Economic Policies
#32Key Findings
Despite some progress in recent years, Bulgaria receives comparatively low scores in international comparison (rank 32) with respect to economic policies. Its score on this measure has risen by 0.5 points relative to 2014.
The country has experienced consistent robust growth for years, interrupted only in 2020. Unemployment rates have been under 5% aside from a brief surge in 2020 and early 2021. However, this is in part due to labor shortages rather than targeted policies. Minimum wage and social security thresholds fuel informal contracts and keep unemployment rates high in poor areas.
Many years of fiscal surpluses kept debt levels comparatively low even through the pandemic, although deficits were expected through 2023. Debt as a share of GDP rose above 25% in late 2021, but dropped rapidly afterward. Economic policies have deteriorated recently, with large public procurement projects issued on a non-competitive basis.
The tax system is heavily VAT-dependent, with direct taxes accounting for a comparatively small share of government revenues. Personal and corporate income taxes are set at a flat 10% rate. Plans to adopt the euro by 2024 have been delayed due to increasing inflation rates. R&D spending is low.
The country has experienced consistent robust growth for years, interrupted only in 2020. Unemployment rates have been under 5% aside from a brief surge in 2020 and early 2021. However, this is in part due to labor shortages rather than targeted policies. Minimum wage and social security thresholds fuel informal contracts and keep unemployment rates high in poor areas.
Many years of fiscal surpluses kept debt levels comparatively low even through the pandemic, although deficits were expected through 2023. Debt as a share of GDP rose above 25% in late 2021, but dropped rapidly afterward. Economic policies have deteriorated recently, with large public procurement projects issued on a non-competitive basis.
The tax system is heavily VAT-dependent, with direct taxes accounting for a comparatively small share of government revenues. Personal and corporate income taxes are set at a flat 10% rate. Plans to adopt the euro by 2024 have been delayed due to increasing inflation rates. R&D spending is low.
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How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?
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Economic policy fully succeeds in providing a coherent set-up of different institutional spheres and regimes, thus stabilizing the economic environment. It largely contributes to the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
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Economic policy largely provides a reliable economic environment and supports the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
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Economic policy somewhat contributes to providing a reliable economic environment and helps to a certain degree in fostering a country’s competitive capabilities and attractiveness as an economic location.
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1
Economic policy mainly acts in discretionary ways essentially destabilizing the economic environment. There is little coordination in the set-up of economic policy institutions. Economic policy generally fails in fostering a country’s competitive capabilities and attractiveness as an economic location.
Ahead of the 2021 elections and in the midst of evolving pandemic impacts and public discontent with Prime Minister Borisov’s cabinet and the prosecutor general’s performance, economic policies deteriorated. The government shifted toward an arms-length treatment of different economic sectors and players; loopholes in the legal framework widened and sizable public procurement of at least 4.5-5% of GDP proceeded on a non-competitive basis.
Nearly one-half of this (i.e., 2% of GDP) was paid in advance to beneficiaries involved in the construction and maintenance of highways and roads. Of these projects, 50% have yet to be launched and have been, since May-June 2021, subject to an audit.
Despite a sizable scope of action (20% government debt-to-GDP ratio, fiscal reserves exceeding 10% of GDP) in 2020 and early 2021, the government’s economic policies have not helped improve the economy’s international competitiveness.
Before the April 2021 elections, a sizable sum (3% of GDP) was paid from public reserves to GAZPROM for a pipeline to Serbia (and the EU) with unclear prospects of an even modest recovery of investment. Some 2.8% of GDP was allocated to combined state-budget/private-sector job saving measures, credit lines for SMEs and self-employed individuals, as well as VAT allowances. In addition, support to the healthcare sector totaled some 0.5% of GDP. In light of the aforementioned record-level mortality rates for 2021, the latter allocation, which arrived late, seems particularly ineffective. In addition, the government wasted its relative advantages in terms of the country’s health infrastructure allowing it to meet the first wave of COVID-19.
The new cabinet appointed at the end of 2021 was set to promptly restore transparency and accountability, leveling back the playground for domestic and foreign investors. It is, however, unclear how much time would be needed to compensate for the sunk-costs of the economic and fiscal policies of the mid-2020 to mid-2021 period, and, especially, the negative impacts of population decline.
The 2020 Global Competitiveness Report published by the World Economic Forum found that Bulgaria was among the four countries showing the largest improvements in terms of its competitiveness scores. Negative policy developments during the pandemic were further aggravated by the electoral instability of 2021. These developments were noted in the International Institute for Management Development’s 2021 World Competitiveness Report, which showed Bulgaria taking the largest dive in the competitiveness ranking (along with Slovenia and Poland).
Citations:
[GCR 2020, page 23: https://www3.weforum.org/docs/WEF_TheGlobalCompetitivenessReport2020.pdf ]
[IMD WCR 2021: https://www.imd.org/centers/world-competitiveness-center/rankings/world-competitiveness/ ]
[See: Krassen Stanchev, The Pandemic’s Impact on Central Europe in a Historical Perspective, Japan Spotlight, March/April 2021: https://www.jef.or.jp/journal/pdf/236th_Special_Article_01.pdf ]
Nearly one-half of this (i.e., 2% of GDP) was paid in advance to beneficiaries involved in the construction and maintenance of highways and roads. Of these projects, 50% have yet to be launched and have been, since May-June 2021, subject to an audit.
Despite a sizable scope of action (20% government debt-to-GDP ratio, fiscal reserves exceeding 10% of GDP) in 2020 and early 2021, the government’s economic policies have not helped improve the economy’s international competitiveness.
Before the April 2021 elections, a sizable sum (3% of GDP) was paid from public reserves to GAZPROM for a pipeline to Serbia (and the EU) with unclear prospects of an even modest recovery of investment. Some 2.8% of GDP was allocated to combined state-budget/private-sector job saving measures, credit lines for SMEs and self-employed individuals, as well as VAT allowances. In addition, support to the healthcare sector totaled some 0.5% of GDP. In light of the aforementioned record-level mortality rates for 2021, the latter allocation, which arrived late, seems particularly ineffective. In addition, the government wasted its relative advantages in terms of the country’s health infrastructure allowing it to meet the first wave of COVID-19.
The new cabinet appointed at the end of 2021 was set to promptly restore transparency and accountability, leveling back the playground for domestic and foreign investors. It is, however, unclear how much time would be needed to compensate for the sunk-costs of the economic and fiscal policies of the mid-2020 to mid-2021 period, and, especially, the negative impacts of population decline.
The 2020 Global Competitiveness Report published by the World Economic Forum found that Bulgaria was among the four countries showing the largest improvements in terms of its competitiveness scores. Negative policy developments during the pandemic were further aggravated by the electoral instability of 2021. These developments were noted in the International Institute for Management Development’s 2021 World Competitiveness Report, which showed Bulgaria taking the largest dive in the competitiveness ranking (along with Slovenia and Poland).
Citations:
[GCR 2020, page 23: https://www3.weforum.org/docs/WEF_TheGlobalCompetitivenessReport2020.pdf ]
[IMD WCR 2021: https://www.imd.org/centers/world-competitiveness-center/rankings/world-competitiveness/ ]
[See: Krassen Stanchev, The Pandemic’s Impact on Central Europe in a Historical Perspective, Japan Spotlight, March/April 2021: https://www.jef.or.jp/journal/pdf/236th_Special_Article_01.pdf ]
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How effectively does labor market policy address unemployment?
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Successful strategies ensure unemployment is not a serious threat.
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Labor market policies have been more or less successful.
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Strategies against unemployment have shown little or no significant success.
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Labor market policies have been unsuccessful and rather effected a rise in unemployment.
Unemployment was at 4.1% in 2019, increasing to 6.3% during the first quarter of 2021 (during the pandemic), falling down to 4.6% in December of the same year. This decline is not a result of an improved functioning of the labor market or of targeted policies, but of labor shortages. In the last four years, 30% to 40% of job openings have remained vacant.
Unemployment among college graduates is half of the national average, among those with lower or no education, the rate is 3 to 5 times higher. Unemployment in the country’s northwest region is typically 2.5 to 3 times higher than the national average, for some districts, the rates up to five times as high.
An objective indicator of the flexibility and the level of development of the labor market is the number of temporary employees as a percentage of the total number of employees: for the last five years and the first six months of 2021, Bulgaria’s rate of temporary employment is four times less than that recorded in the EU overall.
There are some policies designed to incentivize matching the demand for qualified labor (curricula drafting, teaching and examination with employers) with supply, but they are rarely applied. The government-mandated minimum wage and social security thresholds fuel the prevalence of informal contracts and help keep unemployment high in the country’s poorest regions.
Unemployment among college graduates is half of the national average, among those with lower or no education, the rate is 3 to 5 times higher. Unemployment in the country’s northwest region is typically 2.5 to 3 times higher than the national average, for some districts, the rates up to five times as high.
An objective indicator of the flexibility and the level of development of the labor market is the number of temporary employees as a percentage of the total number of employees: for the last five years and the first six months of 2021, Bulgaria’s rate of temporary employment is four times less than that recorded in the EU overall.
There are some policies designed to incentivize matching the demand for qualified labor (curricula drafting, teaching and examination with employers) with supply, but they are rarely applied. The government-mandated minimum wage and social security thresholds fuel the prevalence of informal contracts and help keep unemployment high in the country’s poorest regions.
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How effective is a country’s tax policy in realizing goals of revenue generation, equity, growth promotion and ecological sustainability?
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Taxation policy fully achieves the objectives.
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Taxation policy largely achieves the objectives.
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Taxation policy partially achieves the objectives.
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Taxation policy does not achieve the objectives at all.
Bulgaria’s tax system boasts features that are essential to tax compliance, such as simplicity, built-in compliance incentives, and motivating higher income levels. A 2019 report on the effective tax rate for multinational firms that was commissioned by the Greens in the European Parliament, found that Bulgaria was the only EU member states in which statutory required taxes are paid.
The tax system works well during recessions, as it allows for relatively flexible countercyclical policies when revenues from corporate taxation declines.
Direct taxes, both personal and corporate, constitute a relatively small component of overall tax revenues but the levels (as a share of GDP) are comparable to average OECD countries. The system relies on low rates, has no nontaxable income threshold, and is applied uniformly over a very broad tax base. Both corporate and personal income taxes use a flat 10% rate.
The country’s VAT is at 20%, except for tourist packages. The share of VAT comprising total government revenues fluctuates between 40% to 50%.
Excise duties are the other important source (5-8%) of tax revenues. Bulgaria applies the lowest EU rates; excise duties on alcoholic beverages and tobacco products will very likely be increased.
In terms of efficacy and equity, the system performs relatively well, while challenges remain with adjacent spending allocations, especially in the area of social inclusion and welfare policies.
Since efforts to simplify taxation and undergo a basic consolidation got underway in 1999-2000, and since the proportional tax reforms of 2007-2008 in particular, the budget has registered sizable surpluses, increased transfers to the state pension fund at least twice, and doubled the amount of annual procurement on infrastructure. Fiscal reserves helped the country weather the negative impacts of the 2009-2010 recession, covered lost savings resulting from a major bank bankruptcy (in 2014-2015, equal to 3% of GDP), and make payments on a lost arbitration case (1.2% of GDP to ROSATOM in 2016).
In terms of vertical equity, the picture seems mixed. On the one hand, the system creates incentives to work, and extreme poverty levels (a UN criteria) decreased to below 1% of the population (constituting a near fivefold decrease from 2007 to 2021). On the other hand, social aid and social inclusion budgets are allocated without clear efficacy criteria, welfare benefits are often distributed on a per capita basis, delivering no impact for the disadvantaged in society. For example, a 2021 survey of social aid allocations found that the guaranteed minimum income (GMI) has not been changed since 2009, and if its amount doubles (with no negative impact on budget), GMI will positively affect 4% of the population, reduce the Gini by 2.4 percentage points and will reduce the poverty level (measured by the national poverty line) by 3.4% of the population.
In terms of international competitiveness, the system attracts savings and companies from neighboring jurisdictions under stress (for instance Romania in 2011, Greece 2012-2015 and Turkey after 2016), but issues associated with the rule of law and public procurement remain a major hurdle for larger FDIs.
Since 2007, Bulgaria has spent nearly 3% of its GDP each year on environmental protection. Public investment in water and waste management accounts for nearly half of this. The country performs fairly well on Yale University’s Environmental Performance Index, and has one of the EU’s largest nature protection areas that is managed by public funds.
Citations:
European Commission (2020): Country Report Bulgaria 2020. SWD(2020) 501 final. Brussels, 24-25 (https://ec.europa.eu/info/sites/info/files/2020-european-semester-country-report-bulgaria-en.pdf).
Petr Jansky, Report on effective tax rate for multinational firms, Greens/EFA, January 2019 (https://www.wts.com/wts.de/publications/wts-tax-weekly/anhange/2019/2019_3_1_studie.pdf)
American Institute of Economic Research, Institute Molinari, The Tax Burden on Global Workers: A Comparative Index,” based on data provided by E&Y, first edition, October, 2021.
Kalina Hadjinedelcheva (editor), Flat Tax in Bulgaria: History, Introduction and Results, Sofia, Institute for Market Economics, 2016 (https://ime.bg/var/The-Flat-Tax-in-Bulgaria.pdf)
The tax system works well during recessions, as it allows for relatively flexible countercyclical policies when revenues from corporate taxation declines.
Direct taxes, both personal and corporate, constitute a relatively small component of overall tax revenues but the levels (as a share of GDP) are comparable to average OECD countries. The system relies on low rates, has no nontaxable income threshold, and is applied uniformly over a very broad tax base. Both corporate and personal income taxes use a flat 10% rate.
The country’s VAT is at 20%, except for tourist packages. The share of VAT comprising total government revenues fluctuates between 40% to 50%.
Excise duties are the other important source (5-8%) of tax revenues. Bulgaria applies the lowest EU rates; excise duties on alcoholic beverages and tobacco products will very likely be increased.
In terms of efficacy and equity, the system performs relatively well, while challenges remain with adjacent spending allocations, especially in the area of social inclusion and welfare policies.
Since efforts to simplify taxation and undergo a basic consolidation got underway in 1999-2000, and since the proportional tax reforms of 2007-2008 in particular, the budget has registered sizable surpluses, increased transfers to the state pension fund at least twice, and doubled the amount of annual procurement on infrastructure. Fiscal reserves helped the country weather the negative impacts of the 2009-2010 recession, covered lost savings resulting from a major bank bankruptcy (in 2014-2015, equal to 3% of GDP), and make payments on a lost arbitration case (1.2% of GDP to ROSATOM in 2016).
In terms of vertical equity, the picture seems mixed. On the one hand, the system creates incentives to work, and extreme poverty levels (a UN criteria) decreased to below 1% of the population (constituting a near fivefold decrease from 2007 to 2021). On the other hand, social aid and social inclusion budgets are allocated without clear efficacy criteria, welfare benefits are often distributed on a per capita basis, delivering no impact for the disadvantaged in society. For example, a 2021 survey of social aid allocations found that the guaranteed minimum income (GMI) has not been changed since 2009, and if its amount doubles (with no negative impact on budget), GMI will positively affect 4% of the population, reduce the Gini by 2.4 percentage points and will reduce the poverty level (measured by the national poverty line) by 3.4% of the population.
In terms of international competitiveness, the system attracts savings and companies from neighboring jurisdictions under stress (for instance Romania in 2011, Greece 2012-2015 and Turkey after 2016), but issues associated with the rule of law and public procurement remain a major hurdle for larger FDIs.
Since 2007, Bulgaria has spent nearly 3% of its GDP each year on environmental protection. Public investment in water and waste management accounts for nearly half of this. The country performs fairly well on Yale University’s Environmental Performance Index, and has one of the EU’s largest nature protection areas that is managed by public funds.
Citations:
European Commission (2020): Country Report Bulgaria 2020. SWD(2020) 501 final. Brussels, 24-25 (https://ec.europa.eu/info/sites/info/files/2020-european-semester-country-report-bulgaria-en.pdf).
Petr Jansky, Report on effective tax rate for multinational firms, Greens/EFA, January 2019 (https://www.wts.com/wts.de/publications/wts-tax-weekly/anhange/2019/2019_3_1_studie.pdf)
American Institute of Economic Research, Institute Molinari, The Tax Burden on Global Workers: A Comparative Index,” based on data provided by E&Y, first edition, October, 2021.
Kalina Hadjinedelcheva (editor), Flat Tax in Bulgaria: History, Introduction and Results, Sofia, Institute for Market Economics, 2016 (https://ime.bg/var/The-Flat-Tax-in-Bulgaria.pdf)
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To what extent does budgetary policy realize the goal of fiscal sustainability?
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Budgetary policy is fiscally sustainable.
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Budgetary policy achieves most standards of fiscal sustainability.
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Budgetary policy achieves some standards of fiscal sustainability.
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Budgetary policy is fiscally unsustainable.
Bulgaria has featured sound budgetary policy for most of the last 25 years. The budgetary position worsened during the global recession and the bankruptcy of one of the country’s largest businesses in 2009 – 2010 and of its fourth-largest bank in 2014 – 2015, but budgetary discipline was swiftly restored. The country has registered effective fiscal surpluses of 1-2% of GDP ever since 1998. This has allowed the government to reduce its foreign debt rather swiftly.
Bulgaria’s fiscal rules, which are stricter than EU fiscal rules, have been compromised only once, during the budget planning and updates at the end of 2020 and 2021. Economic recovery during the second half of 2021 provided the opportunity for the country to return to near-balanced budgets for 2022 and 2023, but the mid-term macroeconomic fiscal framework plans a 4% budget deficit for these years.
Local governments, which lack their own revenue, are generally politically dependent on the central government. A pending reform involves ensuring that 1/5 of income taxes derived from a specific area are to remain in the location.
Bulgaria’s fiscal rules, which are stricter than EU fiscal rules, have been compromised only once, during the budget planning and updates at the end of 2020 and 2021. Economic recovery during the second half of 2021 provided the opportunity for the country to return to near-balanced budgets for 2022 and 2023, but the mid-term macroeconomic fiscal framework plans a 4% budget deficit for these years.
Local governments, which lack their own revenue, are generally politically dependent on the central government. A pending reform involves ensuring that 1/5 of income taxes derived from a specific area are to remain in the location.
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To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?
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Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
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Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
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Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
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Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
Since 2009, Bulgaria has nearly doubled its R&D spending to 0.86% of GDP, which is up to three times less than the EU and OECD average (new EU states allocate 60% – 100% more).
In 2020, private sector spending on R&D was 2.6 times that of the state budget. Universities account for 6% of total private sector spending on R&D while NGOs account for 1%.
Bulgaria’s official development strategy agenda “Bulgaria 2030” (2020) mentions the term “infrastructure” 114 times, in all imaginable connotations – from education, innovation and labor markets, to roads, railways and the energy sector, and includes the Sustainable Development Goals of the UN and all EU policy initiatives. In the narrow sense of infrastructure (i.e., physical infrastructure), the strategy plans to invest at least €28 billion in infrastructure by 2030, but does not mention where it will source this funding.
The government’s focus on infrastructure from 2019 to 2021 left the investment in technological innovations almost entirely up to the private sector. The incumbent government promises to continue emphasizing infrastructure and has created a Ministry of Innovations and plans to allocate roughly 1% of GDP to high-tech innovation.
In 2020, private sector spending on R&D was 2.6 times that of the state budget. Universities account for 6% of total private sector spending on R&D while NGOs account for 1%.
Bulgaria’s official development strategy agenda “Bulgaria 2030” (2020) mentions the term “infrastructure” 114 times, in all imaginable connotations – from education, innovation and labor markets, to roads, railways and the energy sector, and includes the Sustainable Development Goals of the UN and all EU policy initiatives. In the narrow sense of infrastructure (i.e., physical infrastructure), the strategy plans to invest at least €28 billion in infrastructure by 2030, but does not mention where it will source this funding.
The government’s focus on infrastructure from 2019 to 2021 left the investment in technological innovations almost entirely up to the private sector. The incumbent government promises to continue emphasizing infrastructure and has created a Ministry of Innovations and plans to allocate roughly 1% of GDP to high-tech innovation.
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To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?
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The government (pro-)actively promotes the regulation and supervision of financial markets. It demonstrates initiative and responsibility in such endeavors and often acts as an international agenda-setter.
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The government contributes to improving the regulation and supervision of financial markets. In some cases, it demonstrates initiative and responsibility in such endeavors.
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The government rarely contributes to improving the regulation and supervision of financial markets. It seldom demonstrates initiative or responsibility in such endeavors.
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The government does not contribute to improving the regulation and supervision of financial markets.
Participation in the ERM II and the advances in related commitments was tested by Bulgarian National Bank (BNB) policies aimed at mitigating the 2020 recession, which involved freezing non-financial sector loan servicing equivalent to 9% of GDP from April 2020 to March 2021. The BNB and the government cooperated in fulfilling ECB 2019 stress-test recommendations, and in October 2021 Bulgaria joined the European Banking Union. The freezing of loan services did not affect the stability of the banking sector or increase the volume of non-performing loans, and credit activities were swiftly restored in the second half of 2021.
Plans to adopt the euro by 1 January 2024 have been delayed as a result of increasing inflation.
In 2021, Bulgaria joined the two-pillar plan to reform international taxation rules and ensure that multinational enterprises pay a fair share of tax wherever they operate. This initiative has been launched by OECD/G-20 member states in an effort to address the erosion of tax bases and profit-shifting by multinational companies.
Plans to adopt the euro by 1 January 2024 have been delayed as a result of increasing inflation.
In 2021, Bulgaria joined the two-pillar plan to reform international taxation rules and ensure that multinational enterprises pay a fair share of tax wherever they operate. This initiative has been launched by OECD/G-20 member states in an effort to address the erosion of tax bases and profit-shifting by multinational companies.