary to achieve the 
correction of the excessive deficit by 2011. 
(3) To limit risks to the adjustment, Bulgar ia should strengthen fiscal governance and 
transparency by reinforcing the Minist ry of Finance's spending controls, 
strengthening the binding nature of its medium-term budgetary framework as well as 
improving the monitoring of the budge t execution througho ut the year.  
(4) The Council establishes the deadline of [13 January 2011] for the Bulgarian 
government to take effective action and to sp ecify measures that will be necessary to 
correct of the excessive deficit. The assessment of effective action will take into account economic developments compar ed to the economic outlook in the 
Commission services' spring 2010 forecast.  
The Bulgarian authorities should report on progr ess made in the implementation of these 
recommendations in a separate chapter in  the forthcoming updates of the convergence 
programme until the abrogation of the excessive deficit procedure. 
In addition, the Council highlights the impor tance of achieving the medium-term objective 
(MTO) for appropriate b udgetary management of economic dow nturns. It therefore invites the 
Bulgarian authorities to ensure that budgeta ry consolidation towards the medium-term 
objective for the budgetary position – a general gove rnment structural balance of ½% of GDP 
– is sustained after the excessive deficit will have been corrected. The efficiency of public 
spending should be improved by fully implementing the planned structural reforms in the area 
of public administration, health care, education, and pensions. 
This recommendation is addressed to the Republic of Bulgaria. Done at Brussels,  
 For the Council 
 The President