EN    EN EN 
 
EN    EN  EUROPEAN COMMISSION 
Brussels, 27.1.2011 
SEC(2011) 113 final 
  
COMMISSION STAFF WORKING PAPER 
Analysis by the Commission s ervices of the action taken 
 
by Bulgaria 
 
in response to the Council Recommendation of  13 July 2010 with a view to bringing an 
end to the situation of excessive government deficit 
   
COM(2011) 22 final 
SEC(2011) 114 final SEC(2011) 115 final SEC(2011) 116 final 
 
EN 2   EN COMMISSION STAFF WORKING PAPER 
Analysis by the Commission serv ices of the action taken  
 
by Bulgaria 
 
in response to the Council Recommendation of  13 July 2010 with a view to bringing an 
end to the situation of excessive government deficit  
1. INTRODUCTION  
The budgetary impact of the economic downturn and expenditure increases stemming from 
sizable commitments undertaken by the out going government ahead of the mid-year 
parliamentary elections in 2009 led to a swing in  the general government balance in Bulgaria 
from a surplus of 1.8% of GDP in 2008 to a deficit of 3.9% in 20091. Against this 
background, on 13 July 2010, the Council decided that an excessive deficit existed and 
addressed recommendations to Bulgaria in acco rdance with Article 126(7)  TFEU with a view 
to bringing an end to the situation of  an excessive government deficit by 2011.2 In its 
recommendations, the Council established a dead line of 13 January 2011 for effective action 
to be taken. 
In particular, the Council recommended to Bulgaria  to: (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; and (c) specify a nd implement the measures that are necessary to 
achieve the correction of the excessive defi cit by 2011. To limit risks to the adjustment, 
Bulgaria was recommended to strengthen fisc al governance and transp arency by reinforcing 
the Ministry of finance's spending controls, strengthening the binding nature of its medium-
term budgetary framework as well as im proving the monitoring of the budget execution 
throughout the year.  
This paper reviews the actions taken by Bulgaria to meet the above recommendations in light 
of the economic and budgetary developments si nce the Council recomme ndations were issued 
on 13 July 2010. In particular, it reviews th e budgetary implementa tion in 2010 by comparing 
the projected budgetary developments in 2010 a ccording to the Commission services' autumn 
2010 forecast with the economic and budgetary scenario underpinning the Council recommendations. The latter was based on th e Commission services' spring 2010 forecast 
published on 5 May 2010 and the budgetary projec tions underlying the subsequent mid-year 
revision of the 2010 budget adopted by the Bulgarian parliament on 8 July.
3 For 2011, the 
basis for the assessment of action taken towards th e correction of the excessive deficit is again 
the Commission services' autumn 2010 forecast, which incorporates the main policy changes 
                                                 
1  With the October 2010 EDP notification the general government balance outcomes in 2008 and 2009 
were revised to a surplus of 1.7% and a deficit of 4.7% of GDP, respectively. The main reasons 
included methodological changes with respect to introducing time-adjusted cash recording of certain tax 
revenues as well as some additional government liabilities in the second half of 2010. 
2  All EDP-related documents for Bulgaria can be found at the following website: 
http://ec.europa.eu/econo my_finance/sgp/deficit/c ountries/bulgaria_en.htm  
3  Given that the 2010 budget update took place in the middle of the year, the revised budgetary 
projections were not incorporated in the Bulgar ia' convergence programme update of January 2010. 
 
EN 3   EN in the draft 2011 budget, approved by the Bu lgarian government on 30 September and 
adopted by the parliament on 2 December 2010. 
2. ECONOMIC DEVELOPMENTS  
Bulgaria entered into recessi on somewhat later than its  neighbours. Economic activity 
contracted by 4.9% in 2009, compared to 4.2% for the EU average, and the deterioration 
continued into the first quarte r of 2010, when the economic activ ity appears to have bottomed 
out. Underpinned by strong exports, GDP growth resumed in the second quarter and gained 
momentum in the second half of the year . The Commission services' autumn 2010 forecast 
expects real GDP to have remained broadly flat for 2010 as a whole.  
The outlook for the Bulgarian economy has remained broadly unchanged since the 
Commission services' spring 2010 forecast under pinning the Council recommendations of 
13 July 2010 (Table 1). The recovery is set to  become more broad-based and accelerate in 
2011 and 2012, with real GDP growth reaching 2.6%  and 3.8%, respectively. Growth will be 
underpinned by both strong external demand as we ll as a pick-up of domestic demand. While 
the recovery might be slightly stronger than in the other EU countries, growth will remain 
well below the pre-crisis average.  
Table 1: Comparison of macroeconomic developments and forecasts 
2009
outturn COM SF10 COM AF10 COM SF10 COM AF10
Real GDP (% change) -4.9 0.0 -0.1 2.7 2.6
Contributions to real GDP growth:
          Final domestic demand -13.1 -3.3 -5.2 2.2 2.3          Changes in inventories -2.7 0.1 0.5 0.2 0.1
          Net exports 10.9 3.3 4.6 0.3 0.3
Employment (% change) -2.7 -1.2 -5.2 0.6 0.7
GDP deflator (% change) 4.1 0.1 2.4 3.0 2.62010 2011
Source : COM SF10 - Commission services' spring 2010 forecast; COM AF10 - Commission services' 
autumn 2010 forecast.
 
The Bulgarian authorities have revised their economic projections several times during the 
course of the year: in the convergence progr amme update of January 2010 economic activity 
was expected to expand by 0.3% and 3.8% in  2010 and 2011, respective ly; the projections 
underlying the revised 2010 budget in  July envisaged real GDP to  grow by 1% in 2010, while 
according to the macroeconomic scenario underpinning the 2011 budget real GDP was 
expected to grow by 0.7% and 3.6% in 2010 and 2011, respectively4. 
3. BUDGETARY IMPLEMENTATION IN 2010 
According to the Commission services' autumn  2010 forecast, the general government budget 
deficit will come down to 3.8% of GDP in 201 0, from 4.7% of GDP in 2009, in line with the 
                                                 
4  According to additional information provided in early January 201 1, the authorities have revised their 
projection for real GDP growth in 2010 further down to 0.2%. 
 
EN 4   EN target set in the revised 2010 budget underpin ning the July 2010 Council recommendations. 5 
The latest forecast of the Ministry of Finance pr ojects a slightly better deficit ratio at 3.6% of 
GDP. 
The initial 2010 budget, approved in December 2009, targeted a small general government 
budget deficit of 0.7% of GDP on a cash basis.  However, the budget execution in the first 
quarter of 2010 showed that th e deficit target was unrealistic.  By end-March, the accumulated 
budget deficit increased to 2.4% of the full-year  GDP compared to a surplus of 0.8% of GDP 
in the first quarter of 2009. Th e increase in the budget deficit was due to lower-than-expected 
tax revenues, largely as a result of the contin ued change in the growth structure and the 
associated higher VAT and excise tax refunds, as  well as to increased social expenditure on 
pensions and unemployment benefits.  
In the April 2010 EDP notification the Bulgaria n authorities still e xpected the general 
government budget deficit to fall below the refe rence value to 2% of GDP already in 2010 
underpinned by a recovery in real GDP growth to  1% and an additional consolidation package 
to the tune of 2¼% of GDP approved on 31 March 2010. The Commission services' spring 
2010 forecast, published on 5 May 2010, projected the 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, an expected gradual imp rovement in the growth outlook, and an 
assessment of the budgetary impact of the announced consolidation measures. 
In June 2010, however, in view of  the deteriorating fiscal situa tion, the government decided to 
revise the 2010 budget. Despite an improved macro- economic scenario of real GDP growth of 
1% against a decline of 2% in  the original budget, the genera l government deficit target was 
raised to 4.8% of GDP on a cas h basis (3.8% of GDP in ESA 95 terms) against 0.7% in the 
initial budget and balanced budget in th e January 2010 update of the Convergence 
Programme. The budget revision reflected a signi ficant downward adjustment of projected 
government revenues – by BGN 2.1 bn or 2.9% of GDP while overall expenditure was 
increased by around 0.7 bn or 1% of GDP. In addition to ensuring the proper functioning of automatic stabilizers, the increas e in budgeted expenditure reflected  the need to offset overdue 
liabilities from the previous year. The govern ment decided to finance the resulting budget 
deficit mainly through the use of accumulated fi scal reserves instead of resorting to the bond 
markets. 
Most recent public finance data shows that Bulgaria  is on track to meet its revised fiscal target 
for 2010. At the end of November 2010, the accumulated general government cash deficit increased to 2.7% of the estimat ed full-year GDP with revenu es having dropped by 5.0% y-o-
y and expenditures having increased by 1.4% y-o-y in nominal terms.  
Budget revenue continued to underperform th roughout 2010. For the year  as a whole, the 
authorities expect the overall revenue-to-GDP  ratio to be around ⅓ percentage points below 
the level projected in the revised annual budge t. In the Commission services' autumn 2010 
forecast the revenue ratio is projected to be so mewhat above the authorities' current estimate, 
largely due to a denominator effect. The main reason for the revenue underperformance is the 
continued weaker-than-expected economic activity with an on-goi ng contraction in the direct 
and indirect tax bases and a highe r than expected decline in em ployment. To prevent a further 
                                                
 
5  The expected 3.8% of GDP fiscal deficit outcome for 2010 includes a one-off deficit increasing item of 
0.1% of GDP related to cancella tion of third countries' debt. 
 
EN 5   EN drop in revenues, the authorities have undertaken  a number of measures to improve collection 
rates, such as tighter external border controls , intensified tax audits and customs checks, and 
greater efforts to collect arre ars owed to the government. 
On the expenditure side, overall spending gr owth was constrained to below nominal GDP 
growth through September 2010, th us contributing to containi ng the widening in the budget 
deficit. However, in line with the practice of previous years, spending is expected to have 
accelerated significantly in the last two months of 2010 when  the government settled its 
liabilities incurred earlier in the year as well as accumulated arrears, mainly in the hospital 
sector. Nevertheless, for the year as a whole,  the authorities expect the expenditure-to-GDP 
ratio to be around ⅔ percentage points below the annual budg eted level, mainly due to savings 
in subsidies and capital spending. In the Commission services' autumn 2010 forecast the 
expenditure ratio is projected to be slightly above the authoritie s' estimate. This is explained 
by higher current primary expenditure in th e Commission services projections, partly 
compensated for by lower capital expenditure. 
Table 2: Composition of the budgetary adjustment 
outturnCP Jan 
2010
% of  
GDP% of  
GDP% ch   
yoy% of  
GDP% ch    
yoy% of 
GDP% ch    yoy% of  
GDP% ch    
yoy% of  
GDP% ch   
yoy% of 
GDP
Revenue 35.9 37.5 12.2 39.2 -4.4 33.4 -2.9 34.1 9.5 34.3 5. 4 34.1
of which:- Taxes on production and imports 15.1 16.0 18.7 17.4 -2.8 14.2 -4.9 14.0 6.5 14.2 4. 5 13.9- Current taxes on imcome, wealth, etc. 5.6 6.3 11.1 6.0 -2.5 5.3 -1.9 5.3 12.8 5.6 4. 4 5.3- Social contributions 7.7 8.0 3.0 7.7 -5.9 7.0 -6.0 7.1 11.7 7.4 7. 6 7.2
- O ther (resedual
) 7.6 7.2 9. 5 8.1 -7. 3 6.9 3. 6 7.7 10.8 7.1 5. 8 7.7
Expenditure 40.6 39.4 -0.7 39.2 -6.2 37.0 -4.4 38.0 6.0 36.8 2. 9 37.1
of which:- Primary expenditure 39.8 38.6 -1.1 38.3 -6.3 36.3 -4.3 37.3 5.8 36.0 2. 5 36.3      of which:
     - Compensation of employees 9.4 9.5 -3.5 8.8 0.9 9.2 -3.0 8.9 0.2 8.6 0. 0 8.4
     - Intermediate consumption 7.1 n.a n.a. n.a -4.4 6.6 -9.7 6.3 6.0 6.6 6. 4 6.4     - Social payments 13.7 n.a n.a. n.a. 6.4 14.1 6.1 14.2 0.4 13.3 1. 5 13.7
     - Subsidies 0.9 0.7 43.7 1.2 24.3 1.0 9.0 0.9 50.0 1.5 7. 5 0.9
     - Gross fixed capital formation 4.9 5.1 6.4 5.1 -4.0 4.6 -6.6 4.5 -0.9 4.3 2. 9 4.4
     - Other (residual) 3.9 4.0 -14.9 3.2 -81.4 0.7 -34.3 2.5 168.1 1.8 4. 8 2.5
- Interest expenditure 0.8 0.8 17.5 0.9 -3.0 0.7 -9.0 0.7 14.6 0.8 21.0 0.8
General government balance (GGB) -4.7 -1.1 0.0 -3.6 -3.8 -2.5 -2.9
Primary balance -3.9 -1.3 0.9 -2.9 -3.1 -1.7 -2.1
One-off and other temporary measures 0.0 n.a n.a n.a. 0.1 n.a. 0.0
Re al  GDP 
growth -4.9 -4.9 0.3 0.2 -0.1 3.6 2.62009 2010 2011
CP Jan 2010 Budget 2011 COM  AF 2010      Budget 2011 COM  AF 2010     
Source : CP Jan 2010 - Convergence Programme January 2010; Budget 2011 - Bulgaria's Budget for 2011 and additional information provide d by the authorities about the expected 
execution of the budget 2010; COM AF10 - Commission services' autumn 2010 forecast. 
4. PROJECTED BUDGETARY DEVELOPMENTS IN 2011  AND 2012 
For 2011 and 2012, the Commission services' autumn  2010 forecast project s deficits of 2.9% 
and 1.8% of GDP, implying annual deficit reduc tions of 0.9% and 1.1% of GDP, respectively, 
based on a no-policy change assumption, an exp ected improvement in the economic outlook 
and a prudent assessment of the fiscal consolidation measures envisaged in the 2011 budget. In structural terms, the exp ected 2011 and 2012 fiscal outcom es imply a gradual adjustment 
and a contractionary fiscal pol icy stance with annual consolida tion efforts of ¾% and ½% of 
GDP, respectively. 
 
EN 6   EN Bulgaria will target slightly lower defic its of 2.5% and 1.5% of GDP in 2011 and 2012, 
respectively, both on cash and accruals (ESA 95) basis, with the difference mostly explained by a projected more buoyant and more broad ba sed economic recovery. The main reasons for 
the 0.4 pps and 0.3 pps higher deficit projectio ns in the Commission services' autumn 2010 
forecast for 2011 and 2012, respectively, compared to those of the authorities are mostly 
twofold. Firstly, in the Commission services ’ forecast the underlying less buoyant growth 
scenario implies also a less revenue-rich co mposition of growth with a lower increase of 
indirect and direct tax bases than that of the authorities . Secondly, the projected lower 
increase in budget revenue in the Commission services’ forecast is based on a more 
conservative assessment of the budgetary impact of the envisaged revenue-enhancing measures with respect to ta x policy and tax collection.  
The 2011 fiscal target would represent an im provement of 1.3% of GDP in the general 
government budget balance with respect to  the expected 2010 budget execution. The 
authorities plan to reach the 2011 fiscal target mostly as a re sult of the expected economic 
recovery, better revenue collection, revenue- enhancing measures, increased spending 
efficiency and a containment of major expe nditure items broadly at their 2010 level in 
nominal terms.  
On the revenue side, the 2011 increases in excise tax rates on some energy products, 
cigarettes and tobacco are expected to resu lt in 0.09% of GDP higher revenue, while the 
delayed effect of the 2010 increases in excise ta x rates on tobacco products is expected to be 
0.07% of GDP. The increase by 1.8 pps. of the pe nsion contribution rate  should bring in 0.5% 
of GDP additional revenue. In addition, the authorities expect to  raise 0.15% of GDP by 
increasing the minimum mandatory insured inco me thresholds for main economic activities 
and professional groups by 5.6% compared to  2010. They also plan to levy a 10% 
withholding tax on income of foreign-controlled legal entities established in preferential tax 
regime areas (off-shore zones) with a source in Bulgaria. A new tax on insurance premiums 
will be introduced that is estimated to yield 0.02%  of GDP. Furthermore, a set of measures are 
aimed at improving tax enforcement and collection of  tax arrears, i.e. the incrimination of the 
non-payment of social security  contributions as well as an increase in the number and 
frequency of tax audits. 
On the expenditure side, total expenditures are projected to decline by 1.3 pps., from 37% of 
GDP in the expected 2010 budget execution to 36.8%  of GDP in 2011 mostly as a result of 
the increase in nominal GDP. In nominal term s, the authorities will aim at maintaining 
compensations of employees in the public s ector, subsidies, social expenditure and 
maintenance outlays at their levels in the 2010 revised budget, while capital expenditure is set 
to decline to its 2009 level
6. Pensions will not be increased in accordance with the so called 
“Swiss rule”7 both in 2011 and in 2012. Additional ex penditure-containment measures are 
also planned, namely improved spending efficiency and limiting the number of new recruits in the public sector. 
For 2012, according to the medium-term fiscal proj ections, Bulgaria aims to scale back the 
deficit to 1.5% of GDP, benefi ting from further improvement in the economic outlook as well 
as additional consolidation meas ures still to be specified an d adopted. Changes in the main 
                                                
 
6  The main total expenditure sub-components policy objectives are defined on a cash basis and do not 
correspond directly to the fiscal fi gures on an accruals (ESA95) basis. 
7  It mandates pension adjustments equal to 50% of the increase in inflation and 50% of the in crease in the 
annual insured income. 
 
EN 7   EN direct and indirect taxes are not envisaged excep t further harmonization of  excise tax rates in 
line with the EU requirements. 
The Commission services see risks to the ac hievement of the 2011 and 2012 deficit targets 
mainly stemming from the strength and br oadness of the expected economic recovery, 
possible underperformance with re spect to revenue collection, diffi culties to contain the build-
up of expenditure in line with the projections u nderlying the achievement of the fiscal targets 
as well as a less than optimal improveme nt in expenditure control mechanisms. 
5. FISCAL GOVERNANCE AND THE QUALITY OF THE PUBLIC FINANCES  
The Bulgarian fiscal framework performed re latively well in the favourable economic 
environment prior to th e crisis; as the governme nt consistently met its fiscal targets and 
accumulated sizeable fiscal buffers. The negativ e 2009 deficit surprise, however, appears to 
have been related al so to procedural weaknesses re garding expenditure planning and 
commitment control on an accrual s basis, in addition to the ne gative impact of the downturn 
on the budget balances. 
The Commission services’ assessment of th e convergence programme update of January 
20108 highlighted the importance of addressing th e shortcomings of the fiscal framework 
related to the existence of certain discretionary  powers of the central government which could 
undermine the transparency of the budget proce dures and democratic control by parliament. 
In addition, it was emphasized that the fram ework does not incorporate multi-annual rules, 
and that the expenditure ceilings (set in the co urse of the medium-ter m fiscal planning) are 
only binding in the short-term. The existence of administrative inefficiencies in tax collection 
contributed to the large revenue  shortfalls in 20 09-2010 in addition to the negative revenue 
impact of the crisis. At the moment, no indepe ndent institution is invol ved in the formulation 
of the macroeconomic assumptions underlyi ng the ex-ante budgetary projections.  
Bulgaria undertook several initiatives to improve expenditure control, monitoring and 
reporting systems in order to limit the risk of expenditure overruns in 2011 and reappearance 
of accrued liabilities. A special clause in the 2011 State Budget Law will give to the Council 
of Ministers the exclusive power to define a nd update ceilings for the contractual obligations 
of central government institutions and entities. This will increase the central control at the 
planning and approval stages, and thus help reducing the defic it bias, while preserving some 
flexibility at the budgetary execution stage pe rmitting to shift resources between different 
programs in order to ensure efficiency gains. In addition, a limit on th e incurred lia bilities to 
suppliers has been defined. As a general principle, the author ities plan to decrease the 
differences between public finance data in accruals (ESA 95) terms and according to the 
national (cash based) methodol ogy. Consequently, the 2011 and 2012 fiscal targets are set to 
coincide for both reporting methodologies. A nu mber of recently initiated and approved 
structural reforms in the areas of public admi nistration, social security and pensions are 
expected to increase the effi ciency of public expe nditures and to improve public finances 
sustainability both in the me dium and in the long-run. 
                                                 
8 Bulgaria's Macro Fiscal A ssessment can be found at: 
http://ec.europa.eu/economy_finance/sgp/pdf/20_scps/2009-10/02_technical_assessment/bg_2010-03-
31_ta_en.pdf   
 
EN 8   EN At the same time, no specific measures have  been outlined by Bulgarian authorities to 
strengthen the binding nature of  the medium-term budgetary framework, while the budgetary 
adjustment might come to a large extent at the expense of capital expenditures preserving 
some of the budgetary rigidities in  the current primary expenditures. 
Table 3: Comparison of key macro economic and budgetary projections 
 
  2008 2009 2010 2011 2012 
COM 6.2 -4.9 -0.1 2.6 3.8 
BG 6.2 -4.9 0.2 3.6 4.7 Real GDP 
(% change) CP 6.0 -4.9 0.3 3.8 4.8 
COM 4.9 -2.9 -4.8 -4.2 -2.7 
BG n.a. n.a. n.a. n.a. n.a. Output gap 
(% of potential GDP) CP 4.8 -3.5 -5.7 -4.7 -2.5 
COM 1.7 -4.7 -3.8 -2.9 -1.8 
BG 1.7 -4.7 -3.6 -2.5 -1.5 General government 
balance 
(% of GDP) CP 1.8 -1.9 0.0 0.1 0.1 
COM 2.5 -3.9 -3.1 -2.1 -1.0 
BG 2.5 -3.9 -2.9 -1.7 -0.2 Primary balance 
(% of GDP) CP 2.7 -1.3 0.9 1.0 1.1 
COM -0.1 -3.6 -2.1 -1.4 -0.9 
BG n.a. n.a. n.a. n.a. n.a. Cyclically-adjusted 
balance 
(% of GDP) CP 0.2 -0.7 1.9 1.7 1.0 
COM -0.1 -3.6 -2.2 -1.4 -0.9 
BG n.a. n.a. n.a. n.a. n.a. Structural balance 
(% of GDP) CP 0.2 -0.7 1.9 1.7 1.0 
COM 13.7 14..7 18.2 20.2 20.8 
BG 13.7 14.7 15.9 19.5 18.2 Government gross 
debt 
(% of GDP) CP 14.1 14.7 14.6 14.5 14.4 
Source : COM - Commission services’ 2010 autumn forecast; BG - Bulgaria's Budget for 2011 and additional 
information provided by the authorities in J anuary 2011; CP -Convergence Programme January 2010.