Report from the Commission - Bulgaria - Report prepared in accordance with Article 126(3) of the Treaty
Date: 2010-05-12
Institutions: European Commission
Subjects: Bulgaria, Economic and Monetary Union, budget deficit, economic recession, report, stability pact

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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 

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REPORT FROM THE COMMISSION 

Bulgaria 

Report prepared in accordance with Article 126(3) of the Treaty 

1. 

THE APPLICATION OF THE STABILITY AND GROWTH PACT IN THE CURRENT CRISIS 
SITUATION 

Many  EU countries are presently facing general  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  benefit  expenditure  (e.g.  unemployment  benefits). 
Second,  recognising  that  budgetary  policies  have  an  important  role  to  play  in  the  current 
extraordinary  economic  situation,  the  Commission  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 financial 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 could 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 deficit of a Member State exceeds the 3% of GDP 
reference  value.  This  report,  which  represents  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  taken  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  Growth  Pact  provides  the  framework  supporting 
government policies for a prompt return to sound budgetary positions taking account of the 
economic situation. 

2. 

LEGAL BACKGROUND  

This  report,  which  assesses  recent  and  current  budgetary  developments  in  Bulgaria  and 
reviews the short- and medium-term prospects in the light of overall economic conditions and 
policy action taken by the government, is prepared according to Article 126(3) of the Treaty 
on the Functioning of the European Union (TFEU). 

Article 126 of the TFEU 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 

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implementation of the excessive deficit procedure”1, which is part of the Stability and Growth 
Pact. According to Article 126(2) of the Treaty, the 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 has declined substantially 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  reference  value  of  60% 
(unless  the  ratio  is  sufficiently  diminishing  and  approaching  the  reference  value  at  a 
satisfactory pace). 

Article 126(3) stipulates that, if a Member State does not fulfil the requirements under one or 
both of these criteria, the Commission has to prepare a report. This 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 conducting sound fiscal policy maintaining general 
government  surpluses.  Therefore,  the  Commission  has  not  initiated  an  EDP  procedure  with 
regard to the country. 

According  to  data  notified  by  the  authorities  in  April  20102  and  subsequently  validated  by 
Eurostat3,  the  general  government  deficit  in  Bulgaria  reached  3.9%  of  GDP  in  2009,  thus 
exceeding  the  3%  of  GDP  reference  value,  while  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 

General government balance 
General government gross debt 
Note: 
a In percent of GDP. 
Source: Eurostat, Commission services' spring 2010 forecast (COM) and April 2010 EDP notification (EDP). 

3.0 
22.7 

0.1 
18.2 

1.6 
37.9 

1.9 
29.2 

1.8 
14.1 

-3.9 
14.8 

COM 
-2.8 
17.4 

BG 

-2.0 
14.7 

2011 
COM 
-2.2 
18.8 

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 

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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 Council of 10 November 2009, available at 
http://ec.europa.eu/economy_finance/sgp/legal_texts/index_en.htm. 
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/government_finance_statistics/excessive_deficit/edp
_notification_tables.  
Eurostat news release No 55/2010 of 22 April 2010. 

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deals with public investment and other relevant factors. Section 5 concludes. The report takes 
into account the Commission services’ spring 2010 forecast, released on 5 May. 

3. 

DEFICIT 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 crisis hit hard the economy of Bulgaria and the negative annual 
GDP volume growth reached 5% in 2009. The deterioration 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. according 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 swung from a surplus of 1.8% of GDP at the end of 2008 to a 
deficit of 3.9% of GDP as the implemented measures to curb expenditures and improve tax 
compliance  were  not  enough  to  offset  the  significant  revenue  shortfall.  Given  the  need  to 
maintain macroeconomic stability under the currency board arrangement the government did 
not adopt stimulus measures. Therefore, the deterioration was mainly driven by a shortfall of 
revenue as a result of the unexpectedly sharp downturn and a change in GDP composition. 

Table 2: Macroeconomic and budgetary developments a 

2004 

2005 

2006 

2007 

2008 

2009 

1.9 

2.7 

3.1 

5.3 

5.9 

6.0 

6.2 

4.3 

3.7 

2.0 

5.6 

5.7 

6.2 

6.3 

6.6 

5.5 

2.8 

-5.0 

Real GDP (% change) 
Potential GDP  
(% change)  
Output gap  
(% of potential GDP) 
General government balance 
Primary balance 
One-off and other temporary measures 
Government gross fixed capital 
formation 
Cyclically-adjusted balance 
Cyclically-adjusted primary balance 
Structural balance b 
Structural primary balance 
Notes: 
a In percent of GDP unless specified otherwise. 
b Cyclically-adjusted balance excluding one-off and other temporary measures. 
Source: Eurostat, Commission services' spring 2010 forecast (COM), taking into account the April 2010 EDP notification. 

-0.5 
-1.5 
-0.5 

-2.0 
-2.8 
-2.0 

-0.3 
-1.1 
-0.3 

-2.8 
-2.0 
0.0 

3.0 
4.4 
-0.1 

1.9 
3.6 
-0.1 

-3.9 
-3.1 
0.0 

3.1 
1.8 
3.2 

2.4 
0.6 
2.4 

2.5 
0.9 
2.6 

0.9 
0.0 
0.9 

0.1 
1.1 
0.0 

1.6 
3.4 
0.0 

1.8 
2.7 
0.0 

-1.5 

-2.9 

-2.8 

-4.8 

-1.1 

2.9 

0.6 

4.2 

4.8 

4.5 

1.7 

5.0 

4.2 

5.7 

0.8 

0.0 

4.8 

0.1 
-0.8 
0.1 

-2.2 
-1.4 
0.0 

-4.0 

-0.8 

4.5 

2010 
2011 
COM  COM 
2.7 

0.0 

The excess over the 3% of GDP reference value is temporary in the sense of the Treaty and 
the Stability and Growth Pact. The Commission services’ spring 2010 forecast indicates that 
the general government deficit will fall below the reference value already in 2010 following 
the end of the worst part of the current severe economic downturn and as a result of the fiscal 

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consolidation  measures  undertaken  by  the  government4.  The  current  assessment  is  that  real 
GDP will continue to contract in the first half of 2010 and the economic recovery will start 
towards the end of the year, 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 2011 (at 2¼% of GDP). The government intends 
to close the budgetary gap in 2011 and to achieve 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 criterion in the Treaty is not fulfilled. 

4. 

RELEVANT FACTORS 

Article 126(3) of the Treaty provides that the Commission report “shall also take into account 
whether  the  government  deficit  exceeds  government  investment  expenditure  and  take  into 
account other relevant factors including the medium-term economic and budgetary position of 
the Member State”. These factors are further clarified 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  investment  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 further challenges for the government revenues in 
the near term and the envisaged considerable fiscal consolidation in 2010.  

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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). 

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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  administration  as  well  as  freezing  pensions.  Higher 
efficiency of public services delivery was achieved by closing down two ministries and three 
state  agencies  in  2009  and  shifting  their  functions  to  other  line  ministries.  In  the  revenue 
administrations  (tax  and  customs)  was  undertaken  a  large  scale  reform.  A  new  integrated 
approach to EU funds management has been put 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 Operational Programs. The spending control has been 
further  enhanced.  The  government  foresees  further  implementation  of  structural  reforms  in 
2010  in  the  area  of  health  care,  education  and  pensions  in  order  to  improve  the  public 
administration efficiency and the sustainability 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, bringing 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, respectively. Therefore, the fiscal stance is 
projected to be restrictive both in 2010 and in 2011. The achievement 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  level.  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  deficit  in  the  entire  period  2009-2012.  The 
Commission  services’  forecast  projects  that  the  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  reference  level  of  3%  of  GDP  as  a  result  of  an 
improvement in the macroeconomic environment and considerable fiscal consolidation. 

Quality of public finances. The domestic budgetary framework appears relatively strong as 
evidenced by the good track record of meeting the budgetary targets, even in an environment 
of  benign  macro-economic  conditions.  In  2009,  Bulgaria  mitigated  the  negative  budgetary 
impact of the crisis by implementing 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 

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the  budgetary  outcome  estimation.  This  would  permit  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  assessed  the  long-term  sustainability  of 
Bulgaria’s  public  finances  as  follows.  The  long-term  budgetary  impact  of  ageing  is  slightly 
lower than the EU average. The budgetary position in 2009, as estimated in the programme, 
compounds  the  budgetary  impact  of  population  ageing  on  the  sustainability  gap.  Achieving 
higher  primary  surpluses  over  the  medium  term,  as  already  foreseen  in  the  convergence 
programme,  would  contribute  to  reducing  further  the  risks  to  the  sustainability  of  public 
finances which were assessed in the Commission 2009 sustainability report as low.  

4.3. 

Other factors put forward 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  procedures.  The  significant  deterioration  of  the 
general  government  balance  in  2009  reflects  mostly  the  impact  of  the  crisis  on  government 
finances.  The  overly  optimistic  macroeconomic  framework  underlying  the  2009  budgetary 
projections  also  contributed  to  the  difficulties  in  the  management  of  public  finances  in  a 
recession  environment.  Government  expenditure  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  efforts  needed  in  order  to  achieve  the  fiscal 
targets. As a result, the significant revenue losses were only partly compensated by spending 
cuts. After conducting audits of ministries and first level spending units, the estimation for the 
2009 deficit was increased. The correction was mainly 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 policy measures in order to achieve its budgetary 
objectives. The authorities already adopted additional 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 measures to achieve the programme target for 2010 
with  a  view  to  sustaining  the  on-going  adjustment  in  the  external  imbalances  and 
safeguarding investor confidence in the economy".  

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5. 

CONCLUSIONS 

The  general  government  deficit  in  Bulgaria  reached  3.9%  of  GDP  in  2009,  above  and  not 
close to the 3% of GDP reference value. According to the Commission services’ spring 2010 
forecast and the EDP notification of the government, 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  qualified  as  exceptional  within  the  meaning  of  the 
Treaty  and  the  Stability  and  Growth  Pact.  Furthermore,  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 examined “relevant factors”, which, according to 
the  Stability  and  Growth  Pact,  can  only  be  taken  into  account  in  the  steps  leading  to  the 
decision  on  the  existence  of  an  excessive  deficit  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 their own merit, the relevant factors in the current case on balance 
seem to be favourable. 

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