COMMISSION STAFF WORKING DOCUMENT Assessment of the 2014 national reform programme and convergence programme for BULGARIA Accompanying the document Recommendation for a COUNCIL RECOMMENDATION on Bulgaria’s 2014 national reform programme and delivering a Council opinion on Bulgaria’s 2014 convergence programme
Date: 2014-06-02
Institutions: European Commission
Subjects: Bulgaria, budget deficit, competitiveness, economic convergence, economic recovery, economic stabilisation, educational system, job creation, marginalisation, poverty, public health, stability programme













EUR-Lex - 52014SC0403 - EN











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52014SC0403

COMMISSION STAFF WORKING DOCUMENT Assessment of the 2014 national reform programme and convergence programme for BULGARIA Accompanying the document Recommendation for a COUNCIL RECOMMENDATION on Bulgaria’s 2014 national reform programme and delivering a Council opinion on Bulgaria’s 2014 convergence programme /* SWD/2014/0403 final */









Contents
Executive summary. 3
1............ Introduction. 5
2............ Economic situation and outlook. 5
3............ Challenges and assessment of policy
agenda. 6
3.1......... Fiscal policy and taxation. 6
3.2......... Financial sector 13
3.3......... Labour market, education and social
policies. 13
3.4......... Structural measures promoting sustainable
growth and competitiveness. 19
3.5......... Modernisation of public administration. 23
4............ Conclusions. 26
Overview table. 27
Annex... 31

Executive summary

Bulgaria’s economic recovery is expected to broaden and pick up in 2014. Nevertheless, the economic rebound is expected to be relatively
slow as GDP growth is forecast to reach 1.7% in 2014 and 2.0% in 2015 according
to the Commission 2014 spring forecast. The labour market is forecast to remain
in distress, with only weak recovery in employment and a slight reduction in
unemployment projected over 2014-15. Following three years of budgetary consolidation,
the general government deficit increased from 0.8% of GDP in 2012 to 1.5% of
GDP in 2013, reflecting an expenditure-driven fiscal expansion in that year.
The general government deficit is expected to increase further in 2014, but to
decrease somewhat in2015. The ratio of general government gross debt to GDP is
forecast to remain low — the second lowest among the EU Member States.
Overall, Bulgaria has made limited progress in addressing the 2013 country-specific recommendations.
On the positive side, Bulgaria’s public finances
are unlikely to face particular challenges over the short to medium term, provided
it complies with its medium-term budgetary objective. The authorities have also
taken some steps towards improving tax collection and the business environment.
The plans to tackle challenges in education, healthcare and youth employment
are still in preparation despite years of delays. In some areas such as pension
reform, the government initially moved in the wrong direction, while in others,
such as energy, taxation and public procurement, it has presented a fragmentary
picture. Policy plans presented in the 2014 national reform programme and
convergence programme are relevant but reforms, particularly to the labour
market, education and the energy sector; do not go far enough to address the
challenges in a comprehensive way. The effectiveness of the national reform
programme will depend on the proper design of the measures outlined and their
full and swift implementation in respect of the timetable set in the programme.
Bulgaria faces a set of interrelated policy challenges to stimulate
sustainable, robust growth while addressing its macroeconomic imbalances. As pointed out by the European Commission in March 2014, these
relate in particular to corporate sector deleveraging and the labour market.
Despite the progress the government has made in implementing its fiscal agenda,
the most pressing challenges for the country have remained broadly unchanged
since 2013 i.e. the labour market, poverty and social exclusion, education,
healthcare, the business environment, public procurement, energy and resource efficiency.
Weak institutional capacity is causing critical delays to the implementation of
necessary reforms.

 Labour
     market: Declining labour force participation, high
     youth unemployment, skills and regional mismatches exacerbated by high
     emigration and inadequate pensions are major concerns, given Bulgaria's population ageing. One challenge is to ensure that workers stay longer on the
     labour market, which will ease the pressure on pensions. Active labour
     market policies have not been effective in facilitating adjustment, while
     weaknesses in the educational system hamper a broad-based accumulation of
     human capital and wage floors risk pricing the vulnerable groups out of
     the labour market.
 Poverty
     and social exclusion: Adequate social protection is also
     a challenge, as Bulgarian citizens are at the highest risk of poverty or
     social exclusion in the EU (49.1% in 2011) and social assistance schemes
     are ineffective in supporting the inclusion of those furthest from the
     labour market. A systematic approach to the inclusion of Roma children
     into quality mainstream education and the integration of Roma into the
     labour market is missing. Employment accessible and effective social
     transfers and services and policies to support a broad-based labour market
     recovery remain key ingredients for addressing poverty. 
 Education:
     Bulgaria’s education and training systems are not adapted to the needs of
     the labour market. Bulgaria has the EU’s highest share of low achievers in
     reading and mathematics, and the third highest share of low achievers in
     science. Overall investment in education and training — particularly in
     primary, secondary and early childhood– are well below the EU average.

·        
Business
environment: A major challenge is to create a more favourable
business climate, including for foreign investors, and to foster investment in
innovation. Businesses would also benefit from improved tax administration,
insolvency procedures and contract enforcement. Shortcomings in public
procurement and the independence, efficiency and quality of the justice system
also persist.
·        
Energy
intensity and
resource efficiency: Bulgaria is highly dependent on
imported energy. There is limited competition among energy suppliers, a lack of
interconnections with neighbouring countries and an inadequately functioning
energy market. High energy intensity, low energy efficiency and poor environmental
infrastructure also hamper business activity and competitiveness.

1.        
Introduction  

In May 2013, the
Commission proposed a set of country-specific recommendations (CSRs) for
economic and structural reform policies for Bulgaria. On the basis of these
recommendations, the Council of the European Union adopted seven CSRs in the
form of a Council Recommendation in July 2013. These CSRs concerned taxation, retirement
policies, the labour market, education, the business environment, and some
aspects of national administration. This staff working document (SWD) assesses
the state of implementation of these recommendations in Bulgaria.
The SWD assesses policy
measures in the light of the findings of the Commission’s 2014 Annual Growth
Survey (AGS)[1]
and the third annual Alert Mechanism Report (AMR),[2] which
were published in November 2013. The Survey sets out the Commission’s proposals
for building the necessary common understanding about the priorities for action
at national and EU level in 2014. It identifies five priorities to guide Member
States to renewed growth: pursuing differentiated, growth friendly fiscal
consolidation; restoring normal lending to the economy; promoting growth and
competitiveness for today and tomorrow; tackling unemployment and the social
consequences of the crisis; and modernising public administration. The AMR
serves as an initial screening device to determine whether macroeconomic
imbalances exist or risk emerging in Member States. The AMR found positive
signs that macroeconomic imbalances in Europe are being corrected. To ensure
that complete and durable rebalancing is achieved, Bulgaria and 15 other Member States were selected for a review of developments in the accumulation and unwinding
of imbalances. These in-depth reviews were published on 5 March 2014 along
with a Commission communication.[3]   
Against the background
of the 2013 Council Recommendations, the AGS, the AMR and the in-depth review, Bulgaria presented a national reform programme (NRP) and a convergence programme on 17 April
2014. These programmes provide detailed information on progress made since July
2013 and on the government’s plans. The information contained in these programmes
provides the basis for the assessment made in this staff working document. The programmes submitted went through a consultation process
involving the national parliament and the social partners. Stakeholders as well
as the general public were invited to submit proposals for consideration by the
government.

2.        
Economic situation
and outlook

Economic situation
Economic recovery in Bulgaria was
still subdued in 2013 and early 2014, but has accelerated somewhat in recent
quarters.
Growth was driven by net exports and a surge in public expenditure in 2013,
whereas household spending remained sluggish. Annual growth reached 0.9% in
2013 and the economy continues to operate well below its potential. Nevertheless,
inflation fell sharply over 2013 and the first months of 2014, driven by
falling import prices, decreases in the administratively set energy prices and
the good harvest that led to lower food prices.
After four
consecutive years of falling employment and rising unemployment, the first
signs of stabilisation appeared in the second half of 2013.
This is mainly due to the traditionally volatile agricultural sector, which
benefited from a good harvest in 2013. While employment in service sectors also
appeared to be stabilising, manufacturing and construction sectors continued to
significantly shed labour in 2013. Unemployment increased at almost 13% of the
labour force in 2013 and further peaked to 13.1% by March 2014. In particular,
young people, the low-skilled and older people face considerable challenges on
the labour market. 
Economic
outlook
According
to the Commission 2014 spring forecast, GDP growth is forecast to pick up only
slowly over 2014-15. Economic growth is expected to expand to
1.7% in 2014 and 2.0% in 2015 as domestic
demand gradually joins exports as the main engine of growth, but to remain
below its potential in the forecast horizon. Household consumption is forecast
to rebound over 2014-15 in line with the gradual improvement in the labour
market situation and strengthening
consumer confidence. Investment will be supported by the fairly strong
financial sector, which has been able to bolster non-government lending over
the crisis years. Exports are forecast to remain relatively strong too over
2014-15, sustained by the expected economic recovery in the EU. Nonetheless,
the rebound in domestic demand would also drive up imports and turn the growth
contribution from net exports slightly negative. The labour market is projected
to improve only gradually as marked labour market mismatches have built up over
the extended crisis years. Unemployment is expected to decline slowly to about
12% by 2015. The expected moderate increase in economic activity is projected
to lift inflation somewhat in 2015 to about 1.2%, from -0.8% in 2014.
The economic scenario underlying both
the national reform programme and the convergence programme is optimistic for
the 2014-15 period. It projects real GDP growth of 2.1% in
2014 and 2.6% in 2015, which is about 0.4 pp. and respectively 0.6 pp. above
the Commission 2014 spring forecast. The programmes do not include the estimate
of the macro impact of the structural reforms.
 

3.        
Challenges and assessment of policy agenda


3.1.                
Fiscal policy and taxation

Budgetary developments and debt
dynamics
The main goal of
the 2014 convergence programme’s medium-term budgetary strategy is to commence
with a gradual fiscal consolidation from 2015 onwards, meeting the MTO by 2016.
The
new programme has lowered the MTO from the previous year. While in 2013 the MTO
was set at -0.5% of GDP, the new program sets it at -1% of GDP as from 2014, which
is still more stringent than what the Stability and Growth Pact requires. While
the previous 2013 programme foresaw to reach the MTO of -0.5% of GDP by 2017,
the new programme targets to reach the new MTO of -1% of GDP by 2016.
In 2013, the
fiscal position loosened compared to the previous year and compared to the
target of the previous convergence programme. The general
government headline deficit increased from 0.8% of GDP in 2012 to 1.5% in 2013,
slightly above the target of 1.3% of GDP set in the previous programme. This
was largely driven by lower than expected revenues (notably VAT and personal
income tax) and discretionary social spending increases after the new
government took office in the summer of 2013. However, compared to the new
governments' revised budgetary targets (a deficit of 2% of GDP), announced in
August 2013, the budgetary outcome in 2013 was better than expected, mainly on
account of lower-than-planned investment expenditure.  
In 2014, the
convergence programme projects the nominal fiscal deficit to increase further
to 1.8% of GDP. This is weaker than the deficit target of 1.3% of
GDP for 2014 foreseen in previous year’s programme, reflecting the government's
expenditure increases announced in August 2013 and the 2014 budget. The
deficit is set to weaken from the previous year on account of further
expenditure increases (notably investments and social expenditure). In
structural terms, this implies also a repeated fiscal stimulus in 2014, by 0.3
pp. according to the programmes' recalculated structural deficit[4] . The
Commission 2014 spring forecast projects a slightly lower fiscal balance at
1.9% of GDP for 2014. The difference arises as the Commission expects
significantly lower growth in VAT and personal income tax revenues in 2014
compared with the Ministry of Finance. However, since at the same time the
Commission projects lower growth in investment expenditure (which has been
typically lower than official plans in recent years), the difference in the
aggregate fiscal deficit is small. In structural terms, the Commission forecast
projects the deficit to increase by 0.4 pp. in 2014, which is slightly more
than the recalculated programme figures.
The latest
convergence programme has also loosened the medium term fiscal targets as
compared with the previous programme. In line with the
lower MTO, the
new programme also targets somewhat higher headline deficits in the medium
term. The headline deficit is set to improve more gradually from 1.8% of GDP in
2014 to 1.5% of GDP in 2015 and to 0.9% by the end of the programme horizon in
2017. This revised fiscal outlook is explained by the government's intention to
boost economic growth through a fiscal stimulus, notably increasing spending
for investment, and also social- and labour market programmes. The recalculated
structural deficit is projected to increase by 0.3% of GDP in 2014 (from 1% of
GDP in 2013 to 1.3% of GDP in 2014) and to decrease by 0.3% of GDP in 2015 (to
1.0% of GDP in 2015).  The primary
balance (net of interest payments) reaches zero by 2017.
The envisioned
gradual mid-term budgetary consolidation is primarily driven by expenditure
restraint, with the expenditure to GDP ratio projected to decline by 2.5 pps.
between 2013-2017, while the revenue to GDP ratio declines by 2 pps.
These trends are similar to the ones presented in the previous Convergence
Programme. Tax revenues to GDP are projected to actually increase over the
period, given the expectations for a tax-rich economic growth based on consumption
and the governments' plans for reducing tax evasion. However, the absorption of
EU funds is expected to be significantly lower in the initial years of the new
7 year EU budget period. This entails both lower revenues and expenditures
compared with the EU funds absorption peak years in 2013-14. Also, the
expenditure plans foresee public wages and social benefits growing slower than
GDP in the medium term (see annex: Table 3). These fiscal
projections are supported by detailed measures fully for 2014 and only partly
for 2015 (see Box 1). For the period 2016-17, the budgetary adjustment
represents projections under a no-policy-change assumption. There are no
significant one-off or other temporary measures planned in the programme.
 Box 1. Main measures The box provides an overview of all discretionary measures with a significant budgetary impact as well as macro-structural measures mentioned in the Convergence Programme/National Reform Programme. While the main tax rates remain unchanged, some specific legislative changes will have an overall small revenue impact in 2014 and 2015 (see the table below). However, in addition the programme expects to significantly boost VAT revenue both in 2014 and 2015 through various measures to fight tax evasion (reverse VAT, tighter control for goods with high fiscal risk, improvements to excise duty legislation/collection). The Commission 2014 spring forecast does not assume additional revenues from these measures. While these measures might be effective and necessary, the Commission forecast takes a more cautious approach in its revenue projections. On the expenditure side, the 2014 budget increases substantially investment and social expenditure (including raising pensions). As already noted, the Commission forecast assumes lower investment expenditure for the year, as typically not all budgeted projects are completed according to the original plans. Notably, the 2014 budget law envisages a possibility for limiting non-interest expenditure and state budget transfers (with an effect of about 0.3% of GDP) in case any risks to the budget balance should materialise. However, the programme does not specify details of how it would be operationalized in practice. Main budgetary measures 
 Revenue || Expenditure 
 2014 
 ·      Measures improving revenue collection[5] (0.8% of GDP) ·      Legislative changes to corporate income tax recording (0.1% of GDP) ·      Wind and solar energy fee (0.2% of GDP) || ·      Public investment programme (0.6% of GDP) ·      Various changes to increase pension generosity (0.3% of GDP) ·      Energy sector investment (0.2% of GDP) ·      Education programmes (0.1% of GDP) ·      Social allowances (0.1% of GDP) ·      Limiting current expenditure and state budget transfers in case fiscal targets are at risk (-0.3% of GDP) 
 2015 
 ·      Tax relief on minimum wage (-0.2% of GDP) ·      Increasing tobacco excises but reducing excises on agricultural fuels (0.05 % of GDP in net terms) ·      Measures improving revenue collection[6] (0.8% of GDP) || ·      No concrete expenditure measures announced 
 Note: The budgetary impact in the table is the impact reported in the programme, i.e. by the national authorities. A positive sign implies that revenue / expenditure increases as a consequence of this measure. 
Assessed against
the deficit projections in the Commission 2014 spring forecast, the deficit
projections of the programme appear broadly realistic for 2014 but slightly
optimistic for 2015. However, several risk factors exist. The
macroeconomic scenario of the programme is somewhat more optimistic than the
Commission 2014 spring forecast for both 2014 and 2015. The programme expects
somewhat faster GDP growth and significantly higher inflation in those years. Additionally,
major discrepancies exist between the two forecasts for some tax and
expenditure items. The programme assumes very high tax elasticity for VAT and
personal income collection, in relation to their tax base growth. Unlike the
Commission forecast, the programme scenario assumes that measures to improve
tax collection would boost revenues. As a result, the programme assumes
substantially higher VAT and income tax growth, especially in 2014 and to some
degree in 2015. Nevertheless, the divergence in the deficit projection between
the two forecasts is much smaller than the differences in revenue projections,
as the programme also assumes significantly higher investment expenditure in
2014 and 2015. In recent years, public investment has been much lower than
initially planned in the budgeting procedure. Other revenue and expenditure
items are broadly consistent between the two forecasts. As mentioned in the Bulgaria section of the Commission 2014 spring forecast, the Commission perceives a risk
due to a potentially weaker-than-expected recovery in private consumption
compared to its baseline macroeconomic scenario, given the slow recovery in
employment. Also, a country specific risk relates to the reliance of Bulgaria on Russian gas imports. These risk factors are also valid for the Programme's
macroeconomic scenario. Somewhat reducing the risks above, the authorities have
a proven track record of meeting and even over-performing their fiscal targets
in the past. Also, the current nominal and structural fiscal deficit is already
close to the limits set by the domestic fiscal rules[7], which
should act as an additional barrier to further deviations from the plans
presented in the programme.
Box
 2. Bulgaria`s
status vis-à-vis the Stability and Growth Pact
Bulgaria
is subject to the preventive arm of the Pact and is at its Medium Term
Objective in 2013. However, it is expected to deviate from its Medium Term
Objective in 2014-15. Therefore, it should preserve a sound fiscal position
which ensures compliance with the Medium Term Objective.
Measured against
the recalculated structural balance and also taking into account
the so called "investment clause", Bulgaria was compliant with the
Pact in 2013. The so called "investment clause" allows
for a temporary deviation from the MTO by 0.6 pp. in 2013 and by 0.1 pp. in
2014. Bulgaria also over-achieved its fiscal targets in 2012 and therefore the
increase in the structural deficit to 1% of GDP in 2013 was in compliance with
the Pact and complies with the Council Recommendations of 10 July 2013. 
The programme
plans to deviate from the MTO in 2014. The programme
foresees a further increase in the structural (recalculated) deficit in 2014 by
0.3 pp. to 1.3% of GDP, which is more than the 0.1 pp. deviation allowed by the
"investment clause". In 2015 the recalculated structural deficit is
projected to decrease to 1% of GDP, reaching the MTO. The Commission forecast
projects a marginally higher structural deficit (by an additional 0.2% of GDP)
in 2014-15, which points to some risks to the fiscal targets set by the
programme. According to the information provided in the programme, the growth
rate of government expenditure, net of discretionary revenue measures, would
not exceed the relevant reference medium-term expenditure benchmarks in 2014-15,
which are estimated at between 1.8-2.1%.. Therefore, the
budgetary plans are in line with the requirement of the Stability and Growth
Pact.. However, taking also account of the Commission 2014 spring forecast
projections and the risks to the budgetary projections arising from the
macroeconomic scenario, there is a risk of a deviation from the MTO for both
2014 and 2015.
In 2013, Bulgaria recorded the
second-lowest debt ratio among EU Member States, with general government gross
debt at 18.9% of GDP, well below the 60% Treaty reference value. The
programme projects government debt to peak at 23.3% of GDP in 2016 and then to
abate to 20.6% of GDP in 2017. The underlying debt dynamics reflect the
positive impact of a gradual improvement in the primary balance and increasing
nominal GDP growth. The projected debt ratio fluctuates slightly from year to
year over the programme period, reflecting the planned repayment and
refinancing operations of some larger bonds in certain years (notably a single
large bond maturing in early 2015). The projections of the debt-to-GDP ratio in
the programme appear plausible taking into account the Commission 2014 spring forecast
and latest available information. Since the debt-to-GDP ratio is below the
reference rate, the debt reduction benchmark is not applicable. 
Fiscal framework
Bulgaria has continued on the path to strengthen its fiscal framework in
2013, albeit with some delays in practical implementation. Previous reforms in the field of numerical
fiscal rules and medium-term fiscal planning have been continued, but with some
delays in legislature. With a view to complying with EU Directive 2011/85/EU on
national budgetary frameworks and preparing the implementation of the Fiscal
Compact[8], a new public
finance law was adopted in January 2013 and it entered into force in January
2014 as planned. Some secondary related legislative acts were delayed in 2013
compared with original plans (notably regarding the 'fiscal council' and a'
correction mechanism'), but the overall processes appear to be on track. Most
notably, the Public Finance Act also required the government to submit to
parliament by mid-2013 a proposal on the establishment of an independent body,
the so called fiscal council, whose mandate would include the monitoring of
national numerical fiscal rules. The establishment of such an institution was also
recommended to Bulgaria as part of a 2013 CSR. The legislative act for the
establishment of the fiscal council is currently debated by the parliament and
the practical establishment of the institution is awaiting the passing of the
law. It remains to be seen to what extent the new institution will in practice
have functional autonomy and adequate resources to effectively carry out its
mandate. 
Long-term sustainability
Despite
pronounced demographic challenges, Bulgaria’s public finances do not appear to
face major sustainability risks. Government debt
(18.9% of GDP in 2013 and expected to rise to 22.7% in 2015) is currently below
the 60% of GDP Treaty threshold and projected to further rise by 2030 although
remaining below the reference value. However, the full implementation of the
convergence programme would put debt on a decreasing path by 2030. The medium-term sustainability gap[9], showing the
adjustment effort up to 2020 required to bring debt ratios to 60 % of GDP
in 2030, is at -1.2% of GDP, primarily related to the current low level of
government debt. In the long-term, Bulgaria appears to face medium fiscal
sustainability risks, primarily related to the projected ageing costs
contributing with 2.6 pp. of GDP over the very long run, in particular due to
the pension and health components. The long-term sustainability gap[10]
shows the adjustment effort needed to ensure that the debt-to-GDP ratio is not
on an ever-increasing path, is at 3.4% of GDP. Risks
would be lower in the event of the structural primary balance reverting to
higher values observed in the past, such as the average for the period
2004-2013. It is therefore appropriate for Bulgaria to further contain
age-related expenditure[11] growth to contribute to the sustainability of public finances in
the medium/long term.
Bulgaria
has one of the most rapidly ageing populations in the EU, bearing a negative impact
on both the labour market and growth potential of the economy. Nevertheless, policy action to counter the decline in the working
age population by boosting labour supply is still lacking. Extending working
careers and the inclusiveness of the labour market is a major challenge.
Employment rates are particularly low for the Roma, the elderly (especially
women) and young people. The high proportion of workers retiring through early
retirement schemes and invalidity pensions, the non-inclusive labour market and
the high prevalence of informal work leads to incomplete working careers, and
in turn challenges the sustainability of the pension system as a whole. These factors
are also reflected in largely inadequate pension outcomes and high rates of old-age
poverty.
Bulgaria has made no progress in addressing the CSR
on pension reform and labour market participation. The new government has backtracked considerably
on previous pension reform by freezing the increase in the retirement age in
2013[12].
In addition, the re-introduction of a partial wage indexation rule (Swiss rule)
for pensions casts doubts on the long term sustainability of the public pension
system. Moreover, instead of phasing out early retirement options, Bulgaria has re-introduced special early retirement schemes. Bulgaris has made no progress
on introducing the same pensionable age for men and women and implementing
active labour market policies that enable older workers to stay longer in the
labour market. Equalising the pensionable age for men and women and increasing
the number of years spent in the labour market would contribute to closing the
gender pension gap of 33% and reducing the very high rate of women (62.8%) and
men (53.6%) over 65 who are at risk of poverty and social exclusion.[13] Also,
no progress has been made in tightening eligibility criteria and checks on the
allocation of invalidity pensions to effectively limit abuse.
Tax system
Bulgaria
faces the challenge of improving tax compliance and the quality of tax
administration with a view to improving both revenue collection and the
business environment. Bulgaria’s tax structure is growth
friendly overall, with a low tax burden on labour and capital compensated by
relatively high taxation of consumption. On aggregate, the country had the
second lowest tax-to-GDP ratio in the EU in 2012. Although revenue from energy
taxes is the second highest in the EU, the implicit tax rate on energy
indicates that the high revenue stems from the high energy-intensity of the
economy rather than from high excise rates on energy products, which are in
fact below average. Revenue from recurrent housing taxes is below the EU
average. Available estimates[14]
suggest the shadow economy is sizeable, and this is confirmed by data for
undeclared work. The costs of
revenue collection remain above the EU average and the compliance costs of
paying taxes are high.[15]
Bulgaria has
made limited progress on measures taken to address the 2013 recommendation
concerning the implementation of a comprehensive tax strategy and strengthening
all aspects of the tax law. A
number of measures have been implemented by consecutive governments in recent
years and others have been introduced for 2014 both to reduce the
administrative burden and curb tax evasion and fiscal fraud. These
include: raising the thresholds for quarterly advance payments of corporate
income tax and personal income tax for smaller firms (2013); strengthening
controls over the movement of non-excise goods of high fiscal risk and introducing
an optional cash‑based VAT regime for small businesses; implementing new
e-services for taxpayers; extending the scope for reverse charging to more
sectors at risk of fraud; and introducing compulsory connections of automated
vending machines to the tax agency’s information systems. However, the
restrictive conditions[16] 
related to the recently introduced refund of personal income tax for the lowest
wage earners could add to the risks of underreporting of labour income. In 2014
some of the control rules for tax warehouses for excise goods have been relaxed
but their impact on the administrative burden for businesses and on tax
compliance remains to be seen. Despite the measures taken, Bulgaria still lacks a fully-fledged tax compliance strategy, which would include estimates
of tax gaps, analysis of the underlying causes, impact assessment of the
measures already in place and new policy measures. A comprehensive tax
compliance strategy would lead to a coordinated approach to risk management and
allow cooperation between the tax, customs[17]
and law enforcement authorities.

3.2.                
Financial sector

Macro-financial stability appears intact. Bulgaria’s bank-dominated financial sector remains
stable overall, maintaining strong capital buffers. The overall capital
adequacy ratio stood at 16.9% at the end of 2013, as compared with 16.7% at the
end of 2012. The core tier‑one ratio[18]
stood at 15.6% in December 2013, up from 15.2% a year ago. Both ratios remain
above EU averages and the regulatory requirements. The average quality of the
credit portfolio has remained broadly unchanged, with the non-performing loans
ratio standing at 16.9% of gross loans at the end of 2013. However, the high
non-performing loans ratio does not imply financial sector risks as
provisioning is adequate. In contrast, provisioning expenses continued to limit
profitability, with return on assets unchanged at 0.7%.
Two acquisitions of foreign-owned banks by domestic entities have further
increased the systemic importance of the latter.
Overall credit activity remained sluggish.
Credit growth decelerated further in the second half of 2013 compared to
the previous years. Credit growth is not expected to accelerate in 2014, given
the still highly leveraged non-financial corporate sector. At the same time,
liquidity in the system remains ample, coming mostly from the growing domestic
deposits.
The aggregate picture conceals differences
across economic sectors. Export-oriented companies
can access credit with relative ease, while SMEs face difficulties, including
high loan rejection rates. Micro-financing alternatives to bank loans are
underdeveloped and limit SMEs’ access to finance. Some initiatives, including
EU-funded JEREMIE products in the seed and venture capital market, have had a
clear positive effect on increasing the availability of credit to SMEs.

3.3.                
Labour market[19], education and social policies

The
labour market has been underperforming in recent years, limiting the adjustment
capacity of the economy and undermining its growth potential. Bulgaria
is facing the challenge of high unemployment and persistent overall
weakness of its labour market, characterised by structural unemployment,
mismatches between labour supply and demand (in terms of both the quality and
quantity), and labour market polarisation. This in turn hampers employability
and reintegration into the labour market. A significant proportion of
unemployed people are not covered by standard safety nets (unemployment
benefits and social assistance) and tend to rely on family solidarity or
informal work. Gross household incomes have increased slightly since 2008 and relative
poverty among people of working age is contained.  The level of inequalities is
still high (1 pp. higher in Bulgaria than the EU average) and the severe
material deprivation rate remains the highest in the EU in 2012. The
poorly educated workforce, concentrated in some regions, contributes to low
labour productivity and structural bottlenecks in several areas — such as skill
mismatches, particularly in relation to new technologies, and the continuous
decline in the working-age population — continue to hamper the prospects for
long-term sustainable growth. The early school leaving is a
particular problem among Roma – according to FRA survey 85% versus 32% for
non-Roma. [20]
In
2013, Bulgaria received CSRs concerning unemployment, education, pension reform
and social exclusion. The authorities were urged to tackle
high levels of youth unemployment by increasing the scope and efficiency of
active labour market policies (ALMPs), improving work incentives and
strengthening the Employment Agency with a view to providing better services.
In addition, the authorities were invited to improve the accessibility and effectiveness
of social transfers, review the employment impact of minimum tresholds for
social security contributions, ensure the education system makes a greater
contribution to human capital formation at all levels and adjust the pension
system to increase the participation of older people in the labour market. Bulgaria has introduced some subsidised employment programmes for older workers, a national plan
aimed at jobs for youth and further opportunities for traineeships, but overall,
  Bulgaria has achieved only limited progress in these areas.
Labour
market
The
efficiency and effectiveness of active labour market policies remain a
challenge for Bulgaria. Coverage and efficiency of ALMPs is low
and is reflected in low lifelong learning participation (in 2013, 1.7% of population
versus 10.4% for the EU-28[21]), low
transition rates from unemployment to employment and a relatively high share of
long-term unemployed (57.4% of all unemployed in 2013) [22]. A strategy on lifelong
learning
was adopted in 2013 with a target of 7% of adults participating in lifelong
learning
by 2020. ALMP
are not well targeted at those unemployed people most in need of activation and
those with the greatest employability. A net impact assessment of the
efficiency and effectiveness of active programmes and measures, as well as of
the overall effect of ALMPs was launched in 2013, but has not yet been finalised.
As a result, Bulgaria has achieved limited progress in enhancing active labour‑market
policies, in particular concerning national funded employment schemes.
Bulgaria has
achieved limited progress in further strengthening the capacity of the
Employment Agency with a view to providing effective counselling for jobseekers. In
the updated Employment Strategy,[23] the
activation of unemployed people from disadvantaged groups through training and the
appointment of case managers and labour psychologists in labour offices is
recognised as a priority. Moreover, the primary objectives of employment policy
are to improve the quality of the services provided and to strengthen the
capacity of the Employment Agency. No tangible impact can be observed yet in
that area. The process of scaling up and diversifying active labour market
policies to match the profiles of jobseekers needs to be further strengthened. No
performance monitoring system is put in place to benchmark effectiveness of the
local branches and coverage of services. Outreach towards NEETs (young persons
aged 18-24 neither in employment, education or training) and towards the Roma
is particularly problematic. Bulgaria is confronted
with a share of NEETs well above the EU average 21.6%, as compared to 13% for
EU 28. Bulgaria has the highest share of young
NEETs who are not in touch with the employment services. At
14.3%, the share of inactive NEETs is more than double the EU 28 average (6.1%)[24]. The
youth unemployment as well as the percentage of early school leavers are
slightly above EU average. Bulgaria has undertaken first steps to implement the
recommendation on establishing a Youth Guarantee (YG). The YG is being
gradually implemented from 2014 onwards, with funding foreseen up to 2020. The
YG currently has a strong focus on early school leavers.
The
capacity for identifying and matching skill needs remains undeveloped. Labour
market monitoring is not sufficiently developed to map open vacancies, even
though recent sectoral level structures were established to improve skills
intelligence. The system for forecasting skill needs is not operational
yet. For the short term, the skills needed will be determined based on data
derived from surveys of employers. For medium- and long-term forecasts of
labour demand and supply, a macroeconomic forecasting model developed by a
consortium of researchers will be used. Meanwhile, in-house training has grown
in popularity among businesses, notably in the ICT sector. However,
current tax legislation does not incentivise in-house corporate training.
Bulgaria has
made limited progress in ensuring that the low-skilled are not
priced out of the labour market. In 2013, the
government carried out an analysis of the impact of minimum insurance
thresholds on the dynamics of unemployment in the country. The study concluded
that that the significant slowdown in economic activity is the main reason for
job losses and that, on aggregate, minimum thresholds have had no significant
impact on the employment of low-skilled workers. However, most of the job
losses in Bulgaria have occurred in construction and tradable sectors, sectors
not properly covered by the study. Further micro‑level analysis seems necessary.
A second analogous study is under way in 2014, but the government has not yet specified
any policy follow-up to these studies. In addition, recent increases in the minimum
wage (by about 40% since 2011) have raised the minimum social security
thresholds for the unskilled and low-skilled at a higher rate than the average
minimum thresholds growth, adding to the risk of pricing these vulnerable
groups out of the labour market. The
minimum wage is established by government, after consultation with social
partners; however, there are no clear guidelines for a transparent minimum wage
setting, taking into account the economic and labour market factors. Whereas
the aim of a wage floor is to support the incomes of low paid/productivity
workers, it also raises the cost of labour for them, reducing their employment
opportunities.
Box 3. The
delivery
of a Youth Guarantee in Bulgaria[25] 
The most
important challenges to deliver a Youth Guarantee in Bulgaria are:
- insufficient
focus on second chance education for the very high number of early school
leavers;
- need to
strengthen apprenticeship and dual training initiatives, including ensuring
that these offers lead to sustainable labour market integration;
- insufficient
outreach to NEETS and insufficient mechanisms for encouraging their
registration;
- scaling up and
diversifying the active labour market policies to match the profiles of
jobseekers, develop capacity for identifying and matching skill needs;
- insufficient
measures specifically targeted at the very low skilled, including a high share
of the Roma population.
Education
The
challenge of improving the overall quality and efficiency of the school
education system remains. Although there was improvement in the 2012 PISA results as compared to the 2009 outcome, Bulgaria was again the worst performer in
reading and maths and the third worst performer in science of the 28 EU Member
States.[26] Bulgaria has still not adopted the School Education Act after years of delays and adoption
is expected to be further delayed to 2015. [27] The
planned legislative changes are expected to provide a framework for the
necessary reforms, including modernising curricula and making improvements to
teacher training and incentives.
The
quality of vocational education and training (VET) remains insufficient. The
poor quality of the learning environment, in particular outdated infrastructure
and limited work‑based learning, result in a high proportion of early school
leavers in VET schools.[28]
Challenges include fully integrating VET in the general education structure,
thus allowing for flexible pathways between subsectors of education, and
ensuring consistency with strategies on early school leaving, higher education
and lifelong learning. Increasing the availability of traineeship and
apprenticeship schemes together with business partners, is critical, in
particular for emerging business sectors and
lower level specialist professions.
Bulgaria has
made no progress in reforming higher education. In particular,
aligning education outcomes to labour-market needs and strengthening
cooperation between education, research and businesses remain unaddressed. Higher
education faces continuing challenges in responding better to labour market
needs. Employment among young graduates was only 67.3 % in 2012. The low
standard of quality certification contributes to the poor performance of higher
education. A strategy on higher education has been developed and is under
discussion in the National Assembly. Proposals include restructuring university
management by directly involving stakeholders such as businesses and students, consolidating
existing universities, and taking a performance-based approach to aligning
education output to labour market demand. Investment in universities’ research
capacity and career development for academic staff are areas in which progress
has not been sufficient and assessment
of the professions in demand in the labour market are immediate challenges.
Improving
access to inclusive education for disadvantaged children, in particular Roma,
is a challenge. Bulgaria has made limited progress in improving
access to inclusive education for disadvantaged children, in particular Roma.[29] The
early school leaving rate remains higher than in other EU-10 countries.[30] A
strategy for reducing early school leavers has been adopted by the Council of
Ministers in October 2013. A
number of initiatives in mainstream education are currently being taken to
improve access to inclusive education for disadvantaged children. In
particular, two years’ compulsory pre-schooling and a broad range of
initiatives aimed at reducing early school leaving are key measures in the
right direction. It is essential to continue and scale up measures aimed at
reducing early school leaving, with more focus on second-chance education, on teacher
education and on combating segregation. Gaps identified by the Commission[31]
regarding school segregation, higher education, and data collection have still
not been convincingly addressed.
Healthcare
Bulgaria needs
a comprehensive healthcare reform. It has made limited
progress in ensuring effective access to healthcare and improving the pricing
of healthcare services by linking hospital financing to outcomes and developing
out-patient care. Health status indicators remain weak in comparison with the
other EU Member States, pointing to higher needs for healthcare and long-term
care and therefore potentially higher costs in the future. Although
the 2014-20 National Healthcare Strategy presented by the Bulgarian government
in 2013 is a step in the right direction, it lacks mapping of infrastructure
investments, a proper monitoring and review system and a clear implementation
timeframe. Lines of action have not been fully defined and budgeting lacks
elaboration. A strategy for emergency care is under preparation. The
main challenges in the Bulgarian healthcare system remain as identified in
2013: the lack of transparency of hospital financing, poor access to health
services for some social groups and regions and the disproportionately high
level of out-of-pocket payments, with informal payments being a particular
problem.[32] The
healthcare system is not addressing the issues of equitable access to
healthcare and optimisation of the hospital network. A lack of administrative
capacity in the healthcare sector affects its ability to draft appropriate
strategies, implement programmes and deliver high-quality projects and thus the
ability to absorb EU funds.
Social policies
Bulgaria faces
a considerable challenge with regard to poverty and social exclusion.
Bulgarian citizens have the highest risk of poverty or social exclusion in the
EU (49.3 % in 2012, almost twice the EU average). Particularly worrying are the
high at-risk-of-poverty rate among Roma,[33] and the
high rates of poverty and social exclusion for children[34] (52.3 %
in 2012) and for those over 65 years old (59.1 % in 2012). High and increasing
levels of child deprivation can be linked to very low use of early childhood
education services, especially among the poorest, a high rate of involuntary
part-time work in particular among women, and work disincentives in the
tax-benefit system for lone parents and second earners on low income. Employment
income appears to be the key to reducing the risk of poverty; the unemployed
face the greatest risk of poverty.
Overall,
the coverage and efficiency of both unemployment benefits and social assistance
is limited. Significant shares of unemployed are not covered by
standard safety nets (unemployment benefits and social assistance) in Bulgaria[35] and
tend to rely on family solidarity or informal work. The rather strict and
tightened eligibility criteria contribute to the low coverage, with those not
receiving any benefits being also not easily reached by activation measures.
There is a fragmentation of agencies which provide benefits/social assistance
and labour market integration services to the unemployed and inactive
population. The appropriate institutional coordination and integration between
various offices is missing, and the high and increasing caseload per staff
hampers the support to jobseekers. [36] The
benefit level of the General Minimum Income is very low and has not increased
in line with the poverty threshold. [37] 
An
integrated approach to more effective social protection is still needed. Bulgaria has made
some progress in ensuring concrete delivery of the National Strategies
on Poverty. Limited progress has been observed in improving the accessibility
and efficiency of social transfers and services, in particular for children and
older people.
In 2013, the government took some steps in this direction: the
adoption of a National
Strategy for Long-term Care by the Council of Ministers on 7 January 2014;[38] the
continuing implementation of the process of deinstitutionalisation of children
in care, widely supported by the European Structural Funds; the expansion of
the monthly
family allowance for children and its linking with regular school attendance
(including compulsory pre-school education) and with certification of standard
vaccinations; expansion of the scope of
the programme of targeted benefits for heating covering specific risk
groups. However, much remains to be done, including the prevention of
child abandonment and the promotion of good-quality alternative community-based
care services (i.e. with qualified staff).
The implementation of the 2013 National Roma
Integration Strategy (NRIS) lacks ambition and a commitment to clear targets. Bulgaria has
made no progress in ensuring concrete delivery of the Strategy. While some of
the measures planned in the fields of education and employment are currently being
implemented, small-scale local and civil actions still need to be scaled up and
integrated into a comprehensive and systematic approach to the inclusion of
Roma children into quality mainstream education and the integration of Roma
into the labour market. Re-establishing constructive dialogue with civil
society and ensuring continuity of the work of the ministerial working group on
the use of EU funds for Roma inclusion are important preconditions for successful
implementation of the strategy.
Box
 4. Conclusions from the March 2014
in-depth review on Bulgaria
The third in-depth review (IDR) for Bulgaria under the Macroeconomic Imbalances Procedure was published on 5 March 2014.[39] Bulgaria
keeps experiencing macroeconomic imbalances, which deserve monitoring and
policy action. The review has focused on analysing in detail the
recent developments and expected future prospects of the identified imbalances.
The main observations are:
•   A sustained current
account adjustment has helped reduce the country’s external financing needs,
but the stock of liabilities remains high. The adjustment
appears to be mostly non-cyclical: it has been driven by a decrease in imports
brought about by the crisis but also by a strong export performance, as
reflected in Bulgaria’s steady gains in world market share. However, the stock
of liabilities remains high. Further unwinding of this vulnerability will
depend on strengthening further external competitiveness and a strong export
performance.
•   Corporate
indebtedness remains high and deleveraging pressures could limit growth in some
sectors, but immediate risks to the economy appear to have been contained. The
debt stock of non-financial corporations has been decreasing since 2010 but
remains high as a share of GDP. As a response to deleveraging pressures,
companies have increased profitability and saving, mostly through cost-cutting,
including labour shedding. However, since most of the debt of non-financial
corporations is in the form of intra‑company loans, potential spillovers to the
financial and public sectors appear to be limited, as already underlined in the
second IDR for Bulgaria.
•   An
underperforming labour market limits the adjustment capacity of the economy and
holds back its growth potential. During the crisis, the
contraction of employment has been more pronounced than the contraction in GDP.
Since 2008, unemployment has more than doubled, to 13% in 2013, and the number
of young and long-term unemployed has increased drastically.
•   Active labour
market policies have not been effective in facilitating adjustment, while
weaknesses in the educational system hamper broad-based accumulation of human
capital and wage floors risk pricing vulnerable groups out of the labour
market.
Two groups, the low-skilled and young workers, have been hardest hit by labour
shedding. So far, active labour market policies, including training, have not
succeeded in reintegrating even the more experienced workers, thus contributing
to skills mismatches and a high level of structural unemployment. Also, wage
floors, in particular in the form of minimum thresholds for social security
contributions and minimum wages, have increased substantially in recent years,
especially for low-skilled workers, endangering their employment prospects.
The in-depth
review also discusses possible policy avenues to addressing the challenges
identified in the analysis: (i) improving the
business environment would help to attract foreign capital and encourage the innovation
capacity of productive sectors, which in turn would help to maintain
competitiveness and safeguard Bulgaria’s strong export performance; (ii)
ensuring effective and increased EU funds absorption would help potential
growth; (iii) improving the effectiveness and increasing the efficiency of
active labour market policies seems warranted; (iv) ensuring that increased
wage floors do not price the low skilled out of work would facilitate labour
market adjustment; and (v) addressing the challenge of reducing skills
mismatches through advances in training and education could be beneficial for
growth in the medium and long term.

3.4.                
Structural measures
promoting sustainable growth and competitiveness

Economic
recovery remains slow as a result of deleveraging pressure and a protracted
labour market adjustment. Labour cost and unit labour cost (ULC)
growth has slowed down; nevertheless, nominal wage growth remains somewhat
higher than gains in productivity. In addition, companies face high business
costs relating to administrative compliance and low energy efficiency. At the
same time, saving rates and the profitability of the corporate sector have increased,
reflecting the deleveraging needs. As a small, open economy, the
country continues to depend on foreign financing to fuel its output growth. Hence,
improving the business environment and infrastructure, particularly as regards
energy and transport, and using available EU funds effectively are essential to
further enhancing Bulgaria’s growth potential.
In
2013, Bulgaria received CSRs concerning a business-friendly environment,
enhanced public administrative capacity and well‑functioning energy markets.
Business
environment
Weak
institutions and lengthy administrative procedures prevent the improvement of
the business environment. Shortcomings in the overall
institutional framework within which businesses operate, including public
administration and the judiciary, are discussed in more detail in section 3.5.
In addition, the poor functioning and weak corporate governance of public
service providers and regulators, including those in the energy, transportation
as well as water and waste management sectors, increases uncertainty and
complicates business operations. Bulgaria’s score for ease of doing business[40] fell slightly
in the last year. Key challenges include obtaining access to electricity and
construction permits, as well as the lengthy
procedures for registering a business. Handling insolvencies takes over three
years and the recovery rate of claims is under one third of the sum due.
Improvements have been made in foreign trade procedures and making it easier to
pay taxes. However, issues remain with customs efficiency and the time taken to
process imports and exports [41].
The
development of e-government has stalled and limits efforts to increase
transparency and reduce the administrative burden. A fully
functioning Point of Single Contact (PSC) is still not in place. The
introduction of e-services has been fragmented in the lack of coordination
across different projects to ensure interoperability of the different systems.
The government drafted a new, updated e-government strategy and an annual
action plan in 2013. The two new documents have yet to be adopted. Recent
improvements made to the Bulgarian PSC for the services sector still fall short
of the requirements of the Services Directive. Only a small number of
procedures can be completed online, and there is no provision for cross-border
completion. Coordination between the different authorities offering services
through the portal is insufficient and there are delays in updating the
information. So far, this issue has not been properly addressed and is slowing
down the setting up of a fully functioning PSC.
Energy, environment
and climate change
Competition
in the electricity and gas sectors remains limited as markets are
underdeveloped. Areas of particular concern for improving the
functioning of the energy markets remain the lack of electricity and gas
exchanges and the lack of a transparent wholesale market. The ‘free market’ in
electricity (around 15 % of total, the rest being regulated) is dominated by a
sole supplier and the small size of the free market means that competition
cannot fulfil its function of ensuring cost efficiency. The costly support
schemes in the power sector are an additional burden affecting the financial
situation of state-owned enterprises and private companies in the sector. Currently,
the power sector is not financially viable and depends on funding from the
Bulgarian Energy Holding, which in turn has to borrow from markets.[42] The
independence and effectiveness of the national regulator remains problematic. The
regulator’s budget has increased slightly but administrative capacity remains
modest compared to the tasks and responsibilities of the regulator. In
addition, the lack of transparency in selection procedures, combined with
constant management changes, has failed to ensure stability.
The
energy sector has drawn attention in the past year and some action has been
taken, with future steps under discussion. Measures taken
in 2013 include transposing the missing elements of the ‘Third Package’ electricity
and gas directives and unbundling the system operator from the National
Electricity Company.[43]
Also, exports were facilitated by removing some end-user surcharges.
Dependency
on imports from a few suppliers and a lack of infrastructure development pose a
risk of supply shocks. Bulgaria has one of the
highest energy trade deficits in the EU (as share of GDP) and depends
predominantly on imports for the supply of crude oil, natural gas and hard
coal. Moreover, it depends on only a few sources and supply routes for these
products – in some cases just one. Its underdeveloped infrastructure prevents it
from diversifying supplies. A number of electricity and natural gas
infrastructure projects have been identified as projects of common interest and
eligible for financial support from the Connecting Europe Facility, but the
concrete infrastructure development remains limited. A small-capacity reverse-flow
project on the border with Romania has been implemented, slightly improving Bulgaria’s capacity to cope with disruptions. However, the project has yet to be connected
to the transit and transmission system on the Bulgarian side.
Energy
efficiency remains low and the steps taken appear insufficient. Energy
intensity remains the highest in the EU. Improving efficiency is recognised by
the authorities as part of the long-term solution to the problem of high energy
bills for end users, which adversely affects competitiveness. It is of
particular concern for the residential and transport sectors. Complete and
timely transposition and effective implementation of the Energy Efficiency
Directive (due to be transposed in June 2014) would provide additional tools to
promote energy efficiency. The success of the 2011 National Energy Efficiency
Action Plan depends on proper control, monitoring and effective penalties for
non-compliance.
In
2013, Bulgaria met its Europe 2020 target for the share of renewables in final
consumption. Reaching the target could allow the country to share
its output with other Member States through cooperation mechanisms. The short
period in which the goal was met could mean that support schemes were too
attractive to investors. Whilst windfall profits by public and private
investors should be avoided to keep energy bills in check, it is also important
not to undermine the investment climate in Bulgaria with measures which are, or
may be perceived as, arbitrary or improvised. In an effort to mitigate the
effects on system stability of the output fluctuations inherent in wind and
solar energy, the authorities have introduced a number of measures, which are
currently being contested by renewable energy producers.
Environmental
protection policies are insufficient, which adversely affects the economy and Bulgarians’
quality of life. Poor outcomes in the waste and water management
sectors have an adverse effect on resource efficiency. The main problems in
water management, namely the inadequate governance of the sector, insufficient
cost recovery for water services and the limited administrative capacity of
stakeholders have persisted. A positive step was the change in the calculation
of waste collection fees by municipalities introduced in 2013. However, the
legislative amendment does not specify the method for calculating waste, which
leaves loopholes in its implementation. According to a recent report,[44] Bulgaria has the highest concentrations of PM2, CO and SO2 in the air, leading
to external costs including healthcare and working days lost.
Transport
and broadband infrastructure
The
state-owned railway operator continues to face financial and restructuring
difficulties. Plans for the privatisation of the cargo unit of the
railway operator were scrapped in 2013, even though the procedure was under
way. At the same time, creditors and suppliers of the company have taken action
to recover sums due and negotiations on the restructuring of loans are still
ongoing. There is still no clear view of the future of either the cargo or the passenger
units. However, the need to optimise the company’s structure is recognised.
Competition in the cargo sector has opened up and its share of overall land
transport is above the EU average.
Broadband
penetration in the country is low, despite high data speeds. Broadband
availability is below the EU average and is especially low in rural areas,
pointing to gaps in infrastructure. Deployment of the Long-Term Evolution
wireless standard has been slow, one of the obstacles being
that the majority of the 800 MHz frequencies are still used by the Ministry of
Defence. The ICT skills of Bulgaria’s overall population are particularly low,
with 80 % of the Bulgarian population and 92 % of disadvantaged people having
no or low IT skills, and the share of the workforce with low or no skills is at
77 % well above the EU average. E-commerce
is still at an early phase, with enterprises’ total turnover from e-commerce
only at 3% of their turnover (the second lowest percentage in the EU)[45]. The
situation has not improved over the past year and broadband is still hampered
by a lack of technical capacity for planning and implementing ICT investment and
by administrative obstacles to investment.
Research
and innovation
Timely
development and implementation of coherent research and innovation strategies
based on smart specialisation is essential to boost competitiveness and
productivity in the medium and long term. The key issues
for Bulgaria at this stage are inefficiencies in public support for research
and innovation, together with low and decreasing public R&D intensity (the
lowest among EU Member States, at 0.24 % of GDP in 2012). Research and
innovation priorities are not well-targeted and aligned in Bulgaria. The
Law on Innovation announced in the 2013 NRP has not been adopted and the
previously envisaged National Innovation Board has not been established.
Furthermore, the National Science Fund did not distribute any funds in 2013 as
an investigation of possible irregularities in the
allocation procedure was launched. All those factors impede any build-up of
research and innovation capacities. In February 2014, the government
launched a public consultation to update the current national strategy for the development
of research to 2020 and the rules of procedure of the National Science Fund. It
has also announced its intention to put in place a system of evaluation of
scientific activity, to improve the research infrastructure, to enhance
knowledge transfer and to promote innovation in enterprises.
Box 5:
Potential impact of structural reforms on growth – a benchmarking exercise
Structural reforms are
crucial for boosting growth. It is therefore important to know the potential
benefits of these reforms. Benefits of structural reforms can be assessed with
the help of economic models. The Commission uses its QUEST model to determine
how structural reforms in a given Member State would affect growth if the
Member State narrowed its gap vis-à-vis the average of the three best EU
performers on key indicators such as the degree of competition in the economy
or labour market participation. Improvements on these indicators could raise Bulgaria's GDP by about 6% in a 10-year period. Some reforms could have an effect even
within a relatively short time horizon. The model simulations corroborate the
analysis of Section 3.3, according to which the largest gains would likely stem
from enhancing competition in product markets and from increasing
participation rates among women and the elderly. In addition, the simulations
support the priority placed by the authorities on reforming active labour
market policies.
Table:
Structural
indicators, targets, and potential GDP effects[46]
Source:
Commission services. Note: Simulations assume that all Member States undertake
reforms which close their structural gaps by half. The table shows the
contribution of each reform to total GDP after five and ten years. If the
country is above the benchmark for a given indicator, we do not simulate the
impact of reform measures in that area; however, the Member State in question can still benefit from measures taken by other Member States. [47]
* The long-run effect of increasing the share of high-skilled population would
be 2.0% of GDP and of decreasing the share of low-skilled would be 2.7%. ** EU
average is set as the benchmark.

3.5.                
Modernisation of public administration

Efforts to modernise public institutions
have continued but due to fragmentation, lack of commitment to in-depth reforms
and lack of strong policy steer, their impact remains limited. Some
measures have been taken to reduce the administrative burden and towards smart
regulation. Strategies for the development of public administration and e-government
have been adopted by the government. However, the updated strategy for
e-government is unlikely to bring it forward due to the vague objectives, lack
of prioritisation and integrated approach, no operational and financial plan
and unclear responsibility for implementation. Despite significant investments
(through European Social Fund) in e-government there are no results yet. The
update of the e-government portal which had to start delivering real time
e-services has not been finalised. Institutional shortcomings and deficiencies
in administrative capacity have persisted and affect key sectors of the
economy.[48]
Reforms in the energy and transportation sectors would help ensure improved
access to the EU single market, enhance growth and competitiveness and attract
foreign investment. Insufficient administrative capacity remains an important
issue with a view to improving both public procurement procedures and
regulatory supervision. In addition, institutional failings in the judicial
system and in health and education have been highlighted in the past year. No
progress has been made in strengthening the role of the administration and
efficiency at local level. No steps have been taken to improve professionalism
and merit-based career development of civil servants. The
performance-based remuneration for civil servants introduced a year ago fails
to yield results. On the contrary, it seems to justify political interference
and fuel even further the inconsistencies in human resources management. Corruption
perceptions remain high and may have a negative impact on investment and the
overall business climate.
In 2013, Bulgaria received CSRs
concerning public procurement, absorption of EU funds and judicial reform. The
authorities were urged to enhance the functioning of the public procurement
system and improve the absorption of EU funds. In addition, they were invited
to improve the quality and independence of the judicial system and to fight
corruption more effectively. Overall, Bulgaria has made only limited progress
in these areas.
Public procurement
and use of EU structural funds
Bulgarian public procurement legislation
and its implementation give rise to concerns. A simple,
codified legal framework is still lacking, while the complicated legal and
regulatory landscape continue to create uncertainty. The amendments to the
Public Procurement Law tabled by the Government in August 2013 were not an
adequate response to the 2013 CSR. Furthermore, there are incompatibilities
between national legislation and the EU legal framework for public procurement.
Implementation is hindered by the complexity and lack of stability of the legal
framework, lack of legal knowledge in the contracting authorities, limited and
non-exhaustive ex-ante and ex-post controls of procurement procedures, as well
as lack of an efficient review system and of a comprehensive e-procurement
system.
These serious shortcomings in the public procurement have created persistent
difficulties and have been a major factor in delays in the implementation of
2007-13 Structural Funds projects. In the
absence of a sound national plan for mandatory e-procurement, Bulgaria is missing out on the substantial transparency benefits that it can bring. At the
end of 2013, a contract was concluded with the EBRD on consultancy services for
the introduction of electronic public procurement in Bulgaria.
A well-functioning public procurement
system is crucial, as public contracts amount to 17 % of GDP.[49]
The
need for broader, more consistent and efficient ex-ante control by the
Public Procurement Agency has not been addressed adequately by the amendments to
the Public Procurement Act drafted by the authorities in the second half of
2013. Although the Agency’s ex-ante control powers would be extended to
new categories of contracts, the scope of control performed on individual contracts
would remain unchanged. A legislative
amendment aimed to introduce electronic instruments in public procurement is
under discussion in the Parliament.
The use of EU funds has increased, but
further efforts to produce results and improve effectiveness are needed. Certified
payments for cohesion policy funds (the ERDF, CF and ESF) rose from 26.7 % in
2012 to 45.5 % at the end of 2013. Despite their significant rise, this still
leaves 54.5 % (EUR 3.63 billion) to be used in 2014-15. Successful performance
of investments in the next programming period requires progress in implementing
reforms that increase the efficiency of public administrations and public
services. Effective implementation of the national strategy on the reform of
the public procurement sector, which is currently under preparation, is key to
achieving this.
Justice 
Judicial reform has started but appears
to be insufficient and incomplete. An action plan
for the reform of the prosecution offices has been launched, covering an
18-month period from September 2013 to March 2015. It includes internal
restructuring of the central prosecutors’ offices and the administration of the
Prosecutor General, and streamlining of the structure of local prosecutors’
offices. Currently, the strategy for the judiciary is being updated. The
availability of ICT tools for the registration and management of cases has
increased. However, Bulgaria does not regularly evaluate court
activities nor has it set quality standards. Regarding the
efficiency of the justice system, the 2014 EU Justice Scoreboard shows that the
time taken to deal with insolvency cases is especially high in Bulgaria (over 3 years).[50]
This increases uncertainty among market participants and reduces the country’s overall
attractiveness to investors.
The independence of the judiciary
remains a key concern for the predictability, fairness and
stability of the legal system in which businesses operate. Full
implementation of the system of random allocation of cases is important to safeguard
the independence of the judiciary. It is too early to assess whether
the measures that have been or are currently
carried out regarding promotions, appraisal and recruitment of judges would have
a positive effect. The perceived independence of the judiciary in Bulgaria has fallen further and Bulgaria had the second worst rating in the EU for 2012-13.[51] The
institutional deficiencies leading to corruption allegations were detailed in
the latest report under the Cooperation and Verification Mechanism and in the
2014 EU Anti‑Corruption Report.[52]
Both reports acknowledged a few steps forward but noted that overall progress
had not yet been sufficient, and was fragile. Consistent checks and dissuasive
sanctions for conflicts of interest are needed. Anti-corruption institutions
need to be coordinated and shielded from political influence, especially in
managerial appointments. 

4.        
Conclusions

Despite
the positive developments in terms of fiscal and financial sector stability, Bulgaria has not been able to benefit from the global rebound after the crisis. Low
employment rates and high unemployment among the low-skilled and young people
reflect persistent skill and regional mismatches as well as the low quality and
low relevance to labour market needs of the education and training systems. A
persistent and significant proportion of the population is thus vulnerable to
poverty and social exclusion. As a small, open economy, Bulgaria relies on foreign financing to fuel its output growth. Therefore, improving the
business environment, public administration and infrastructure are essential to
further enhancing Bulgaria’s growth potential.
The
analysis in this staff working document leads to the conclusion that Bulgaria has made limited progress in addressing the 2013 country-specific recommendations. On
the positive side, the government has achieved its medium-term objective for public
finances, despite the slow economic recovery. The authorities also took some
steps towards improving tax collection and the business environment. However,
the current pace of reform is insufficient to address the challenges and the
implementation of past reforms is lagging behind in a number of areas. Only
limited progress has been made in implementing the 2013 recommendations on the
labour market, education, healthcare, poverty and social exclusion, as no
substantial measures have been adopted in these areas despite protracted delays. There
is also a need for real and tangible progress in public administration and
judicial reforms, with results so far remaining very limited. Moreover,
the government initially moved in the wrong direction on pension reform and sent
conflicting signals in the areas of energy, taxation and public procurement. 
The
policy plans submitted by Bulgaria are relevant and specific but implementation
of the measures needs to be monitored to ensure it is effective. Bulgaria confirms its existing strategies, which focus on sound public finances, increasing
investment in infrastructure and the absorption of EU funds across sectors, and
improving the business environment. However, reforms, particularly in the
public administration, labour market, education and the energy sector lack the
ambition and forward-looking vision needed to address the challenges in a
comprehensive way. The effectiveness of the national reform programme will
depend on the proper design of the measures outlined and their fully and swift
implementation in respect of the timetable set in the programme.

Overview table
 
 2013 commitments || Summary assessment[53] 
 Country-specific recommendations (CSRs) 
 CSR 1: Preserve a sound fiscal position by ensuring compliance with the medium-term objective and pursue a growth-friendly fiscal policy as envisaged in the convergence programme.   Implement a comprehensive tax strategy to strengthen all aspects of the tax law and collection procedures with a view to increase revenue, notably by improving tax collection, tackling the shadow economy and reducing compliance costs.   Establish an independent institution to monitor fiscal policy and provide analysis and advice. || Bulgaria has made some progress in addressing the CSR 1: ·         Some progress in ensuring compliance with the MTO. Measured against the recalculated structural balance and also taking into account the so called "investment clause", Bulgaria was compliant with the Pact in 2013. However, there is a risk of deviation from the MTO in 2014-15. ·         Limited progress on legislation to improve tax collection and reducing tax compliance costs. The measures taken to fight tax evasion do not address the issues in a comprehensive way. ·         Some progress in establishing a fiscal council. In the second half of 2013 the government submitted a proposal to the Parliament on the establishment of an independent body whose mandate includes monitoring the national numerical fiscal rules set out in the Public Finance Act. 
 CSR 2: Phase out early retirement options, introduce the same statutory retirement age for men and women and implement active labour market policies that enable older workers to stay longer in the labour market. Tighten the eligibility criteria and controls for the allocation of invalidity pensions to effectively limit abuse. || Bulgaria has made no progress in addressing the CSR 2: ·         Some measures are reversing the reform: freezing of the increase in pensionable age and reintroducing early retirement options. ·         No commitment to equalise the statutory retirement age for men and women. ·         No underpinning with active labour market measures that promote the employability of older workers. ·         No effective changes in eligibility criteria and checks on the allocation of invalidity pensions. ·         Re-introduction of a partial wage indexation rule (‘the Swiss rule’) for pensions. 
 CSR 3: Accelerate the national Youth Employment Initiative, for example through a Youth Guarantee.   Further strengthen the capacity of the Employment Agency with a view to providing effective counselling to jobseekers and develop capacity for identifying and matching skill needs. Enhance active labour-market policies, in particular concerning national employment schemes.   Undertake a review of the minimum thresholds for social security contributions to ensure that the system does not price the low-skilled out of the labour market.   Ensure concrete delivery of the National Strategies on Poverty and Roma integration.   Improve the accessibility and effectiveness of social transfers and services, in particular for children and older people. || Bulgaria has made limited progress in addressing the CSR 3: ·         Limited progress in implementing a functioning Youth Guarantee. The monitoring and evaluation mechanisms of the YG remain weak. ·         Limited progress concerning strengthening of the capacity of the Employment Agency and developing capacity to identify and match skill needs. The system for forecasting skill needs is not operational yet. ·         Limited progress in enhancing active labour-market policies, as policies are not well targeted and impact assessment is missing. ·         Some action taken to analyse the impact of increases in minimum thresholds, but with no clear conclusions and policy follow-up. ·         Some progress in delivering the National Strategy on Poverty, with the adoption of a National Strategy for Long-term Care and continuation of the process of deinstitutionalisation of children. Progress is limited on improving the accessibility and effectiveness of social transfers and services, in particular for children and older people. ·         No progress related to concrete delivery of the National Roma Integration Strategy. Measures still need to be scaled up and integrated into a comprehensive approach towards the inclusion of Roma children. 
 CSR 4: Adopt the School Education Act and pursue the reform of higher education, in particular through better aligning outcomes to labour-market needs and strengthening cooperation between education, research and business.   Improve access to inclusive education for disadvantaged children, in particular Roma.    Ensure effective access to healthcare and improve the pricing of healthcare services by linking hospitals’ financing to outcomes and developing out-patient care. || Bulgaria has made no progress in addressing the CSR 4: ·         No progress on the School Education Act as its approval has been postponed again. ·         Limited progress in pursuing reform of higher education, a strategy in this area is currently drafted. ·         No progress in improving access to inclusive education for disadvantaged children, in particular Roma. ·         Limited progress in ensuring effective access to healthcare and improving the pricing of healthcare services. The National Healthcare Strategy 2014-20 has been approved but it lacks a clear implementation timeframe. 
 CSR 5: Take further steps to improve the business environment, by cutting red tape, implementing an e-government strategy and implementing the legislation on late payments.   Improve the quality and independence of the judicial system and fight corruption more effectively.   Improve the access to finance for SMEs and start-ups. || Bulgaria has made limited progress in addressing the CSR 5: ·         Some progress in reducing the administrative burden with a few measures implemented and many more in the pipeline. Foreign trade procedures and the ease of paying taxes show some improvements. ·         No progress has been made in the introduction of e-government. A new strategy is being drafted. ·         Some progress on the late payments directive — it has been transposed into national law. Its impact on business operation remains to be seen.  ·         Limited progress in improving the quality and independence of judiciary, as also confirmed by the 2014 CVM report. The strategy for the judiciary is being updated. ·         Limited progress in improving access to finance for SMEs and start-ups. JEREMIE-funded seed and venture capital funds have been successful, but SMEs still face difficulties in bank financing. 
 CSR 6: Accelerate the absorption of EU funds.   Ensure sound implementation of public-procurement legislation by extending ex-ante control by the Public Procurement Agency to prevent irregularities. || Bulgaria has made limited progress in addressing the CSR 6: ·         Some progress in accelerating absorption (almost doubled in 2013). The effectiveness of investments remains to be assessed. ·         Limited progress in the extension of ex ante control by the Public Procurement Agency. Proposed legislative amendments aim at including new types of contracts for ex ante control but have not broadened the scope of supervision of individual contracts. 
 CSR 7: Strengthen the independence of national regulatory authorities and the administrative capacity in particular in the energy and transport sectors, as well as for waste and water management.   Remove market barriers, quotas, territorial restrictions and regulated prices and complete the market design by setting up a transparent wholesale market for electricity and natural gas. Accelerate electricity and gas interconnector projects and enhance the capacity to cope with disruptions.   Step up efforts to improve energy efficiency. || Bulgaria has made limited progress in addressing the CSR 7: ·         No progress in strengthening the independence and effectiveness of regulation. Administrative capacity is insufficient and staff turnover is high. No progress in strengthening the capacity of the regulator to perform its responsibilities in the water sector. Some progress in waste management through changing the local taxes law. The reform of the Road Infrastructure Agency has not started yet. ·         Limited progress in setting up transparent wholesale markets. Bulgaria transposed the missing elements of the ‘Third Package’ electricity and gas directives and unbundled the system operator in the power sector. ·         Limited progress in accelerating electricity and gas interconnector projects, with only one small project completed. ·         Limited progress in energy efficiency, shown through the early delivery of obligation schemes and technical preparation of the calculation methods. 
 Europe 2020 (national targets and progress) 
 Policy field target || Progress achieved 
 Early school leaving target: 11 % || The early school leaving rate was 13.9% in 2010, 11.8% in 2011 and 12.5% in both 2012 and 2013. No progress towards meeting the target. A strategy on early school leaving has been finalised. 
 Tertiary education target: 36 % || The tertiary attainment rate was 27.7% in 2010, 27.3% in 2011, 26.9% in 2012 and 29.4% in 2013. Some progress towards meeting the target. A strategy on higher education has been prepared and is under discussion in the National Assembly.  
 Employment rate target (in %): 76 % || The employment rate increased marginally to 63.5% in 2013 (62.9% in 2011 and 63% in 2012). 
 Target on the reduction of population at risk of poverty in number of persons: Decrease by 260 000 (baseline (2008): 1 632 000). || People at risk of poverty (2012): 1 559 000. Some progress has been achieved towards the target. 
 R&D target: 1.5 % of GDP || R&D intensity in 2012 was 0.64% of GDP. It increased from 0.57% in 2011 to 0.64% in 2012, but this was due only to an increase in business R&D intensity, while public R&D intensity continued to decline. 
 Energy Efficiency target: 25 % in primary energy savings and 50 % energy intensity reduction by 2020 By 2020: level of 15.8 Mtoe primary consumption and 9.16 Mtoe final energy consumption || During the period 2000–2009 the primary and the final energy intensity decreased at an average annual rate of about 5%. In 2010 and 2011 the primary energy intensity increased by 1.6% and 5.4%, and the final energy intensity by 2.1% and 2.5% respectively.[54] 
 2020 Renewable energy target: 16 % || With a RES share of 16.3% in 2012, Bulgaria had already reached its 2020 RES target. 
 Greenhouse gas (GHG) emissions target: +20 % (compared to 2005 emissions, ETS emissions are not covered by this national target)   || Change in non-ETS greenhouse gas emissions between 2005 and 2012: +8%. According to the latest national projections submitted to the Commission and taking into account existing measures, it is expected that the target will be missed: +23% in 2020 as compared with 2005. 

Annex 

Standard
Tables 
Table I. Macroeconomic indicators
Table
II. Comparison of macroeconomic developments and forecasts
Table III. Composition of the
budgetary adjustment
Table IV. Debt dynamics
Table V. Sustainability indicators
Table
VI. Taxation indicators
Table VII. Financial market
indicators
Table VIII. Labour market and
social indicators
Table IX. Product market
performance and policy indicators
Table X. Green growth
Indicators used in box 5 on potential
impact on growth of structural reforms
Final
goods sector mark-ups: price cost margin, i.e.
the difference between the selling price of a good or service and its cost.
Final goods mark-ups are proxied by the mark-ups in selected services sectors
(transport and storage, post and telecommunications, electricity, gas and water
supply, hotels and restaurants and financial intermediation but excluding real
estate and renting of machinery and equipment and other business activities[55]).
Source: Commission services estimation using the methodology of Roeger (1995)
based on EUKLEMS 1996-2007 data. 
Entry costs:
cost of starting a business in the intermediate sector. The intermediate sector
is proxied by the manufacturing sector in the model. 
Source: starting business costs in % of income per
capita, 2012 data. Doing Business Database. www.doingbusiness.org

Implicit consumption tax rate: 
defined as total taxes on consumption over the value of private consumption. In
the simulations it is used as a proxy for shifting taxation away from labour to
indirect taxes; the implicit consumption tax-rates are increased (halving the
gap vis-à-vis the best performers) while labour tax-rates are reduced, so that
the combined impact is  ex-ante budgetary neutral.
Source: European Commission, Taxation trends in the
European Union, 2013 edition, Luxembourg, 2013, 2011 data.            
Shares of high-skilled and low-skilled:
share of high skilled workers are increased, share of low-skilled workers are
reduced (halving the gap vis-à-vis the best performers). Skill definitions:
Low-skilled correspond to ISCED 0-2 categories, high-skilled correspond to
scientists (in mathematics and computing, engineering, manufacturing and
construction). The remainder is medium-skilled. 
Source: 2012 data or latest available, EUROSTAT. 
Female non-participation rate: percentage
of female that do not work/search for a job (non-active female
population/female of a working age)
Source:
2012 data or latest available, EUROSTAT.
Low-skilled male non-participation
rates: percentage of low-skilled male that do
not work/search for a job (non-active low-skilled male population/ male of a
working age)
Source:
2012 data or latest available, EUROSTAT.
Elderly non-participation rates
(55-64y): it is the percentage of the elderly
population (55-64ys) that do not work/search for a job (non-active elderly
population/55-64y population)
Source:
2012 data or latest available, EUROSTAT.
ALMP:
Active Labour Market Policy expenditures in % GDP over the share of unemployed
in the population. 
Source:
2011 or latest available data. EUROSTAT   
Benefit replacement rate:  %
of a worker's pre-unemployment income that is paid out by the unemployment
scheme.  
Source: average of net replacement rates over 60
months of unemployment, 2012 data, OECD, Benefits and Wages Statistics. www.oecd.org/els/benefitsandwagesstatistics.htm.
[1] COM(2013) 800 final.
[2] COM(2013) 790 final.
[3] Aside from the 16 Member States identified in the AMR, Ireland was also covered by an in-depth review, following the conclusion by the Council
that it should be fully integrated into the normal surveillance framework after
the successful completion of its financial assistance programme.
[4] Cyclically adjusted balance net of one-off and temporary measures,
recalculated by the Commission services on the basis of the information
provided in the programme, using the commonly agreed methodology.
[5] The Commission 2014 spring forecast does not assume additional
revenues from measures aiming to fight tax evasion. While the measures might be
effective, the Commission forecast takes a cautious approach in its revenue
forecast. 
[6] Based on conservative forecast assumptions, the Commission 2014
spring forecast does not project additional revenues from this measure. 
[7] 2% of GDP nominal budget deficit and
structural deficit/ medium term objective of 1% of GDP, which are somewhat more
stringent limits than required by the SGP.
[8] Bulgaria has
signed the Treaty on Stability, Coordination and Governance in the EMU, but not
ratified it to date.
[9] See Table V. The medium-term sustainability gap (S1) indicator
shows the upfront adjustment effort required, in terms of a steady improvement
in the structural primary balance to be introduced until 2020, and then
sustained for a decade, to bring debt ratios back to 60% of GDP in 2030,
including financing for any additional expenditure until the target date,
arising from an ageing population. The following thresholds were used to assess
the scale of the sustainability challenge: (i) if the S1 value is less than
zero, the country is assigned low risk; (ii) if a structural adjustment in the
primary balance of up to 0.5 pp. of GDP per year until 2020 after the last year
covered by the autumn 2013 forecast (year 2015) is required(indicating an
cumulated adjustment of 2.5 pps.), it is assigned
medium risk; and, (iii) if it is greater than 2.5 (meaning a structural
adjustment of more than 0.5 pp. of GDP per year is necessary), it is assigned
high risk].
[10] See Table V. The long-term sustainability gap (S2) indicator shows
the immediate and permanent adjustment required to satisfy an inter-temporal
budgetary constraint, including the costs of ageing. The S2 indicator has two
components: i) the initial budgetary position (IBP) which gives the gap to the
debt stabilising primary balance; and ii) the additional adjustment required
due to the costs of ageing. The main assumption used in the derivation of S2 is
that in an infinite horizon, the growth in the debt ratio is bounded by the
interest rate differential (i.e. the difference between the nominal interest
and the real growth rates); thereby not necessarily implying that the debt
ratio will fall below the EU Treaty 60% debt threshold.
The following thresholds for the S2 indicator were used: (i) if the
value of S2 is lower than 2, the country is assigned low risk; (ii) if it is
between 2 and 6, it is assigned medium risk; and, (iii) if it is greater than
6, it is assigned high risk.
[11] Ageing costs comprise long-term projections of public age-related
expenditure on pension, health care, long-term care, education and unemployment
benefits. See the 2012 Ageing Report for details.
[12] As stated in the 2014 update of the NRP, one of the reasons for the
temporary suspension of raising the retirement age is the fact that the burden
of the reform launched in 2000 is taken by a single generation.
[13] Bulgaria Country Fiche on Gender Equality and Policy Developments
(ENEGE, Fourth Quarter 2013).
[14] Tax reforms in EU Member States 2013 — Tax policy challenges for
economic growth and fiscal sustainability.
[15] There are several factors affecting comparability of data on the
costs of revenue collection, calculated as the ratio of administrative costs
per net revenue collected. The National Revenue Agency does not administer
excise duties, which are therefore not included in the sum of net revenue
collected. However, it is in charge of the collection of social security and
health insurance contributions Source: OECD (2013), Tax Administration 2013:
Comparative Information on OECD and Other Advanced and Emerging Economies, OECD
Publishing, pp. 178-183. Compliance costs are measured as time to comply, see
World Bank. (2013). Doing Business 2014: Understanding Regulations for Small
and Medium-Size Enterprises. Washington, DC: World Bank Group.
[16] There are two main restrictions for claiming the relief. First,
individuals have to gain their income only from employment. Even a small amount
of income from, e.g., savings interest would disqualify an individual applying
for the relief. Second, individuals cannot earn more than the minimum salary.
[17] The customs administration is responsible for the collection of
excise duties, which, together with consumption taxes other than VAT, represent
more than 18 % of total tax revenue. Source: Eurostat.
[18] The ratio of a bank’s core equity capital to its total
risk-weighted assets.
[19] For further details, see the 2014 Joint
Employment Report, COM(2013)801, which includes a scoreboard of key employment
and social indicators.
[20] FRA (2014), Education: The situation of Roma in 11 EU Member
States. Roma Survey - Data in Focus. Luxembourg: Publications Office of the
European Union (forthcoming).
[21] Of the population aged between 25 and 64 years.
[22] According to the National Statistical Institute of Bulgaria
[23] Adopted in October 2013.
[24] In the 2014 update of the NRP it is envisaged that by 2015 the
unemployment rate among young people aged 15–24 will increase to 27.2% and the
level of NEET will fall to 20.5%.
[25] Bulgaria presented a Youth Guarantee Implementation Plan in
December 2013, updated in April 2014.
[26] Programme for International Student Assessment (PISA) study based
on 2012 data, OECD, 2013.
[27] According to the 2014 update of the NRP, the revision of the law is ongoing and its approval by the National Assembly is planned for 2015. The
elaboration of the corresponding secondary statutory instruments is envisaged
for 2016. Hence, the new law could become fully operational from the 2016/2017
school year.
[28] The drop-out rate in VET schools was 4.2% in 2011, more than double
the drop-out rate of 1.6% in general schools. In addition, 19% of the students
completing VET did not obtain a professional qualification (Source: National
Statistical Institute).
[29] On average, the Roma receive four and a half years less education
than the non-Roma population in Bulgaria (UNPD/WB/EC Regional Roma Survey,
2011).
[30] 12.5% in Bulgaria 2012, according to Eurostat.
[31] In 2012, the Commission assessed the national Roma integration
strategies of all Member States and identified gaps — SWD (212)133.
[32] According to the 2013 Special Eurobarometer on corruption, the
incidence of bribery/informal payments in Bulgaria is higher than the EU
average. Given that the cost of healthcare is a greater barrier to equitable
access to healthcare in Bulgaria than in the EU generally, this jeopardises
access for the most disadvantaged groups of the population.
[33] Source: FRA Roma Pilot survey 2011, Data in focus reports
(forthcoming April 2014).
[34] Defined as under 18 years of age.
[35] Coverage of unemployment benefits is among the lowest in the EU
(9.4% vs. 30% in the EU according to Labour Force Survey, while net replacement
rates are very low after 12 months (13% vs. 38% in the EU).  Non-coverage rate
of jobless poor is the 3rd highest at 44.7%.
[36] Public employment service (PES) staff has been cut by 12 percent
over 2004-13. In conjunction with the increasing number of unemployed, this has
led to an almost 84 percent increase in caseload per employment service staff
over 2008-12. The staff of the Social Assistance Agency has also been reduced
by almost 18 percent over 2003-13.
[37] The General Minimum Income for a single person has increased from
55 BGN in 2008 to 65 BGN in 2012, while the official poverty line has increased
from 152 to 241 BGN. Net income for people on social assistance is the 2nd
lowest in the EU at 20.7% of the median income.
[38] The elaboration of this strategy was set out as a measure in the
2020 National Strategy for Reducing Poverty and Promoting Social Inclusion.
[39] http://ec.europa.eu/economy_finance/economic_governance/macroeconomic_imbalance_procedure/index_en.htm.
[40] Bulgaria ranked 58th in the 2014 World Bank Doing Business report, down from the
57th the previous year.
[41] World Bank (2013). Doing Business 2014:
Understanding Regulations for Small and Medium-Size Enterprises. Washington,   DC: World Bank Group.
[42] The financial situation of the National Electricity Company is also
challenging as it is obliged to buy electricity from old and inefficient
thermal plants at regulated tariffs well above market prices while the
regulator has reduced the tariffs for residential consumers by over 15% since
2013.
[43] The decision on certification by the Regulator and the European
Commission’s approval are still pending.
[44] Air Quality in Europe — 2013 Report, European Environment Agency, http://www.eea.europa.eu/publications/air-quality-in-europe-2013.
[45] Eurostat Community Survey on ICT usage by enterprises, [isoc_ec_evaln2], 2013.
[46] Final goods sector
mark-ups is the difference between the selling price of a good/service and its
cost. Entry cost refers to the cost of starting a business in the intermediate
sector. The implicit consumption tax rate is a proxy for shifting taxation away
from labour to indirect taxes. The benefit replacement rate is the % of a worker's pre-unemployment income that is
paid out by the unemployment scheme. For a detailed explanation of indicators see
Annex.
[47] For a detailed
explanation of the transmission mechanisms of the reform scenarios see:
European Commission (2013), "The growth impact of structural reforms",
Chapter 2 in QREA No. 4. December 2013. Brussels; http://ec.europa.eu/economy_finance/publications/qr_euro_area/2013/pdf/qrea4_section_2_en.pdf
[48] Key institutional impediments to competitiveness continue to be
policy instability and inefficient government, according to "The global
competitiveness report 2013-2014", World Economic Forum, pp.138-139.
[49] Source: Eurostat.
[50] Source: The 2014 EU Justice Scoreboard — Communication from the
Commission to the European Parliament, the Council, the European Central Bank,
the European Economic and Social Committee and the Committee of the Regions,
COM(2014) 155 final, available at: http://ec.europa.eu/justice/effective-justice/scoreboard/index_en.htm.
[51]
World Economic Forum, The Global Competitiveness Report; 2013-2014, http://www3.weforum.org/docs/WEF_GlobalCompetitivenessReport_2013-14.pdf.
[52] CVM
report 2014, EU Anti-Corruption Report, COM(2014) 38 final, 3
February 2014, http://ec.europa.eu/anti-corruption-report.
[53] The following categories are used to assess progress in
implementing the 2013 country specific recommendations. 
No progress: The Member State has neither announced nor adopted any measures to
address the CSR. This category also applies if a Member State has commissioned
a study group to evaluate possible measures. 
Limited progress: The Member State has announced some measures to address the CSR,
but these measures appear insufficient and/or their adoption/implementation is
at risk. 
Some progress: The Member State has announced or adopted measures to address the
CSR. These measures are promising, but not all of them have been implemented
yet and implementation is not certain in all cases. 
Substantial progress: The Member State has adopted measures, most of which have been
implemented. These measures go a long way in addressing the CSR. 
Fully addressed: The Member State has adopted and implemented measures that address
the CSR appropriately.
[54] Based on the 2014 update of the NRP. Commission services have not
received the new National Action Plan on Energy Efficiency by 15 May 2014.
[55] The real estate sector is excluded because of statistical difficulties
of estimating a mark-up in this sector. The sector renting of machinery and equipment
and other business activities is conceptually part of intermediate goods
sector.