EN    EN EN 
 
EN    EN  EUROPEAN COMMISSION 
Brussels, 12.5.2010 
SEC(2010) 587 final 
  
REPORT FROM THE COMMISSION 
Bulgaria 
 
Report prepared in accordance with  Article 126(3) of the Treaty 
 
 
EN 2   EN REPORT FROM THE COMMISSION 
Bulgaria 
 
Report prepared in accordance with  Article 126(3) of the Treaty 
 
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 strong 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. Several factors are at play . First, the economic downturn brings about 
declining tax revenue and rising social bene fit expenditure (e.g. unemployment benefits). 
Second, recognising that budgetary policies have an important ro le to play in the current 
extraordinary economic situation, the Commissi on 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 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, several countries have taken measures to stabilise the fi nancial sector, some of which impact on the 
debt position or constitute a risk of higher deficits and debt in the future, although some of the costs of the government support co uld be recouped in the future. 
The Stability and Growth Pact requires the Commission to prepare a report such as the 
present one whenever an actual or planned defi cit of a Member State exceeds the 3% of GDP 
reference value. This report, which represen ts the first step in the “excessive deficit 
procedure” (EDP), analyses the reasons for the breach of the reference value with due regard 
to the economic background and all other relevant  factors. The amendments to the Stability 
and Growth Pact in 2005 aimed specifically at ensuring that in particular the economic and 
budgetary background was fully take n into account in all steps in the EDP. This means for 
instance that, if an “excessive deficit” is deemed to exist, adequate attention needs to be paid 
to the economic background and outlook when making recommendations on the pace of the 
correction. In this way, the Stability and Gr owth Pact provides the framework supporting 
government policies for a prompt return to sound budgetary positions taking account of the economic situation. 
2. L
EGAL BACKGROUND  
This report, which assesses recent and current budgetary developments in Bulgaria and 
reviews the short- and medium-t erm prospects in the light of overall economic conditions and 
policy action taken by the government, is prepar ed according to Article 126(3) of the Treaty 
on the Functioning of the European Union (TFEU). 
Article 126 of the TFEU lays dow n an excessive deficit procedur e (EDP). This procedure is 
further specified in Council Regulation (EC)  No 1467/97 “on speeding up and clarifying the 
 
EN 3   EN implementation of the excessive deficit procedure”1, which is part of th e Stability and Growth 
Pact. According to Article 126(2) of the Treaty, the Commission has to monitor compliance with budgetary discipline on the ba sis of two criteria, namely: (a) whether the ratio of the 
planned or actual government deficit to gro ss domestic product (GDP) exceeds the reference 
value of 3% (unless eith er the ratio has declined substant ially and continuously and reached a 
level that comes close to the reference value; or, alternatively, the excess over the reference value is only exceptional and temporary and the ratio remains close to the reference value); and (b) whether the ratio of government debt  to GDP exceeds the re ference value of 60% 
(unless the ratio is sufficiently diminishi ng and approaching the reference value at a 
satisfactory pace). 
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 exceeds government investment expenditure and take into account all other relevant factors, including the medium-term economic and 
budgetary position of the Member State”. 
Over the past decade, Bulgaria has been c onducting sound fiscal policy maintaining general 
government surpluses. Therefore, the Commissi on has not initiated an EDP procedure with 
regard to the country . 
According to data notified by the authorities in April 2010
2 and subsequently validated by 
Eurostat3, the general government deficit in Bulg aria reached 3.9% of GDP in 2009, thus 
exceeding the 3% of GDP reference value, wh ile general government gross debt stood at 
14.8% of GDP, below the 60% of GDP reference value and considerably  lower than five 
years ago. 
Table 1 : General government deficit and debt a 
 2004 2005 2006 2007 2008 2009 2010 2011 
       COM BG COM 
General government balance 1.6 1.9 3.0 0.1 1.8 -3.9 -2.8 -2.0 -2.2 
General government gross debt 37.9 29.2 22.7 18.2 14.1 14.8 17.4 14.7 18.8 
Note : 
a In percent of GDP. 
Source : Eurostat, Commission services' spring 2010 foreca st (COM) and April 2010 EDP notification (EDP). 
The notified figure for the 2009 deficit provides prima facie  evidence on the existence of an 
excessive deficit in Bulgaria in the sense of the Treaty and the Stability and Growth Pact. The 
Commission has therefore decided to initiate an excessive deficit procedure for Bulgaria with 
the adoption of this report. Section 3 of the report examines the deficit criterion. Section 4 
                                                 
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. 
2 According to Council Regulation (EC) No 479/2009, Member States have to report to the Commission, 
twice a year, their planned and actua l government deficit and debt le vels. The most recent notification 
of Bulgaria can be found at:  http://epp.eurostat.ec.europa.eu/portal/page/porta l/government_finance_statistics/excessive_deficit/edp
_notification_tables.  
3 Eurostat news release No 55/2010 of 22 April 2010. 
 
EN 4   EN deals with public investment a nd other relevant factor s. Section 5 concludes. The report takes 
into account the Commission services’ spring 2010 forecast, released on 5 May. 
3. D EFICIT CRITERION   
In 2009, the general government deficit reached 3.9% of GDP.  
Well in excess of 3% of GDP, it is not close  to the Treaty reference value.  
The excess over the 3% of GDP reference value is exceptional . In particular it results from a 
severe economic downturn in the sense of the Treaty and the Stability and Growth Pact. The 
global economic and financial cris is hit hard the economy of Bu lgaria and the negative annual 
GDP volume growth reached 5% in 2009. The dete rioration stemmed from  sharp contractions 
in both external demand and foreign investment inflows. Reflecting the fall in investment and 
private consumption, domestic demand declined abruptly, driving down indirect tax revenue, 
which account for more than 40% of government  revenue in Bulgaria. The scale of the 
economic contraction was unexpected, i.e. acco rding to the 2008 update of the convergence 
programme the government expected  real GDP to grow by 4.7% in 2009. As a result of the 
downturn the budgetary balance sw ung from a surplus of 1.8% of GDP at the end of 2008 to a 
deficit of 3.9% of GDP as th e implemented measures to curb  expenditures and improve tax 
compliance were not enough to offset the signif icant revenue shortfall. Given the need to 
maintain macroeconomic stabili ty under the currency board arrangement the government did 
not adopt stimulus measures. Therefore, the dete rioration was mainly driven by a shortfall of 
revenue as a result of the unexpectedly sh arp downturn and a change in GDP composition.  
Table 2 : Macroeconomic and budgetary developments a 
 2004 2005 2006 2007 2008 2009 2010 2011 
       COM COM 
Real GDP (% change) 6.6 6.2 6.3 6.2 6.0 -5.0 0.0 2.7 
Potential GDP  
(% change)  5.5 5.9 5.7 5.6 5.3 2.7 2.0 1.9 
Output gap  
(% of potential GDP) 2.8 3.1 3.7 4.3 5.0 -2.9 -4.8 -4.0 
General government balance 1.6 1.9 3.0 0.1 1.8 -3.9 -2.8 -2.2 
Primary balance 3.4 3.6 4.4 1.1 2.7 -3.1 -2.0 -1.4 
One-off and other temporary measures 0.0 -0.1 -0.1 0.0 0.0 0.0 0.0 0.0 
Government gross fixed capital 
formation 2.9 4.2 4.2 4.8 5.7 4.8 4.5 4.5 
Cyclically-adjusted balance 0.6 0.8 1.7 -1.5 0.0 -2.8 -1.1 -0.8 
Cyclically-adjusted primary balance 2.4 2.5 3.1 -0.5 0.9 -2.0 -0.3 0.1 
Structural balance b 0.6 0.9 1.8 -1.5 0.0 -2.8 -1.1 -0.8 
Structural primary balance 2.4 2.6 3.2 -0.5 0.9 -2.0 -0.3 0.1 
Notes : 
a In percent of GDP unless specified otherwise. 
b Cyclically-adjusted balance excluding on e-off and other temporary measures. 
Source : Eurostat, Commission services' spring 2010 forecast (COM),  taking into account the April 2010 EDP notification. 
The excess over the 3% of GDP reference value is temporary  in the sense of the Treaty and 
the Stability and Growth Pact. The Commissi on services’ spring 2010 forecast indicates that 
the general government deficit will fall below the reference value al ready in 2010 following 
the end of the worst part of the current severe  economic downturn and as a result of the fiscal 
 
EN 5   EN consolidation measures undertaken by the government4. The current assessment is that real 
GDP will continue to contract in the first ha lf of 2010 and the economic recovery will start 
towards the end of the y ear, accelerating in 2011.  
Based on this macroeconomic assessment and also taking into account recent developments 
in general government receipts and expenditures, on unchanged policies assumption, the deficit is expected to be on a declining path and to remain below the 3% of GDP reference 
value both in 2010 (at 2¾% of GDP) and in 201 1 (at 2¼% of GDP). The government intends 
to close the budgetary gap in 2011 and to ach ieve a balanced general government budget . 
In sum, the deficit is not close to the 3% of  GDP reference value, although the excess over it 
is exceptional and temporary in the sense of the Treaty and the Stability and Growth Pact. 
This analysis suggests that the deficit cr iterion in the Treaty is not fulfilled. 
4. R
ELEVANT FACTORS  
Article 126(3) of the Treaty pr ovides that the Commission report “shall also take into account 
whether the government deficit exceeds governme nt investment expenditure and take into 
account other relevant factors including the me dium-term economic and budgetary position of 
the Member State”. These factors are further cl arified in Article 2(3)  of Council Regulation 
(EC) No 1467/97, which also specifies that “any  other factors which, in the opinion of the 
Member State concerned, are relevant in order to comprehensively assess in qualitative terms 
the excess over the reference value and which the Member State has put forward to the 
Commission and to the Council” need to be given due consideration.  
In view of the above provisions, the following four subsections consider in turn (1) the 
medium-term economic position; (2) the medium-term budgetary position (including public investment); (3) other factors put forward by the Member State; and (4) other factors 
considered relevant by the Commission. 
4.1. Medium-term economic position 
Cyclical conditions and potential growth.  Before the onset of the global economic and 
financial downturn Bulgaria had witnessed strong real GDP growth underpinned by fast 
credit expansion and large foreign investme nt inflows. As the global economic crisis 
unfolded, economic activity was severely impacted, resulting in a 5% contraction of real GDP 
in 2009. The output gap turned sharply negative  in 2009 and would rise further in 2010. It 
would also remain in negative territory over 2011-2012. According to the Commission 
services' spring forecast the economic contraction is expected to end in the second half of 2010 and the economy should start growing again on annual basis in 2011. Initially, the main 
driver of the economic recovery is expected to be net exports . However, the shift towards a 
less tax rich growth composition may pose furt her challenges for the government revenues in 
the near term and the envisaged consid erable fiscal consolidation in 2010.  
                                                
 
4 The assessment takes into account part of the fiscal  consolidation and anti crisis package of measures 
announced in March 2010 (notably the decision to contain government expenditure at 90% of the 
allocation for the budgetary year  and to permit spending the other 10% only if there are enough 
budgetary resources at the end of the year). 
 
EN 6   EN Recent structural reforms.  Upon taking office in July the new government undertook 
several expenditure reducing measures, namely additional cuts in primary expenditure beyond the 90% budget rule, abstaining from initially planned wage increase in the public sector, compressing subsidies, capital spending, maintenance and operation expenditure, 
streamlining and downsizing public administrati on as well as freezi ng pensions. Higher 
efficiency of public services delivery was ach ieved by closing down two ministries and three 
state agencies in 2009 a nd shifting their functi ons to other line minist ries. In the revenue 
administrations (tax and customs) was undertak en a large scale reform. A new integrated 
approach to EU funds management has been pu t in practice with the establishment of a new 
administrative structure within the Council of Ministers, which provides for a better 
coordination of the implementation of Operatio nal Programs. The spending control has been 
further enhanced. The government foresees furt her implementation of structural reforms in 
2010 in the area of health care, education an d pensions in order to improve the public 
administration efficiency and the su stainability of public finances. 
4.2. Medium-term budgetary position 
Structural deficit and fiscal consolidation in good times. During the past economic good 
times Bulgaria has achieved consistently high fiscal surpluses and accumulated large fiscal reserves, reflecting buoyant economic growth  and considerable revenue windfalls.  On the 
expenditure side, there was a decline in the government expenditure-to-GDP ratio as well as  a 
certain expenditure restructuring towards more growth enhancing  items, such as capital 
expenditures.  The medium-term budgetary strategy of the government is to set the general 
government budget deficit on a declining path, br inging it down below the reference value at 
2% of GDP already in 2010, and to achieve  a balanced budget from 2011 onwards. The 
structural balance is expected to improve from a deficit of 2.9% of GDP in 2009 to deficits of 
1.1% of GDP and 0.8% of GDP in 2010 and 2011, resp ectively. Therefore, th e fiscal stance is 
projected to be restri ctive both in 2010 and in 2011. The ac hievement of these targets would 
require considerable and frontloaded fiscal consolidation already in 2010 and depends on the 
expected improvement of the macroeconomic environment.  
Public investment . Government investment (as a share of GDP) was larger than the budget 
deficit and amounted to 4¾% of GDP in 2009,  down from 5¾% of GDP in 2008 but still 
higher than the 2007 leve l. It was consistently maintained  above 4% of GDP in the period 
2006-2009. According to the January 2010 update of the convergence programme public investment is set to remain unchanged at 5.1%  of GDP until 2012. Therefore, it is planned to 
be well above the general government de ficit in the entire period 2009-2012. The 
Commission services’ forecast projects that th e general government deficit ratio would 
continue to be below the public investment ratio also in 2010-2011 when the budgetary gap is expected to be brought down below the referen ce level of 3% of GD P as a result of an 
improvement in the macroeconomic environmen t and considerable fiscal consolidation.  
Quality of public finances.  The domestic budgetary framew ork appears relatively strong as 
evidenced by the good track record of meeting th e budgetary targets, even in an environment 
of benign macro-economic conditions. In 2009, Bulgaria mitigated the negative budgetary 
impact of the crisis by implemen ting sizeable consolidation measures . In the recent past, the 
budgetary framework has been improved by streamlining budgetary procedures, enhancing reporting requirements, and including a more comprehensive macroeconomic analysis and 
assessment of the fiscal risks in the budgetary  documents. The government plans to tighten 
further the reporting requirements with respect to  the first level spending units and to improve 
 
EN 7   EN the budgetary outcome estimation. This would pe rmit a timely adjustment of fiscal policy 
measures in order to achieve the budgetary objectives. 
Long-term sustainability of public finances.  In its opinion of 26 April 2010 on the most 
recent convergence programme, the Council a ssessed the long-term sustainability of 
Bulgaria’s public finances as  follows. The long-term budgetary impact of agei ng is slightly 
lower than the EU average. The budgetary pos ition in 2009, as estimated  in the programme, 
compounds the budgetary impact of population ag eing on the sustainability gap. Achieving 
higher primary surpluses over th e medium term, as already foreseen in the convergence 
programme, would contribute to reducing furthe r the risks to the sustainability of public 
finances which were assessed in the Commi ssion 2009 sustainability report as low.  
4.3. Other factors put forwar d by the Member State 
The authorities of Bulgaria have not submitted a list of relevant factors according to Article 
2(3) of Council Regulation (EC) No 1467/97. 
4.4. Other factors considered relevant by the Commission 
Recent public finance developments in Bulgaria were also influenced by the following factors 
in the area of budgetary institutions and proc edures. The significant deterioration of the 
general government balance in 200 9 reflects mostly the impact of the crisis on government 
finances. The overly optimistic macroeconom ic framework underlying the 2009 budgetary 
projections also contributed to the difficulties in the management of public finances in a 
recession environment. Government expenditu re and revenue for 2009 were set based on a 
forecast for 4.7% growth of real GDP against a contraction of 5%. This made more difficult 
the estimation of the additional consolidation e fforts needed in order to achieve the fiscal 
targets. As a result, the significant revenue loss es were only partly co mpensated by spending 
cuts. After conducting audits of ministries and first level spen ding units, the estimation for the 
2009 deficit was increased. The correction was main ly due to longer-term contracts for which 
the final payments have to be done in 2010 but on accrual basis had to be reported in 2009. 
The early identification and reporting of these commitments, already with the April EDP notification rather than  with the autumn EDP notification, would permit to the government to 
better target and adjust the necessary fiscal pol icy measures in order to achieve its budgetary 
objectives. The authorities already adopted additio nal consolidation package that is expected 
to bring the budget deficit below the reference level already in 2010 and they stand ready to 
adopt further measures in that respect, if this is necessary.  
In its opinion on the most recent update of the convergence programme, the Council 
considered that "the planned consolidation in 2010 is not fully underpinned by measures 
outlined in the programme. In addition, its full achievement depends on an optimistic macroeconomic scenario with further risks coming from the upward revision of the 2009 
deficit". The Council therefore invited Bulgaria "to continue  implementing strict fiscal 
policies and adopt further consolidation measur es to achieve the programme target for 2010 
with a view to sustaining the on-going adju stment in the external imbalances and 
safeguarding investor confidence in the economy" .  
 
EN 8   EN 5. C ONCLUSIONS  
The general government deficit in Bulgaria  reached 3.9% of GDP in 2009, above and not 
close to the 3% of GDP reference value. A ccording to the Commission services’ spring 2010 
forecast and the EDP notification of the governme nt, the budget deficit in 2010 is expected to 
be contained below the reference level in 2010-2011 and to be set on a declining path. The excess over the reference value can be qualifie d as exceptional within the meaning of the 
Treaty and the Stability and Growth Pact. Furt hermore, it can be considered temporary. 
However, the deficit criterion in  the Treaty is not fulfilled as  the general government deficit 
for 2009 is not close to the reference value. 
General government gross debt remained well below the 60% of GDP reference value at 
14.8% of GDP in 2009. This suggests that the debt criterion in the Treaty is fulfilled. 
In line with the Treaty, this report has also ex amined “relevant factors”, which, according to 
the Stability and Growth Pact, can only be take n into account in the steps leading to the 
decision on the existence of an excessive defi cit 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. Considered on thei r own merit, the relevant factor s in the current case on balance 
seem to be favourable.