Proposal for a Council Decision on the existence of an excessive deficit in Bulgaria
Date: 2010-07-06
Institutions: European Commission
Subjects: Bulgaria, budget deficit, public debt, public finance

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EUROPEAN COMMISSION 

Brussels, 6.7.2010 
SEC(2010) 882 final 

Proposal for a 

COUNCIL DECISION 

on the existence of an excessive deficit in Bulgaria 

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EXPLANATORY MEMORANDUM 

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  in  2008/09.  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  timely,  targeted  and 
temporary and 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 have impacted 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  initiate  the  excessive  deficit 
procedure (EDP) whenever the deficit of a Member State exceeds the 3% of GDP reference 
value.  The  amendments  to  the  Stability  and  Growth  Pact  in  2005  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  provides  the  framework  supporting 
government  policies  for  a  prompt  return  to  sound  budgetary  positions taking  account  of  the 
economic situation, and thereby ensuring long-term sustainability of public finances. 

2. 

PREVIOUS STEPS IN THE EXCESSIVE DEFICIT PROCEDURE 

Article 126 of the Treaty on the Functioning of the European Union 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  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). 

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 Council of 10 November 2009, available at 
http://ec.europa.eu/economy_finance/sgp/legal_texts/index_en.htm. 

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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”. 

On the basis of the data notified by the Bulgarian authorities in April 20102 and subsequently 
validated by Eurostat3 and taking into account the Commission services’ spring 2010 forecast, 
the Commission adopted a report under Article 126(3) for Bulgaria on 12 May 20104. 

Subsequently, and in accordance with Article 126(4), the Economic and Financial Committee 
formulated an opinion on the Commission report on 27 May 2010. 

3. 

THE EXISTENCE OF AN EXCESSIVE DEFICIT 

According  to  the  data  notified  by  the  Bulgarian  authorities  in  April  2010,  the  general 
government deficit in Bulgaria reached 3.9% of GDP in 2009, thus exceeding the 3% of GDP 
reference value. The Commission report under Article 126(3) considered that the deficit was 
not close to the 3% of GDP reference value but that the excess over the reference value can be 
qualified as exceptional within the meaning of the Treaty and the Stability and Growth Pact. 
In particular, it results from a severe economic downturn in the sense  of the Treaty and the 
Stability and Growth Pact, as the global economic and financial crisis hit hard the economy of 
Bulgaria and the negative annual GDP volume growth reached 5% in 2009. Furthermore, the 
excess over the reference value could be considered temporary. According to the Commission 
services’  spring  2010  forecast,  based  on  a  no-policy  change  assumption,  the  general 
government deficit will fall below the reference value already in 2010 with the stabilization of 
the  economy  and  as  a  result  of  the  fiscal  consolidation  measures  announced  by  the 
government  at  the  end  of  March  2010.  In  a  notification  submitted  on  22  June  2010,  the 
Bulgarian authorities further revised the planned deficit for 2010 to 3.8% of GDP, above and 
not close to the reference value. The deficit criterion in the Treaty is not fulfilled. 

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 Bulgarian authorities further revised the planned debt for 2010 to 15.3% of GDP. The debt 
criterion in the Treaty is fulfilled. 

In line with the provisions in the Treaty and the Stability and Growth Pact, the Commission 
also  analysed  in  its  report  “relevant  factors”.  According  to  the  Stability  and  Growth  Pact, 
these can only be taken into account in the steps leading to the decision on the existence of an 
excessive deficit if the deficit satisfies the double condition of closeness and temporariness. In 

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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. 
All EDP-related documents for Bulgaria can be found at the following website: 
http://ec.europa.eu/economy_finance/sgp/deficit/countries/index_en.htm. 

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the  case  of  Bulgaria,  the  double  condition  is  not  met.  Considered  on  their  own  merit,  the 
relevant factors in the current case on balance seem to be favourable.  

The opinion of the Economic and Financial Committee in accordance with Article 126(4) of 
the Treaty is consistent with the assessment in the Commission report under Article 126(3) on 
the existence of excessive deficit.  

The Commission, having taken into account its report under Article 126(3) and the opinion of 
the  Economic  and  Financial  Committee  under  Article  126(4),  is  of  the  opinion  that  an 
excessive  deficit  exists  in  Bulgaria.  This  opinion,  adopted  by  the  Commission  on  12  May 
2010,  is  herewith  addressed  to  the  Council  according  to  Article  126(5).  The  Commission 
proposes  that  the  Council  shall  decide  accordingly,  in  conformity  with  Article  126(6).  In 
addition,  the  Commission  is  submitting  to  the  Council  a  recommendation  for  a  Council 
Recommendation  to  be  addressed  to  Bulgaria  with  a  view  to  bringing  the  situation  of  an 
excessive deficit to an end according to Article 126(7). 

4. 

RECOMMENDATIONS TO END THE EXCESSIVE DEFICIT SITUATION 

According 
the  Council 
to  Article  3(4)  of  Council  Regulation  (EC)  No  1467/97, 
recommendation  under  Article  126(7)  has  to  establish  a  deadline  of  six  months  at  most  for 
effective  action  to  be  taken  by  the  Member  State  concerned  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”. Article 2(6) of the Regulation implies 
that  the  “relevant  factors”  considered  in  the  Commission  report  under  Article  126(3)  of  the 
Treaty have to be taken into account in deciding whether special circumstances exist. Article 
3(4)  of  the  Regulation  specifies  that  the  Council  has  to  recommend  that  the  Member  State 
achieves  a  “minimum  annual  improvement  of  at  least  0.5%  of  GDP  as  a  benchmark,  in  its 
cyclically  adjusted  balance  net  of  one-off  and  temporary  measures,  in  order  to  ensure  the 
correction of the excessive deficit within the deadline set in the recommendation”. 

In the case of Bulgaria, the relevant factors, as clarified in Article 2(3) of Regulation (EC) No 
1467/97  and  examined  in  the  Commission’s  report  under  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.  In  particular,  in  the 
Commission  services'  spring  2010  forecast,  following  the  severe  contraction  in  2009  as  a 
result of the global economic and financial crisis, real GDP growth is projected to gradually 
recover and reach 2.7% by 2011. In the April 2010 EDP notification the Bulgarian authorities 
expect the general government budget deficit to fall below the reference value to 2% of GDP 
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  projects  the  general  government  budget  deficit  to  improve  to  2.8%  of 
GDP in 2010 and to 2.2% 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 Bulgarian authorities 
undertook  a  mid-year  revision  of  the  2010  budget  and  increased  their  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 proper functioning of automatic stabilizers and a 
more accurate reflection of the domestic and international economic challenges. On the basis 
of  the  Commission  services’  forecast  and  the  latest  budgetary  and  economic  developments, 

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the Bulgarian authorities should avoid a deterioration of the 2010 deficit beyond 3.8% of GDP 
and  correct  the  excessive  deficit  by  2011  at  the  latest,  implying  a  structural  consolidation 
effort of around ¾ percentage points of GDP in that year.  

The deficit surprise in 2009, in addition 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 deterioration of the budgetary 
position. The negative outcome reflects also 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 growth structure. However, 
part  of  these  revenue  windfalls,  instead  of  being  fully  saved,  have  been  used  to  finance 
relatively  high  ad-hoc  pension  increases  and  public  sector  wage  increases,  far  above 
productivity gains, as well as for tax and social security rate cuts.  

The  non-binding  nature  of  the  medium-term  fiscal  framework  in  the  three-year  budgetary 
planning horizon and the lack of effective spending control mechanisms and expenditure rules 
have prevented the fiscal position from becoming even stronger, thus further cushioning the 
negative  impact  from  the  downturn  on  public  finances.  In  addition,  the  existing  budgetary 
framework  allows  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  subsequent  expenditure 
overruns. Successive reduction of pension contribution rates combined with pension increases 
and the absence of offsetting reform measures have brought about a substantial rise in pension 
spending, posing risks to the sustainability of the system. Furthering reforms in the education 
system and public administration would contribute to improving administrative capacity and 
the  level  of  skills  and  to  increasing  the  efficiency  of  public  spending  thus  achieving  the 
needed budgetary consolidation. 

Enhanced surveillance under the EDP, which seems necessary in view of the deadline for the 
correction of the excessive deficit, will require regular and timely monitoring of the progress 
made in the implementation of the fiscal consolidation strategy to ensure the correction of the 
excessive  deficit.  In  this  context,  until  the  abrogation  of  the  excessive  deficit  procedure  a 
separate  chapter  in  the  update  of  the  Bulgarian  convergence  programme,  could  usefully  be 
devoted to this issue. 

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Key macroeconomic and budgetary projections 

Real GDP 
(% change) 
Output gap1,2 
(% of potential GDP) 
General government balance 
(% of GDP) 
Primary balance 
(% of GDP) 
Cyclically-adjusted balance1 
(% of GDP) 
Structural balance3 
(% of GDP) 
Government gross debt 
(% of GDP) 

2007 

2008 

2009 

2010 

2011 

2012 

2013 

6.2 

6.0 

-5.0 

0.0 

2.7 

n.a. 

n.a. 

4.3 

5.0 

-2.9 

-4.8 

-4.0 

n.a. 

n.a. 

0.1 

1.8 

-3.9 

-2.8 

-2.2 

n.a. 

n.a. 

1.1 

2.7 

-3.1 

-2.0 

-1.4 

n.a. 

n.a. 

-1.5 

0.0 

-2.8 

-1.1 

-0.8 

n.a. 

n.a. 

1.8 

0.0 

-2.8 

-1.1 

-0.8 

n.a. 

n.a. 

18.2 

14.1 

14.8 

17.4 

18.8 

n.a. 

n.a. 

Notes: 

1  Output  gaps  and  cyclically-adjusted  balances  from  the  programmes  as  recalculated  by  Commission  services  on  the 
basis of the information in the programmes. 
2 Based on estimated potential growth of 3.4%, 3.1% and 2.9% 2009-2011. 
3  Cyclically-adjusted  balance  excluding  one-off  and  other  temporary  measures.  There  are  no  one-off  and  other 
temporary measures in the most recent programme and Commission services’ autumn forecast. 

Source: 

Commission services’ spring 2010 forecasts (COM); Commission services’ calculations. 

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Proposal for a 

COUNCIL DECISION 

on the existence of an excessive 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(6) thereof, 

Having regard to the proposal from the European Commission, 

Having regard to the observations made by Bulgaria, 

Whereas: 

(1) 

(2) 

(3) 

(4) 

According  to  Article  126  of  the  Treaty  on  the  Functioning  of  the  European  Union 
Member States shall avoid excessive government deficits. 

The Stability and Growth Pact is based on the objective of sound government finances 
as a means of strengthening the conditions for price stability and for strong sustainable 
growth conducive to employment creation. 

The excessive deficit procedure (EDP) under Article 126 of the Treaty, as clarified by 
Council  Regulation  (EC)  No  1467/97  on  speeding  up  and  clarifying 
the 
implementation of the excessive deficit procedure5 (which is part of the Stability and 
Growth  Pact),  provides  for  a  decision  on  the  existence  of  an  excessive  deficit.  The 
Protocol  on  the  excessive  deficit  procedure  annexed  to  the  Treaty  sets  out  further 
provisions  relating  to  the  implementation  of  the  EDP.  Council  Regulation  (EC)  No 
479/20096 lays down detailed rules and definitions for the application of the provision 
of the said Protocol.  

The  2005  reform  of  the  Stability  and  Growth  Pact  sought  to  strengthen  its 
effectiveness and economic underpinnings as well as to safeguard the 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  provides  the  framework  supporting  government 
policies  for  a  prompt  return  to  sound  budgetary  positions  taking  account  of  the 
economic situation. 

(5) 

Article  126(5)  of  the  Treaty  requires  the  Commission  to  address  an  opinion  to  the 
Council if the Commission considers that an excessive deficit in a Member State exists 
or may occur. Having taken into account its report in accordance with Article 126(3) 

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OJ L 209, 2.8.1997, p. 6.  
OJ L 145, 10.6.2009, p. 1.  

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(6) 

(7) 

(8) 

(9) 

and  having  regard  to  the  opinion  of  the  Economic  and  Financial  Committee  in 
accordance  with  Article  126(4),  the  Commission  concluded  that  an  excessive  deficit 
exists  in  Bulgaria.  The  Commission  therefore  addressed  such  an  opinion  to  the 
Council in respect of Bulgaria on [6 July 2010]7. 

Article 126(6) of the Treaty states that the Council should consider any observations 
which the Member State concerned may wish to make before deciding, after an overall 
assessment,  whether  an  excessive  deficit  exists.  In  the  case  of  Bulgaria,  this  overall 
assessment leads to the following conclusions. 

According to the data notified by the Bulgarian authorities in April 2010, the general 
government deficit in Bulgaria reached 3.9% of GDP in 2009, thus exceeding the 3% 
of GDP reference value. The deficit was not close to the 3% of GDP reference value 
but  the  excess  over  the  reference  value  can  be  qualified  as  exceptional  within  the 
meaning of the Treaty and the Stability and Growth Pact. In particular, it results from 
a severe economic downturn in the sense of the Treaty and the Stability and Growth 
Pact, as the global economic and financial crisis hit hard the economy of Bulgaria and 
the  negative  annual  GDP  volume  growth  reached  5%  in  2009.  According  to  the 
Commission services’ spring 2010 forecast, the general government deficit would fall 
below the reference value already in 2010 with the stabilization of the economy and as 
a result of the fiscal consolidation measures undertaken by the government. However, 
on  the  basis  of  the  revised  deficit  target  for  2010  (3.8%  of  GDP  according  to  the 
notification  of  22  June  2010  by  the  Bulgarian  authorities),  significantly  above  the 
Commission  services’  spring  forecast  of  2.8%  of  GDP,  the  breach  of  the  reference 
value may not remain temporary. The deficit criterion in the Treaty is not fulfilled. 

According to the data notified by the Bulgarian authorities in April 2010, 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 Bulgarian authorities further revised the 
planned debt for 2010 to 15.3% of GDP. The debt criterion in the Treaty is fulfilled. 

According to Article 2(4) of Council Regulation (EC) No 1467/97, “relevant factors” 
can  only  be  taken  into  account  in  the  steps  leading  to  the  Council  decision  on  the 
existence  of  an  excessive  deficit  in  accordance  with  Article  126(6)  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.  In  the  case  of  Bulgaria,  this  double 
condition is not met. Therefore, relevant factors are not taken into account in the steps 
leading to this decision, 

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All EDP-related documents for Bulgaria can be found at the following website: 
http://ec.europa.eu/economy_finance/sgp/deficit/countries/index_en.htm. 

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HAS ADOPTED THIS DECISION: 

From an overall assessment it follows that an excessive deficit exists in Bulgaria. 

Article 1 

Article 2 

This decision is addressed to the Republic of Bulgaria. 

Done at Brussels,  

For the Council 
The President 

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