Council opinion of 27 March 2007 on the convergence programme of Bulgaria, 2006-2009
Date: 2007-03-27
Institutions: Council of the European Union
Subjects: Bulgaria, budget estimate, economic convergence, economic forecasting, public finance, stability programme

24.4.2007

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Official Journal of the European Union

C 89/11

COUNCIL OPINION

of 27 March 2007

on the convergence programme of Bulgaria, 2006-2009

(2007/C 89/04)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

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

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

(1)

(2)

(3)

(4)

(5)

On 27 March 2007 the Council examined the convergence programme of Bulgaria, which covers the
period 2006 to 2009.

Bulgaria has achieved a high degree of macroeconomic stability supported by sound public finances.
Economic growth has been strong and stable, increasing to around 5½ % in recent years, but the
GDP per capita (in PPS) remains low at 32,9 % of the EU-25 average in 2005. Therefore, the scope
for catching up remains ample and represents Bulgaria's overriding challenge for the medium and
long term. After the introduction of the currency board in 1997, inflation was reduced to single-digit
figures by 1999, but the disinflation process has stalled in recent years, and CPI inflation reached
7,3 % in 2006.

The macroeconomic scenario underlying the programme envisages that real GDP growth will remain
at a high level, slightly increasing from 5,9 % in 2006 to 6,1 % on average over the rest of the
programme period. Assessed against currently available information, this scenario appears to be
based on plausible growth assumptions. However, high external imbalances continue to be a risk
factor in the medium term, in particular as the external deficit in 2006 turned out at 16 % of GDP,
although the financing of the deficit has been fully ensured through FDI inflows. The programme's
projections for inflation appear realistic.

For 2006, the general government surplus is estimated at 3,3 % of GDP in the Commission services'
autumn 2006 forecast, against a target of a balanced budget set in the December 2005 pre-accession
economic programme (PEP) and a projected surplus of 3,2 % of GDP in the Convergence Programme.
The substantially better budgetary outcome is mainly the result of higher than projected revenues due
to conservative revenue forecasts in the PEP, higher output growth, and improved revenue collection.
Compared to the PEP projections, expenditures are also lower by 1 % of GDP, reflecting mainly lower
current expenditures.

The medium-term budgetary strategy laid down in the convergence programme aims at maintaining
a general government surplus in the range of 0,8-1,5 % of GDP in order to safeguard macroeconomic
stability and sustainability of public finances. A strong fiscal loosening is projected in 2007, with the
budgetary surplus attaining 0,8 % of GDP, down from 3,2 % of GDP in 2006. In 2008 and 2009,
the general government surplus would rise again and stabilise at 1,5 % of GDP. With interest expendi-
tures declining by around ¼ % of GDP over the programme period, the primary surplus is projected
to decline from 4½ % of GDP in 2006 to 2¼ % of GDP in 2007 before reverting to around 2¾ % of
GDP in 2008 and 2009. The fiscal loosening in 2007 would be almost exclusively expenditure-
driven. Expenditures are projected to increase by 2¾ % of GDP, with only part of this increase, about
¾ % of GDP, being reversed in 2008. The projected increase in expenditures in 2007 would come
mainly from ‘other expenditures’ (+2½ % of GDP) and subsidies (+½ % of GDP). The increase in

(1) OJ L 209, 2.8.1997, p. 1. Regulation as amended by Regulation (EC) No 1055/2005 (OJ L 174, 7.7.2005, p. 1). The

documents referred to in this text can be found at the following website:
http://europa.eu.int/comm/economy_finance/about/activities/sgp/main_en.htm

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Official Journal of the European Union

24.4.2007

‘other expenditures’ reflects Bulgaria's contribution to the EU (1¼ % of GDP), an increase in expendi-
tures on EU Structural Fund projects (¼ % of GDP), which would be fully covered by higher revenues
from EU grants, and an increase in ‘other current expenditure’ (1 % of GDP). Planned reductions in
corporate and personal
income taxes in 2007 are projected to be almost fully compensated by
improved compliance and tax collection rates. Consequently, total revenues would remain almost
constant (as a percent of GDP) over the programme period. The programme also indicates that
although the budget for 2007 envisages a general government surplus of 0,8 % of GDP, a higher
surplus of 2 % of GDP would actually be targeted during budget execution. This would be done on
the basis of provisions in the Budget Law, which allow the spending of 10 % of the budgeted current
primary expenditures only in case that the external deficit does not widen further. Budgetary targets
have been revised considerably upwards compared to the 2005 pre-accession economic programme,
reflecting substantial revenue over-performance in 2006 with carry-over effects in subsequent years
and a slightly more favourable outlook for output growth.

(6)

(7)

(8)

The structural balance (i.e.
the cyclically-adjusted balance net of one-off and other temporary
measures) calculated according to the commonly agreed methodology is planned to decrease from
around 3¼ % of GDP in 2006 to 1 % in 2007 and then to increase again to around 2 % of GDP in
2008 and 2009. If a higher nominal surplus of 2 % of GDP is achieved in 2007 during the budget
execution, as outlined as a target in the programme, the adjustment path would be smoother. The
medium-term objective (MTO) for the budgetary position presented in the programme is a balanced
budget in structural terms, which it plans to maintain by a large margin throughout the programme
period. As the MTO is more demanding than the minimum benchmark (estimated at a deficit of
around 1¼ % of GDP), achieving it should fulfil the aim of providing a safety margin against the
occurrence of an excessive deficit. The MTO is more demanding than implied by the debt ratio and
average potential output growth in the long term.

The budgetary outcome in 2007 could be better than projected in the programme, while in 2008
and 2009 the risks to the budgetary projections appear broadly balanced. In view of the good track
record with respect to the achievement of budgetary targets and provisions in the 2007 Budget Law
for limiting expenditures during budget execution, a higher surplus for 2007 appears to be realistic
even though revenue projections for 2007 could entail certain downside risks as revenue shortfalls
from tax reductions may not be fully compensated by improved compliance and collection rates.
Although no details are given on the adjustment strategy from 2008 onwards, the budgetary targets
until the end of the programme period appear to be broadly plausible, provided that a better than
currently projected budgetary outcome in 2007 is realised.

In view of this risk assessment, the budgetary stance in the programme implies that the MTO is main-
tained by a large margin throughout the programme period. In addition, it provides a sufficient safety
margin against breaching the 3 % of GDP deficit threshold with normal macroeconomic fluctuations
throughout the programme period. The fiscal policy stance implied by the programme is expan-
sionary in 2007 which could turn out to be pro-cyclical in good times. This would not be fully in
line with the Stability and Growth Pact. In particular, good times are expected to occur in 2007,
when the structural balance is planned to decline by around 2¼ % of GDP according to the
programme and by 1½ % according to the Commission services' autumn 2006 forecast.

(9)

Government gross debt is estimated to have reached 25¼ % of GDP in 2006, well below the 60 % of
GDP Treaty reference value. The programme projects the debt ratio to decline by 4 percentage points
over the programme period.

(10)

In the absence of the long-term projections of age-related expenditures, based on the common
macroeconomic assumptions as carried out by the EPC/Commission, it is not possible to assess the
impact of population ageing in Bulgaria on a comparable and robust basis as it is currently done for
the other Member States, for which the projections on this basis are available. However, a significant
impact of ageing on expenditures cannot be excluded given the current demographic structure. The
initial budgetary position, with a large structural surplus, contributes significantly to stabilise debt
before considering the long-term budgetary impact of ageing. Maintaining high primary surpluses
over the medium term would contribute to containing risks to the sustainability of public finances.

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(11)

The budgetary strategy in the programme is partly consistent with the broad economic policy guide-
lines included in the integrated guidelines for the period 2005-2008. According to the programme,
the fiscal policy stance is expansionary in 2007 which could turn out to be pro-cyclical in good
times and risks aggravating the already high external deficit. In addition, while steps to improve the
long-term sustainability of the pension system have been taken, very few concrete measures to
improve the efficiency of public spending, in particular as regards healthcare expenditures, where
there are recurrent problems with the monitoring and control of expenditures and the quality of the
services provided, are presented.

(12) As regards the data requirements specified in the code of conduct for stability and convergence

programmes, the programme has some gaps in the required and optional data (1).

The Council considers that the medium-term budgetary position is sound and the budgetary strategy
provides an example of fiscal policies conducted in compliance with the Stability and Growth Pact. However,
the planned reduction in the budget surplus during economic good times in 2007 could turn out to imply a
pro-cyclical fiscal stance and could add to existing external imbalances. Achieving a higher surplus of 2 % of
GDP through the budget execution would significantly reduce that risk.

In view of the above assessment, the Council invites Bulgaria to:

(i) achieve a higher budgetary surplus in 2007 than planned in the programme and to maintain a strong
position thereafter in order to foster macroeconomic stability and to contain the high external deficit;

(ii) to further strengthen the efficiency of public spending, in particular through a reform of the healthcare

system.

Comparison of key macroeconomic and budgetary projections (1)

2005

2006

2007

2008

2009

Real GDP
(% change)

HICP inflation
(%)

CP Jan 2007

COM Nov 2006

PEP Dec 2005

CP Jan 2007

COM Nov 2006

PEP Dec 2005

Output gap
(% of potential GDP)

CP Jan 2007 (2)

General government
balance
(% of GDP)

COM Nov 2006 (6)

PEP Dec 2005

CP Jan 2007

COM Nov 2006

PEP Dec 2005

5,5

5,5

5,7

5,0

5,0

4,9

0,5

0,5

n.a.

2,4

2,4

1,8

5,9

6,0

5,7

7,4

7,0

6,7

0,1

0,3

n.a.

3,2

3,3

0,0

5,9

6,0

5,9

4,0

3,5

3,1

6,2

6,2

5,9

3,0

3,8

2,8

6,1

n.a.

n.a.

3,0

n.a.

n.a.

– 0,4

– 0,8

– 1,0

– 0,1

– 0,5

n.a.

0,8

1,8

n.a.

1,5

1,7

– 0,2

– 0,7

n.a.

n.a.

1,5

n.a.

n.a.

(1) In particular, the labour market data on hours worked and some information on long-term sustainability are not provided.

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Official Journal of the European Union

24.4.2007

Primary balance
(% of GDP)

Cyclically-adjusted
balance
(% of GDP)

Structural balance (3)
(% of GDP)

Government gross debt
(% of GDP)

CP Jan 2007

COM Nov 2006

PEP Dec 2005

CP Jan 2007 (2)

COM Nov 2006

PEP Dec 2005

CP Jan 2007 (4)

COM Nov 2006 (5)

PEP Dec 2005

CP Jan 2007

COM Nov 2006

PEP Dec 2005

2005

2006

2007

2008

2009

3,9

3,9

3,4

2,1

2,1

n.a.

2,1

2,1

n.a.

29,8

29,8

31,3

4,6

4,7

1,5

3,2

3,2

n.a.

3,2

3,2

n.a.

25,3

25,8

26,3

2,2

2,9

1,2

1,0

1,8

n.a.

1,0

1,8

n.a.

22,7

21,8

23,9

2,8

2,7

0,5

1,9

1,9

n.a.

1,9

1,9

n.a.

22,3

17,9

22,7

2,7

n.a.

n.a.

2,0

n.a.

n.a.

2,0

n.a.

n.a.

21,1

n.a.

n.a.

Notes:
(1) The government accounts of Bulgaria have not yet been officially subject to a complete quality assessment by Eurostat. Eurostat will

publish and validate government balance and debt figures shortly after the data notification of 1 April 2007.

(2) Commission services calculations on the basis of the information in the programme.
(3) Cyclically-adjusted balance (as in the previous rows) excluding one-off and other temporary measures.
(4) There are no one-off and other temporary measures in the programme.
(5) There are no one-off and other temporary measures in the Commission services' autumn 2006 forecast.
(6) Based on estimated potential growth of 5,8 %, 6,3 %, 6,4 % and 6,7 % respectively in the period 2005-2008.

Source:
Convergence programme (CP); Pre-accession economic programme (PEP); Commission services' autumn 2006 economic forecasts (COM); Commission
services' calculations