CELEX: 52010SC0882
Language: en
Date: 2010-07-06
Title: Proposal for a Council Decision on the existence of an excessive deficit in Bulgaria

EN
EN    EN
 ---pagebreak---    EUROPEAN COMMISSION
                                    Brussels, 6.7.2010
                                    SEC(2010) 882 final
                       Proposal for a
                  COUNCIL DECISION
    on the existence of an excessive deficit in Bulgaria
EN                                                       EN
 ---pagebreak---                                     EXPLANATORY MEMORANDUM
   1.         THE APPLICATION OF THE STABILITY AND GROWTH PACT IN THE CURRENT CRISIS
              SITUATION
   Many EU countries are presently facing general government deficits above the 3% of GDP
   reference value set in the Treaty. The often strong deterioration in the deficit as well as the
   debt positions must be seen in the context of the unprecedented global financial crisis and
   economic downturn in 2008/09. Several factors are at play. First, the economic downturn
   brings about declining tax revenue and rising social benefit expenditure (e.g. unemployment
   benefits). Second, recognising that budgetary policies have an important role to play in the
   current extraordinary economic situation, the Commission called for a fiscal stimulus in its
   November 2008 European Economic Recovery Plan (EERP), endorsed by the European
   Council in December. The Plan explicated that the stimulus should be timely, targeted and
   temporary and differentiated across Member States to reflect their different positions in terms
   of public finance sustainability and competitiveness and should be reversed when economic
   conditions improve. Finally, several countries have taken measures to stabilise the financial
   sector, some of which have impacted on the debt position or constitute a risk of higher deficits
   and debt in the future, although some of the costs of the government support could be
   recouped in the future.
   The Stability and Growth Pact requires the Commission to initiate the excessive deficit
   procedure (EDP) whenever the deficit of a Member State exceeds the 3% of GDP reference
   value. The amendments to the Stability and Growth Pact in 2005 aimed at ensuring that in
   particular the economic and budgetary background was taken into account fully in all steps in
   the EDP. In this way, the Stability and Growth Pact provides the framework supporting
   government policies for a prompt return to sound budgetary positions taking account of the
   economic situation, and thereby ensuring long-term sustainability of public finances.
   2.         PREVIOUS STEPS IN THE EXCESSIVE DEFICIT PROCEDURE
   Article 126 of the Treaty on the Functioning of the European Union lays down an excessive
   deficit procedure (EDP). This procedure is further specified in Council Regulation (EC) No
   1467/97 “on speeding up and clarifying the implementation of the excessive deficit
   procedure”1, which is part of the Stability and Growth Pact.
   According to Article 126(2) of the Treaty, the Commission has to monitor compliance with
   budgetary discipline on the basis of two criteria, namely: (a) whether the ratio of the planned
   or actual government deficit to gross domestic product (GDP) exceeds the reference value of
   3% (unless either the ratio has declined substantially and continuously and reached a level
   that comes close to the reference value; or, alternatively, the excess over the reference value is
   only exceptional and temporary and the ratio remains close to the reference value); and (b)
   whether the ratio of government debt to GDP exceeds the reference value of 60% (unless the
   ratio is sufficiently diminishing and approaching the reference value at a satisfactory pace).
   1
            OJ L 209, 2.8.1997, p. 6. The report also takes into account the “Specifications on the implementation
            of the Stability and Growth Pact and guidelines on the format and content of stability and convergence
            programmes”, endorsed by the ECOFIN Council of 10 November 2009, available at
            http://ec.europa.eu/economy_finance/sgp/legal_texts/index_en.htm.
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 ---pagebreak---    Article 126(3) stipulates that, if a Member State does not fulfil the requirements under one or
   both of these criteria, the Commission has to prepare a report. This report also has to “take
   into account whether the government deficit exceeds government investment expenditure and
   take into account all other relevant factors, including the medium-term economic and
   budgetary position of the Member State”.
   On the basis of the data notified by the Bulgarian authorities in April 20102 and subsequently
   validated by Eurostat3 and taking into account the Commission services’ spring 2010 forecast,
   the Commission adopted a report under Article 126(3) for Bulgaria on 12 May 20104.
   Subsequently, and in accordance with Article 126(4), the Economic and Financial Committee
   formulated an opinion on the Commission report on 27 May 2010.
   3.        THE EXISTENCE OF AN EXCESSIVE DEFICIT
   According to the data notified by the Bulgarian authorities in April 2010, the general
   government deficit in Bulgaria reached 3.9% of GDP in 2009, thus exceeding the 3% of GDP
   reference value. The Commission report under Article 126(3) considered that the deficit was
   not close to the 3% of GDP reference value but that the excess over the reference value can be
   qualified as exceptional within the meaning of the Treaty and the Stability and Growth Pact.
   In particular, it results from a severe economic downturn in the sense of the Treaty and the
   Stability and Growth Pact, as the global economic and financial crisis hit hard the economy of
   Bulgaria and the negative annual GDP volume growth reached 5% in 2009. Furthermore, the
   excess over the reference value could be considered temporary. According to the Commission
   services’ spring 2010 forecast, based on a no-policy change assumption, the general
   government deficit will fall below the reference value already in 2010 with the stabilization of
   the economy and as a result of the fiscal consolidation measures announced by the
   government at the end of March 2010. In a notification submitted on 22 June 2010, the
   Bulgarian authorities further revised the planned deficit for 2010 to 3.8% of GDP, above and
   not close to the reference value. The deficit criterion in the Treaty is not fulfilled.
   The data in the April 2010 EDP notification shows that the general government gross debt
   remains well below the 60% of GDP reference value and stood at 14.8% of GDP in 2009. The
   Commission services’ spring 2010 forecast projects the debt ratio to increase over the 2010-
   2011 period, but to remain below 19% of GDP. In a notification submitted on 22 June 2010,
   the Bulgarian authorities further revised the planned debt for 2010 to 15.3% of GDP. The debt
   criterion in the Treaty is fulfilled.
   In line with the provisions in the Treaty and the Stability and Growth Pact, the Commission
   also analysed in its report “relevant factors”. According to the Stability and Growth Pact,
   these can only be taken into account in the steps leading to the decision on the existence of an
   excessive deficit if the deficit satisfies the double condition of closeness and temporariness. In
   2
           According to Council Regulation (EC) No 479/2009, Member States have to report to the Commission,
           twice a year, their planned and actual government deficit and debt levels. The most recent notification
           of Bulgaria can be found at:
           http://epp.eurostat.ec.europa.eu/portal/page/portal/government_finance_statistics/excessive_deficit/edp_
           notification_tables.
   3
           Eurostat news release No 55/2010 of 22 April 2010.
   4
           All EDP-related documents for Bulgaria can be found at the following website:
           http://ec.europa.eu/economy_finance/sgp/deficit/countries/index_en.htm.
EN                                                        3                                                         EN
 ---pagebreak---    the case of Bulgaria, the double condition is not met. Considered on their own merit, the
   relevant factors in the current case on balance seem to be favourable.
   The opinion of the Economic and Financial Committee in accordance with Article 126(4) of
   the Treaty is consistent with the assessment in the Commission report under Article 126(3) on
   the existence of excessive deficit.
   The Commission, having taken into account its report under Article 126(3) and the opinion of
   the Economic and Financial Committee under Article 126(4), is of the opinion that an
   excessive deficit exists in Bulgaria. This opinion, adopted by the Commission on 12 May
   2010, is herewith addressed to the Council according to Article 126(5). The Commission
   proposes that the Council shall decide accordingly, in conformity with Article 126(6). In
   addition, the Commission is submitting to the Council a recommendation for a Council
   Recommendation to be addressed to Bulgaria with a view to bringing the situation of an
   excessive deficit to an end according to Article 126(7).
   4.        RECOMMENDATIONS TO END THE EXCESSIVE DEFICIT SITUATION
   According to Article 3(4) of Council Regulation (EC) No 1467/97, the Council
   recommendation under Article 126(7) has to establish a deadline of six months at most for
   effective action to be taken by the Member State concerned as well as a deadline for the
   correction of the excessive deficit, which “should be completed in the year following its
   identification unless there are special circumstances”. Article 2(6) of the Regulation implies
   that the “relevant factors” considered in the Commission report under Article 126(3) of the
   Treaty have to be taken into account in deciding whether special circumstances exist. Article
   3(4) of the Regulation specifies that the Council has to recommend that the Member State
   achieves a “minimum annual improvement of at least 0.5% of GDP as a benchmark, in its
   cyclically adjusted balance net of one-off and temporary measures, in order to ensure the
   correction of the excessive deficit within the deadline set in the recommendation”.
   In the case of Bulgaria, the relevant factors, as clarified in Article 2(3) of Regulation (EC) No
   1467/97 and examined in the Commission’s report under Article 124(3), were considered
   favourable. However, they do not suggest the existence of special circumstances warranting a
   departure from the standard deadline for correcting the deficit. In particular, in the
   Commission services' spring 2010 forecast, following the severe contraction in 2009 as a
   result of the global economic and financial crisis, real GDP growth is projected to gradually
   recover and reach 2.7% by 2011. In the April 2010 EDP notification the Bulgarian authorities
   expect the general government budget deficit to fall below the reference value to 2% of GDP
   in 2010 underpinned by a recovery in real GDP growth to 1% and the additional consolidation
   package to the tune of 2¼% of GDP from 31 of March 2010. The Commission services'
   spring 2010 forecast projects the general government budget deficit to improve to 2.8% of
   GDP in 2010 and to 2.2% of GDP in 2011, based on a no-policy change assumption, on an
   expected gradual improvement in the growth outlook, and on a prudent assessment of the
   budgetary impact of the announced consolidation measures. In June the Bulgarian authorities
   undertook a mid-year revision of the 2010 budget and increased their planned government
   deficit to 3.8% of GDP. The revision was initiated as a result of a significant downward
   adjustment of projected government revenues, in the wake of very weak tax data in the first
   few months of 2010. It aims at ensuring the proper functioning of automatic stabilizers and a
   more accurate reflection of the domestic and international economic challenges. On the basis
   of the Commission services’ forecast and the latest budgetary and economic developments,
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 ---pagebreak---    the Bulgarian authorities should avoid a deterioration of the 2010 deficit beyond 3.8% of GDP
   and correct the excessive deficit by 2011 at the latest, implying a structural consolidation
   effort of around ¾ percentage points of GDP in that year.
   The deficit surprise in 2009, in addition to the negative budgetary impact from the downturn,
   appears also to be related to procedural weaknesses with expenditure planning and
   implementation control on an accrual basis. The large payment commitments uncovered
   under annexes to contracts signed by the predecessor government ahead of the July 2009
   elections were not planned in the budget and led to additional deterioration of the budgetary
   position. The negative outcome reflects also the fact that the recent economic good times were
   not fully used as an opportunity to undertake substantial reforms to improve the efficiency of
   public spending. In the pre-crisis period Bulgaria has benefited from significant revenue
   windfalls resulting from buoyant activity and a very tax-intensive growth structure. However,
   part of these revenue windfalls, instead of being fully saved, have been used to finance
   relatively high ad-hoc pension increases and public sector wage increases, far above
   productivity gains, as well as for tax and social security rate cuts.
   The non-binding nature of the medium-term fiscal framework in the three-year budgetary
   planning horizon and the lack of effective spending control mechanisms and expenditure rules
   have prevented the fiscal position from becoming even stronger, thus further cushioning the
   negative impact from the downturn on public finances. In addition, the existing budgetary
   framework allows for certain discretionary spending powers of the government which
   undermines fiscal transparency and accountability. The lack of reforms in the healthcare
   sector has repeatedly led to accumulation of hospital arrears and subsequent expenditure
   overruns. Successive reduction of pension contribution rates combined with pension increases
   and the absence of offsetting reform measures have brought about a substantial rise in pension
   spending, posing risks to the sustainability of the system. Furthering reforms in the education
   system and public administration would contribute to improving administrative capacity and
   the level of skills and to increasing the efficiency of public spending thus achieving the
   needed budgetary consolidation.
   Enhanced surveillance under the EDP, which seems necessary in view of the deadline for the
   correction of the excessive deficit, will require regular and timely monitoring of the progress
   made in the implementation of the fiscal consolidation strategy to ensure the correction of the
   excessive deficit. In this context, until the abrogation of the excessive deficit procedure a
   separate chapter in the update of the Bulgarian convergence programme, could usefully be
   devoted to this issue.
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 ---pagebreak---                                 Key macroeconomic and budgetary projections
                                                         2007     2008     2009    2010    2011    2012      2013
                         Real GDP
                                                          6.2      6.0     -5.0      0.0      2.7   n.a.      n.a.
                        (% change)
                       Output gap1,2
                                                          4.3      5.0     -2.9     -4.8     -4.0   n.a.      n.a.
                  (% of potential GDP)
              General government balance
                                                          0.1      1.8     -3.9     -2.8     -2.2   n.a.      n.a.
                       (% of GDP)
                     Primary balance
                                                          1.1      2.7     -3.1     -2.0     -1.4   n.a.      n.a.
                       (% of GDP)
              Cyclically-adjusted balance1
                                                         -1.5      0.0     -2.8     -1.1     -0.8   n.a.      n.a.
                       (% of GDP)
                    Structural balance3
                                                          1.8      0.0     -2.8     -1.1     -0.8   n.a.      n.a.
                       (% of GDP)
                 Government gross debt
                                                         18.2     14.1     14.8     17.4    18.8    n.a.      n.a.
                       (% of GDP)
   Notes:
   1
     Output gaps and cyclically-adjusted balances from the programmes as recalculated by Commission services on the
   basis of the information in the programmes.
   2
     Based on estimated potential growth of 3.4%, 3.1% and 2.9% 2009-2011.
   3
     Cyclically-adjusted balance excluding one-off and other temporary measures. There are no one-off and other
   temporary measures in the most recent programme and Commission services’ autumn forecast.
   Source:
   Commission services’ spring 2010 forecasts (COM); Commission services’ calculations.
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 ---pagebreak---                                              Proposal for a
                                        COUNCIL DECISION
                          on the existence of an excessive deficit in Bulgaria
   THE COUNCIL OF THE EUROPEAN UNION,
   Having regard to the Treaty on the Functioning of the European Union, and in particular
   Article 126(6) thereof,
   Having regard to the proposal from the European Commission,
   Having regard to the observations made by Bulgaria,
   Whereas:
   (1)     According to Article 126 of the Treaty on the Functioning of the European Union
           Member States shall avoid excessive government deficits.
   (2)     The Stability and Growth Pact is based on the objective of sound government finances
           as a means of strengthening the conditions for price stability and for strong sustainable
           growth conducive to employment creation.
   (3)     The excessive deficit procedure (EDP) under Article 126 of the Treaty, as clarified by
           Council Regulation (EC) No 1467/97 on speeding up and clarifying the
           implementation of the excessive deficit procedure5 (which is part of the Stability and
           Growth Pact), provides for a decision on the existence of an excessive deficit. The
           Protocol on the excessive deficit procedure annexed to the Treaty sets out further
           provisions relating to the implementation of the EDP. Council Regulation (EC) No
           479/20096 lays down detailed rules and definitions for the application of the provision
           of the said Protocol.
   (4)     The 2005 reform of the Stability and Growth Pact sought to strengthen its
           effectiveness and economic underpinnings as well as to safeguard the sustainability of
           the public finances in the long run. It aimed at ensuring that in particular the economic
           and budgetary background was taken into account fully in all steps in the EDP. In this
           way, the Stability and Growth Pact provides the framework supporting government
           policies for a prompt return to sound budgetary positions taking account of the
           economic situation.
   (5)     Article 126(5) of the Treaty requires the Commission to address an opinion to the
           Council if the Commission considers that an excessive deficit in a Member State exists
           or may occur. Having taken into account its report in accordance with Article 126(3)
   5
           OJ L 209, 2.8.1997, p. 6.
   6
           OJ L 145, 10.6.2009, p. 1.
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 ---pagebreak---        and having regard to the opinion of the Economic and Financial Committee in
       accordance with Article 126(4), the Commission concluded that an excessive deficit
       exists in Bulgaria. The Commission therefore addressed such an opinion to the
       Council in respect of Bulgaria on [6 July 2010]7.
   (6) Article 126(6) of the Treaty states that the Council should consider any observations
       which the Member State concerned may wish to make before deciding, after an overall
       assessment, whether an excessive deficit exists. In the case of Bulgaria, this overall
       assessment leads to the following conclusions.
   (7) According to the data notified by the Bulgarian authorities in April 2010, the general
       government deficit in Bulgaria reached 3.9% of GDP in 2009, thus exceeding the 3%
       of GDP reference value. The deficit was not close to the 3% of GDP reference value
       but the excess over the reference value can be qualified as exceptional within the
       meaning of the Treaty and the Stability and Growth Pact. In particular, it results from
       a severe economic downturn in the sense of the Treaty and the Stability and Growth
       Pact, as the global economic and financial crisis hit hard the economy of Bulgaria and
       the negative annual GDP volume growth reached 5% in 2009. According to the
       Commission services’ spring 2010 forecast, the general government deficit would fall
       below the reference value already in 2010 with the stabilization of the economy and as
       a result of the fiscal consolidation measures undertaken by the government. However,
       on the basis of the revised deficit target for 2010 (3.8% of GDP according to the
       notification of 22 June 2010 by the Bulgarian authorities), significantly above the
       Commission services’ spring forecast of 2.8% of GDP, the breach of the reference
       value may not remain temporary. The deficit criterion in the Treaty is not fulfilled.
   (8) According to the data notified by the Bulgarian authorities in April 2010, the general
       government gross debt remains well below the 60% of GDP reference value and stood
       at 14.8% of GDP in 2009. The Commission services’ spring 2010 forecast projects the
       debt ratio to increase over the 2010-2011 period, but to remain below 19% of GDP. In
       a notification submitted on 22 June 2010, the Bulgarian authorities further revised the
       planned debt for 2010 to 15.3% of GDP. The debt criterion in the Treaty is fulfilled.
   (9) According to Article 2(4) of Council Regulation (EC) No 1467/97, “relevant factors”
       can only be taken into account in the steps leading to the Council decision on the
       existence of an excessive deficit in accordance with Article 126(6) if the double
       condition - that the deficit remains close to the reference value and that its excess over
       the reference value is temporary - is fully met. In the case of Bulgaria, this double
       condition is not met. Therefore, relevant factors are not taken into account in the steps
       leading to this decision,
   7
       All EDP-related documents for Bulgaria can be found at the following website:
       http://ec.europa.eu/economy_finance/sgp/deficit/countries/index_en.htm.
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 ---pagebreak---    HAS ADOPTED THIS DECISION:
                                              Article 1
   From an overall assessment it follows that an excessive deficit exists in Bulgaria.
                                              Article 2
   This decision is addressed to the Republic of Bulgaria.
   Done at Brussels,
                                               For the Council
                                               The President
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