REPORT FROM THE COMMISSION Bulgaria Report prepared in accordance with Article 126(3) of the Treaty
Date: 2015-11-16
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: Bulgaria, budget deficit, budgetary control, gross domestic product, public debt, public expenditure, public finance, short-term economic prospects, stability pact

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   EN 

   EUROPEAN COMMISSION  Brussels, 16.11.2015  COM(2015) 802 final   REPORT FROM THE COMMISSION Bulgaria  Report prepared in accordance with Article 126(3) of the Treaty  
 
 
REPORT FROM THE COMMISSION 

Bulgaria 

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

1. 

INTRODUCTION 

Article 126 of the Treaty on the Functioning of the European Union (TFEU) lays down the 
excessive deficit procedure (EDP). This procedure is further specified in Council Regulation 
(EC) No 1467/97 “on speeding up and clarifying the implementation of the excessive deficit 
procedure”1, which is part of the Stability and Growth Pact (SGP).  

According  to  Article  126(2)  TFEU,  the  Commission  has  to  monitor  compliance  with 
budgetary discipline on the basis of two criteria, namely: (a) whether the ratio of the planned 
or actual government deficit to gross domestic product (GDP) exceeds the reference value of 
3%  (unless  either  the  ratio  has  declined  substantially  and  continuously  and  reached  a  level 
that comes close to the reference value; or, alternatively, the excess over the reference value 
is only exceptional and temporary and the ratio remains close to the reference value); and (b) 
whether the ratio of government debt to GDP exceeds the reference value of 60% (unless the 
ratio is sufficiently diminishing and approaching the reference value at a satisfactory pace). 

Article 126(3) TFEU stipulates that, if a Member State does not fulfil the requirements under 
one or both of the above criteria, the Commission has to prepare a report. This report also has 
to  “take  into  account  whether  the  government  deficit  exceeds  government  investment 
expenditure  and  take  into  account  all  other  relevant  factors,  including  the  medium-term 
economic and budgetary position of the Member State”. 

This  report,  which  represents  the  first  step  in  the  EDP,  analyses  the  question  of  Bulgaria's 
compliance with the deficit criterion of the Treaty, with due regard to the economic situation 
and other relevant factors.  

Data  notified  by  the  Bulgarian  authorities  on  31  March  2015  stated  that  the  general 
government deficit amounted to 2.8% of GDP in 2014, thus below the 3% of GDP reference 
value.  However,  on  21  April  2015,  Eurostat  issued  a  reservation  on  the  quality  of  the  data 
reported by Bulgaria in relation to the sector classification of the Deposit Insurance Fund and 
the impact  on  the  government  deficit  of  the  fund's  repayment  of  the  guaranteed  deposits  in 
the Corporate Commercial Bank2. Data notified by the authorities on 15 October 20153 and 
subsequently  validated  by  Eurostat4  show  that  the  general  government  deficit  in  Bulgaria 
reached  5.8%  of  GDP  in  2014,  thus  exceeding  the  3%  of  GDP  reference  value,  while  the 

1 

2 
3 

4 

OJ L 209, 2.8.1997, p. 6. The report also takes into account the “Specifications on the implementation 
of the Stability and Growth Pact and guidelines on the format and content of stability and convergence 
programmes”, endorsed by the ECOFIN Council of 3 September 2012, available at: 
http://ec.europa.eu/economy_finance/economic_governance/sgp/legal_texts/index_en.htm. 
Eurostat news release No 72/2015 - 21 April 2015. 
According to Council Regulation (EC) No 479/2009, Member States have to report to the Commission, 
twice a year, their planned and actual government deficit and debt levels. The most recent notification 
of Bulgaria can be found at:  
http://ec.europa.eu/eurostat/web/government-finance-statistics/excessive-deficit-procedure/edp-
notification-tables 
Eurostat news release No 186/2015 - 21 October 2015.  

2 

 
 
 
                                                 
general government debt stood at 27.0% of GDP in 2014, below the 60% of GDP reference 
value.  According  to  the  same  notification,  the  deficit  is  planned  to  reach  2.8%  of  GDP  in 
2015, thus below the 3% of GDP reference value. This is confirmed by the Commission 2015 
autumn forecast.  

Table 1. General government deficit and debt (% of GDP) 

The  notified  budget  deficit  for  2014  provides  prima  facie  evidence  on  the  existence  of  an 
excessive  deficit  in  Bulgaria  in  the  sense  of  the  Treaty  and  the  Stability  and  Growth  Pact, 
before however considering all factors as set out below. 

The Commission has therefore prepared the following report to comprehensively assess the 
excess  over  the  reference  value,  in  order  to  examine  whether  the  Treaty  reference  value  is 
complied  with  after  all  relevant  factors  have  been  considered.  Section  2  of  the  report 
examines  the  deficit  criterion,  Section  3  discusses  debt  developments.  Section  4  deals  with 
relevant factors. The report takes into account the Commission 2015 autumn forecast released 
on 5 November 2015.  

2. 

DEFICIT CRITERION  

In 2014, according to the data notified by the Bulgarian authorities and validated by Eurostat, 
the  general  government  deficit  reached  5.8%  of  GDP,  up  from  0.8%  of  GDP  in  2013  and 
significantly above the Treaty reference value. 

The excess over the 3% of GDP reference value can be considered exceptional. In particular 
it  resulted  from  an  unusual  event  outside  the  control  of  the  government  in  the  sense  of  the 
Treaty and the Stability and Growth Pact, as the 2014 deficit was negatively affected by the 
statistical  re-classification  inside  the  general  government  of  the  Deposit  Insurance  Fund 
following  the  repayment  of  the  guaranteed  deposits  in  the  Corporate  Commercial  Bank 
amounting to around 3.0% of GDP. This upward revision compared to the spring notification 
explains the excess over the 3% of GDP Treaty reference value and was not known when the 
initial budget for 2014 had been adopted. In view of the unexpected nature outside the control 
of  the  government  and  the  fact  that  it  became  known  late  in  the  year,  it  should  not  lead  to 
procedural consequences under the Excessive Deficit Procedure. 

Furthermore, the excess over the 3% of GDP reference value is temporary in the sense of the 
Treaty  and  the  Stability  and  Growth  Pact.  In  particular,  the  Commission's  2015  autumn 
forecast indicates that the deficit is expected to fall below the reference value as of 2015. At 
unchanged policy, the deficit will remain below 3% of GDP in 2016 and 20175. 

5  

In view of the consolidation measures included in the approved 2015 budget, the general government 
deficit is set to decline to 2.8% of GDP in 2015 and further to 2.7% in 2016-17. 

3 

201120122013COMNational authoritiesCOMNational authoritiesCOMNational authoritiesCOMNational authoritiesDeficit criterionGeneral government balance-2.0-0.6-0.8-5.8-5.8-2.8-2.8-2.7-2.0-2.7-1.4Debt criterionGeneral government gross debt15.317.618.027.027.031.8NA 32.8NA 33.6NA Change in structural balance0.61.5-0.3-1.7NA -0.1NA 0.1NA 0.0NA Source: Eurostat, Commission 2015 autumn forecast and Ministry of Finance.2014201520162017 
 
 
                                                 
In  sum,  the  deficit  outcome  in  2014  was  above  and  not  close  to  the  3%  of  GDP  reference 
value but the excess over the reference value is both exceptional and temporary in the sense 
of  the  Treaty  and  the  Stability  and  Growth  Pact.  This  analysis  suggests  that  the  deficit 
criterion in the Treaty is not fulfilled before analysing the relevant factors. 

3. 

DEBT DEVELOPMENTS 

The general government gross debt increased from 18.0% of GDP in 2013 to 27.0% in 2014. 
This  reflects  several  factors:  i)  the  financing  of  the  2014  budgetary  deficit;  ii)  the  pre-
financing  for  a  roll-over  of  a  large  bond  maturing  in  January  2015;  iii)  the  debt  issued  to 
support the stabilisation of the financial sector via a liquidity scheme in mid-2014 and iv) the 
pay-out  of  guaranteed  deposits  in  the  last  part  of  the  year.  Applying  the  no-policy  change 
assumption,  the  Commission  2015  autumn  forecast  does  not  include  any  potential  further 
debt  issuances  for  financial-sector  stabilisation measures,  since  they  were  not  known  at  the 
time of forecast preparation. The debt ratio is forecast to increase to 33.6% of GDP by 2017, 
reflecting primarily the financing needs related to the budgetary deficit. 

4. 

RELEVANT FACTORS  

Article 126(3) of the TFEU provides that the Commission report “shall also take into account 
whether  the  government  deficit  exceeds  government  investment  expenditure  and  take  into 
account other relevant factors, including the medium-term economic and budgetary position 
of the Member State”. These factors are further clarified in Article 2(3) of Council Regulation 
(EC)  No  1467/97,  which  also  specifies  that  “any  other  factors  which,  in  the  opinion  of  the 
Member  State  concerned,  are  relevant  in  order  to  comprehensively  assess  in  qualitative 
terms the excess over the reference value and which the Member State has put forward to the 
Commission and to the Council” need to be given due consideration.  Finally, Article 2(5) of 
the  Regulation  provides  that  the  implementation  of  pension  reforms  that  introduce  a  multi-
pillar  system,  which  includes  a  mandatory,  fully-funded  pillar,  should  be  considered  in  all 
assessments in the framework of the excessive deficit procedure. 

As  the  debt-to-GDP  ratio  is  below  the  Treaty  reference  value,  the  relevant  factors  shall  be 
taken  into  account  in  all  the  steps  leading  to  a  decision  on  the  existence  of  an  excessive 
deficit even if the excess over the 3% of GDP reference value is neither close nor temporary 
(as per Article 2(4) of Council Regulation (EC) No 1467/97). 

In view of the above provisions, the following subsections consider in turn (1) the medium-
term  economic  position;  (2)  the  medium-term  budgetary  position;  (3)  medium-term 
government debt position; (4) systemic pension reform; (5) other factors put forward by the 
Member State. 

4.1.  Medium-term economic position 

Cyclical  conditions  and  potential  growth.  After  the  global  economic  crisis  in  2009, 
economic activity in Bulgaria remained weak, with average real GDP growth over 2010-14 
amounting only to about 1%. Also Bulgaria's potential growth is estimated to have declined 
substantially  compared  to  the  pre-crisis  boom  years:  potential  growth  is  estimated  to  have 
been  reduced  down  to  0.5%  on  average  over  2010-14  from  over  5%  in  pre-crisis  years, 
reflecting declining investment and a lower contribution to growth from labour. Nevertheless, 
growth potential is estimated to have gradually recovered to about 1.7% in 2014, reflecting 
the  catching-up  potential  of  the  Bulgarian  economy  through  capital  accumulation  and  total 

4 

 
 
factor  productivity  (TFP)  increase.  Taking  account  of  the  potential  growth  profile  and  the 
actual growth outcomes, the output gap in the Bulgarian economy is estimated to have almost 
closed  in  2013  and  stayed  at  the  same  level  over  2014-15.  However,  the  small  negative 
output gap is expected to widen moderately over 2016-17 mainly due to a drop in investment 
from projects co-financed by EU funds.  

Table 2: Macroeconomic and budgetary developmentsa 

4.2.  Medium-term budgetary position  

General  Government  deficit.  According  to  the  Commission  2015  autumn  forecast,  the 
general government deficit has deteriorated rapidly from 0.8% in 2013 to 5.8% in 2014 and is 
projected to improve to 2.8% of GDP in 2015 and to 2.7% in both 2016 and 2017. The deficit 
increase in 2014 was largely driven by the sizeable support to the financial sector related to 
the repayment of the guaranteed deposits in the Corporate Commercial Bank (amounting to 
around  3%  of  GDP).  Moreover,  weaker-than-expected  government  revenues,  in  particular 
VAT, had a negative impact on the headline deficit of around 1% of GDP. The remainder of 
the  increase  in  2014  can  be  attributed  to  higher  current  and  capital  expenditure.  Current 
spending  was  higher  in  particular  in  social  expenditure  and  the  public  sector  wage  bill. 
Capital investments also increased substantially in 2014, related to the peak in the EU funds 
absorption at the end of the 2007-13 programming period. Capital expenditure is, however, 
projected to drop in 2016 due to an expected slowdown in the implementation of EU projects 
at  the  start  of  the  new  programming  period.  On  the  revenue  side,  the  Commission's  2015 
autumn forecast projects current revenue to grow over 2015-17 in line with the respective tax 
bases  without  major  changes  in  tax  elasticities.  Together  with  gradually  increasing  interest 
expenditure from 0.8% of GDP in 2014 to 1% of GDP in 2016, this implies that the primary 
balance would decline to -1.8% of GDP in 2015 and -1.7% in 2016.  

Structural  deficit  and  departure  from  the  MTO.  In  2014,  Bulgaria  had  to  reinforce  the 
budgetary  measures  in  the  light  of  the  emerging  gap  relative  to  the  preventive  arm  of  the 
Stability  and  Growth  Pact  requirements.  On  14  July  2015,  the  Council  recommended 
Bulgaria to avoid a deterioration in the structural deficit in 2015 and achieve an adjustment of 
0.5% of GDP in 2016. 

5 

 201120122013COMCOMCOMCOMNational authoritiesCOMNational authoritiesCOMNational authoritiesCOMNational authoritiesReal GDP (% change)2.00.21.31.51.51.721.52.12.02.5Potential GDP (% change) 0.30.40.91.71.61.92.41.92.42.02.4Output gap (% of potential GDP)-0.3-0.5-0.1-0.2-0.1-0.4-0.5-0.8-0.8-0.8-0.7HICP inflation3.42.40.4-1.6-1.6-0.8-0.90.70.51.11.0General government gross debt15.717.618.027.027.031.8NA 32.8NA 33.6NA General government balance-2.0-0.6-0.8-5.8-5.8-2.8-2.8-2.7-2.0-2.7-1.4Primary balance-1.30.20.0-4.9-4.9-1.8-2.3-1.7-1.1-1.6-0.4One-off and other temporary measures0.00.00.0-3.0-3.0-0.1NA 0.0NA 0.0NA Government gross fixed capital formation3.43.44.15.25.25.4NA 4.7NA 4.7NA Cyclically-adjusted balance-2.0-0.5-0.8-5.7NA -2.6NA -2.4NA -2.4NA Cyclically-adjusted primary balance-1.20.3-0.5-2.6NA -1.9NA -1.6NA -1.6NA Structural balance b-2.0-0.5-0.8-2.5-2.6-2.6NA -2.4NA -2.4NA Structural primary balance-1.30.30.0-1.6NA -1.6NA -1.4NA -1.5NA 2014201520162017Notes:a In percent of GDP unless specified otherwise.b Cyclically-adjusted balance excluding one-off and other temporary measures.Source: Eurostat, Commission 2015 autumn forecast and Ministry of Finance. 
 
 
In  2015,  the  structural  balance  pillar  points  to  a  risk  of  some  deviation  (gap  of  -0.1%  of 
GDP),  while  the  expenditure  benchmark  pillar  is  expected  to  be  complied  with.  However, 
over  2014  and  2015  taken  together,  there  is  a  risk  of  significant  deviation  based  on  the 
structural  balance  pillar  (annual  average  gap  of  -0.8%  of  GDP),  while  the  expenditure 
benchmark points to compliance (positive annual average gap of 2.3% of GDP). This calls for 
an overall assessment. The deviation over two years is partly stemming from sizable revenue 
shortfalls  in  2014  which  negatively  affect  the  structural  balance.  Also  the  large  increase  in 
public investment in 2014 contributed to a deterioration of the structural balance whereas this 
is  smoothened  in  the  calculation  of  the  expenditure  benchmark.  After  correcting  for  these 
factors, the structural balance still points to a risk of some deviation. Therefore, on balance, 
the overall assessment points to a risk of some deviation over the years 2014 and 2015 taken 
together. 

In  2016,  there  is  a  risk  of  some  deviation  (gap  of  -0.4%  of  GDP)  based  on  the  structural 
balance pillar while the expenditure benchmark pillar points to a risk of significant deviation 
(gap of -0.9% of GDP). This calls for an overall assessment. The significant deviation from 
the expenditure benchmark is due to the negative impact of the significant and sudden drop in 
EU-funded investments6. Considering this factor, the structural balance seems to be a better 
indicator of the fiscal effort at the current juncture. Therefore, the overall assessment points 
to a risk of some deviation from the adjustment path towards the MTO in 2016.  

Quality  of  public  finances.  The  implementation  of  the  current  Bulgarian  fiscal  framework 
has been delayed and the framework has not been able to prevent the fiscal slippage in 2014, 
namely  the  expenditure  overruns  not  related  to  the  financial  sector.  While  a  new  public 
finance  law  came  into  force  in  January  2014  as  planned,  related  secondary  legislation  was 
delayed during 2013-14, in particular on the ‘fiscal council’ and the ‘correction mechanism’. 
The  Public  Finance  Act  required  the  government  to  submit  a  proposal  on  setting  up  an 
independent body, the ‘fiscal council’, to parliament by mid-2013. Parliament approved the 
relevant legal act in 2015, well after the deadline for transposing Council Directive 2011/85 
on  requirements  for  budgetary  frameworks  and  the  Fiscal  Compact  to  which  Bulgaria  is 
bound.  As  part  of  the  2014  European  Semester,  Bulgaria  was  recommended  to  ensure  the 
capacity  of  the  new  fiscal  council  to  fulfil  its  mandate,  but  the  fiscal  council  is  still  not 
operational.  Bulgaria  was  also  recommended  to  improve  tax  collection  and  address  the 
shadow economy, based on a comprehensive risk analysis and evaluation of past measures. 
The above recommendations remain valid. 

Public  investment.  Public  investment  in  Bulgaria  has  been  closely  linked  to  the 
implementation  of  EU-funded  projects  and  thus  follows  the  cycle  of  the  programming 
periods.  Capital  expenditure,  including  the  EU-funded  and  national  co-financing  parts,  is 

6  

Total  investment  expenditure  under  the  expenditure  benchmark  is  smoothed  to  reduce  the  inherent 
volatility  of  investment.  In  the  case  of  Bulgaria,  investment  projects  (GFCF)  are  to  a  large  degree 
funded  by  EU  programmes,  However,  such  EU-funded  expenditures  are  excluded  from  the  net 
expenditure  growth  rate  underlying  the  expenditure  benchmark,  whereas  they  are  included  in  the 
smoothed  investment  amount  underlying  the  expenditure  benchmark.  As  EU-funded  investments  are 
expected to decrease substantially in 2016, the smoothened value of investment expenditure for 2016 as 
included in the expenditure benchmark is substantially higher than the actual value in 2016. Therefore, 
due to smoothing of the total investments instead of the non-EU funded investments, the expenditure 
benchmark  pillar  overestimates  the  net  expenditure  growth.  Correcting  for  this  issue,  the  deviation 
from the required adjustment on the basis of the expenditure benchmark would be lower, pointing to 
some deviation instead of a significant deviation in 2016. 

6 

 
 
                                                 
expected  to  peak  at  around  5.4%  of  GDP  in  2015  from  a  low  of  3.4%  in  2011.  It  is  then 
projected  to  decrease  to  around  4.7%  in  2016  and  gradually  increase  as  the  2014-2020 
programming period advances. 

4.3.  Medium-term government debt position  

According to the 2015 Ageing Report published on 12 May 2015, general government gross 
debt in Bulgaria is expected to rise from 27.0% of GDP at the end of 2014 to 39% in 2025, 
remaining  well  below  the  60%-of-GDP  reference  value  in  the  Treaty.  The  report  includes 
long-term  budgetary  projections  of  age-related  expenditure  such  as  pension,  health  care, 
long-term care, education and unemployment benefits.  

Moreover,  based  on  the  sustainability  indicators  developed  by  the  Commission,  Bulgaria 
appears  to  face  low  fiscal  sustainability  risks  in  the  medium  term  and  medium  fiscal 
sustainability risks in the long term. The medium-term sustainability gap is at -1.3% of GDP, 
indicating low risks in the medium-term. In the long term, Bulgaria appears to face medium 
risks. The long-term sustainability gap, which shows the adjustment effort needed to ensure 
that the debt-to-GDP ratio is not on an ever-increasing path, amounts to 2.3% of GDP. 

4.4. 

  Other factors put forward by the Member State 

In  a  letter  of  28  October  2015,  the  Bulgarian  authorities  communicated  what  they  consider 
relevant factors in accordance with Article 2(3) of Council Regulation (EC) No 1467/97.  

The  above  analysis  largely  covers  the  key  factors  put  forward  by  the  authorities.  The 
authorities  noted  that  the  statistical  re-classification  inside  the  general  government  of  the 
Deposit Insurance Fund drove the general government deficit above the 3% of GDP Treaty 
reference  value.  In  further  explaining  the  unexpected  increase  in  the  2014  deficit,  the 
authorities  stressed  the  underperformance  of  revenues  due  to  low  nominal  growth  in  a 
deflationary  environment.  In  addition,  the  authorities  noted  that  unexpected  expenditures 
related to increased immigration flows and natural disasters in 2014 had required additional 
expenditure of about 0.1% of GDP. The authorities also referred to the temporary suspension 
of payments by the EU for some EU funded programmes. This necessitated bridge-financing 
by  the  national  budget,  creating  a  significant  budgetary  deficit  in  cash  terms,  but  not  in 
accrual terms.  

4.5. 

Systemic pension reforms 

With  the  pension  reform  in  2000,  Bulgaria  introduced  a mandatory  second  pillar  of  private 
pension  funds  alongside  the  pay-as-you-go  pillar.  According  to  the  data  delivered  by 
authorities  to  Eurostat,  the  annual  cost  of  the  second  pillar  is  on  average  close  to  1.0%  of 
GDP in the period 2009-2012, and can be expected to remain at around that level until 2014. 
However,  starting  from  2015,  the  government  has  introduced  the  option  for  employees  to 
redirect their pension savings between the private "second" pillar pension funds and the state 
system  up  to  five  years  before  retirement.  Depending  on  the  volume  of  redirected  pension 
contributions, this could improve the general government deficit and proportionally decrease 
the cost of the fully-funded pillar. 

7 

 
 
5. 

CONCLUSIONS 

While  general  government  gross  debt  remains  below  the  60%-of-GDP  reference  value,  the 
general government deficit in Bulgaria reached 5.8% of GDP in 2014, above and not close to 
the  3%  of  GDP  reference  value.  The  excess  over  the  reference  value  can  be  qualified  as 
exceptional  within  the  meaning  of  the  Stability  and  Growth  Pact.  Furthermore,  it  can  be 
considered temporary.  

This  report  also  examined  relevant  factors.  Notably,  Bulgaria  is  projected  to  be  broadly 
compliant  with  the  required  adjustment  path  towards  the  MTO  both  in  2015  and  2016. 
Moreover, capital expenditure, including the EU-funded and national co-financing parts, has 
strongly increased in recent years and is expected to peak at around 5.4% of GDP in 2015, 
before declining to 4.7% of GDP in 2016. On this basis, the analysis presented in this report 
including  the  assessment  of  all  the  relevant  factors  suggests  that  the  deficit  criterion  as 
defined in the Treaty and in Regulation (EC) No 1467/1997 should be considered as currently 
complied with. 

8