Commission Opinion 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) 883 final 

Recommendation for a 

COUNCIL RECOMMENDATION  

with a view to bringing an end to the situation of an excessive government deficit in 
Bulgaria 

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Recommendation for a 

COUNCIL RECOMMENDATION  

with a view to bringing an end to the situation of an excessive government 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(7) thereof; 

Having regard to the recommendation from the European Commission; 

Whereas: 

(1) 

(2) 

(3) 

(4) 

(5) 

According  to  Article  126  of  the  Treaty  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  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. 

The Council has decided on [13 July 2010], in accordance with Article 126(6) of the 
Treaty, that an excessive deficit exists in Bulgaria. 

In accordance  with Article  126(7)  of  the Treaty and Article 3 of Council  Regulation 
(EC) No 1467/97 on speeding up and clarifying the implementation of the excessive 
deficit procedure1 (which is part of the Stability and Growth Pact), the Council is also 
required  to  make  recommendations  to  the  Member  State  concerned  with  a  view  to 
bringing  the  situation  of  excessive  deficit  to  an  end  within  a  given  period.  The 
recommendation  has  to  establish  a  deadline  of  six  months  at  the  most  for  effective 
action to be taken by the Member State concerned to correct the excessive deficit as 
well  as  a  deadline  for  the  correction  of  the  excessive  deficit,  which  should  be 
there  are  special 
completed 
circumstances.  In  deciding  whether  special  circumstances  exist,  “relevant  factors”  as 
clarified in Article 2(3) of Regulation (EC) No 1467/97 should be taken into account. 

identification  unless 

the  year  following 

its 

in 

1 

OJ L 209, 2.8.1997, p. 6.  

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(6) 

(7) 

Furthermore, in a recommendation to correct an excessive deficit the Council should 
request the achievement of a minimum annual improvement in the structural balance, 
i.e. the cyclically-adjusted balance excluding one-off and other temporary measures, of 
0.5% of GDP as a benchmark. 

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.  Taking  into  account  both  the  Commission  services'  spring  2010  forecast  and 
the  authorities'  latest  EDP  notification  of  June  2010  Bulgaria  is  recommended  to 
correct the excessive deficit by 2011.  

In  the  years  prior  to  the  crisis  and  in  the  context  of  a  very  tax-rich  growth  structure 
Bulgaria has maintained a relatively strong budgetary position and markedly reduced 
the  general  government  gross  debt  ratio.  In  2009,  however,  the  budgetary  situation 
deteriorated significantly. Large revenue shortfalls resulted from a fall in GDP of 5% 
(against an expected growth of 4.7% underlying the budget) and the growth structure 
becoming much less tax intensive with a sizable contraction in domestic demand. At 
the  same  time  expenditure  increased  because  in  addition  to  the  working  of  the 
economic  stabilizers  sizable  payment  commitments  undertaken  by  the  outgoing 
government  ahead  of  the  mid-year  parliamentary  elections  were  uncovered  in  the 
second half of the year. As a result, the budget balance swung from a surplus of 1.8% 
of  GDP  in  2008  to  a  deficit  of  3.9%  of  GDP  in  2009.  Given  the  need  to  maintain 
macro-economic stability under the currency board arrangement, the government did 
not adopt fiscal stimulus measures in response to the downturn. In the April 2010 EDP 
notification the Bulgarian authorities expected the general government budget deficit 
to  fall  below  the  reference  value  to  2%  of  GDP  already  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  published  on  5  May  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,  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, the correction of the excessive deficit in 2011 implies a structural fiscal 
effort  of  around  ¾  percentage  points  of  GDP  in  that  year,  assuming  that  the  2010 
deficit target is met.  

(8) 

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 

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(9) 

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 and public finances. Furthering reforms in the 
improving 
education  system  and  public  administration  would  contribute 
administrative capacity and the level of skills and to increasing the efficiency of public 
spending thus achieving the needed budgetary consolidation. 

to 

(10) 

In  the  past  years  the  government  gross  debt-to-GDP  ratio  has  followed  a  downward 
trend, decreasing from around 38% in 2004 to 14% in 2008, while at the same time the 
government has accumulated financial assets that accounted to around 12% of GDP in 
2008. 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 to 15.3% of GDP. 

(11)  Enhanced  surveillance  under  the  EDP  will  require  regular  and  timely  monitoring  of 
the  progress  made  in  the  implementation  of  the  fiscal  consolidation  strategy.  In  this 
context,  a  separate  chapter  in  forthcoming  updates  of  the  Bulgaria  convergence 
programme could usefully be devoted to this issue.  

(12) 

In general, in the view of the Council, budgetary consolidation measures should secure 
a lasting improvement in the general government balance, while being geared towards 
enhancing the quality of the public finances and reinforcing the growth potential of the 
economy, 

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HAS ADOPTED THIS RECOMMENDATION: 

(1) 

(2) 

(3) 

(4) 

The Bulgarian authorities should put an end to the present excessive deficit situation 
by 2011 at the latest.  

The Bulgarian authorities should bring the general government deficit below 3% of 
GDP  in  a  credible  and  sustainable  manner.  Specifically,  to  this  end,  the  Bulgarian 
authorities should:  

(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; 

(c) 

specify  and  implement  the  measures  that  are  necessary  to  achieve  the 
correction of the excessive deficit by 2011. 

To  limit  risks  to  the  adjustment,  Bulgaria  should  strengthen  fiscal  governance  and 
transparency  by 
the  Ministry  of  Finance's  spending  controls, 
strengthening the binding nature of its medium-term budgetary framework as well as 
improving the monitoring of the budget execution throughout the year.  

reinforcing 

The  Council  establishes  the  deadline  of  [13  January  2011]  for  the  Bulgarian 
government to take effective action and to specify measures that will be necessary to 
correct  of  the  excessive  deficit.  The  assessment  of  effective  action  will  take  into 
account  economic  developments  compared  to  the  economic  outlook  in  the 
Commission services' spring 2010 forecast.  

The  Bulgarian  authorities  should  report  on  progress  made  in  the  implementation  of  these 
recommendations  in  a  separate  chapter  in  the  forthcoming  updates  of  the  convergence 
programme until the abrogation of the excessive deficit procedure. 

In  addition,  the  Council  highlights  the  importance  of  achieving  the  medium-term  objective 
(MTO) for appropriate budgetary management of economic downturns. It therefore invites the 
Bulgarian  authorities  to  ensure  that  budgetary  consolidation  towards  the  medium-term 
objective for the budgetary position – a general government structural balance of ½% of GDP 
–  is  sustained  after  the  excessive  deficit  will  have  been  corrected.  The  efficiency  of  public 
spending should be improved by fully implementing the planned structural reforms in the area 
of public administration, healthcare, education, and pensions. 

This recommendation is addressed to the Republic of Bulgaria. 

Done at Brussels,  

For the Council 
The President 

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