Addressing the Medium- and Long-run Challenges: the Overall Policy Framework

Lyubomir Datzov

Deputy Minister of Finance

Republic of Bulgaria

May 2007

Macroeconomic developments Increasing activity of the economy, GDP

growth rate accelerating to about 6.3% on average in recent years;

High rates of investment and potential GDP growth

Positive real convergence prospects

GDP growth

0

1

2

3

4

5

6

7

2000 2001 2002 2003 2004 2005 2006 2007 (f) 2008 (f)

pe

r c

en

t

EU-25 Bulgaria Source: Eurostat

External sector developments The current account deficit increased to around 16%, but The inflow of FDI was also impressive: EUR 4.1 billion in

2006, covering 103% of the CAD The FDI inflows were exclusively non-privatization related

0

500

1000

1500

2000

2500

3000

3500

4000

4500

2001 2002 2003 2004 2005 2006

mln. EUR

Total FDI privatization free Source: BNB

Inflation rate

Single-digit since introduction of the CBA Accelerated to 7.4% in 2006 mainly due to

adjustments in administrated prices and excise taxes

Expected to decelerate in 2007 and following years

Labour market

Employment is increasing steadily, employment rate still to catch up with EU averages

Unemployment decreasing, reaching record-low levels

Some sectors report labour shortages, but evidence is still somewhat contradictory

Overall policy framework

Outlined in three major strategic documents: The Convergence Programme (2006-2009) The National Reform Programme (2007-2009) The National Strategic Reference Framework

(2007-2013) Full consistency among goals and policy

actions is implemented in the three documents

Main challenges before the fiscal policy Three main strains of challenges:

Macroeconomic imbalances and adequacy of budgetary policy

Structuring and re-structuring of budgetary expenditures

Structural reforms in all areas of public spending

Macroeconomic imbalances and budgetary responses Output gaps: adequate fiscal surpluses need

to be achieved in order to counter-balance eventual demand-pull inflationary pressures

Expenditures need to be constrained in order not to stimulate imports and CAB deterioration

In cases of economic downturns the fiscal policy should react properly to provide the required recovery impulses

Achieving public spending efficiency Increasing budget revenues has an upper

limit A ceiling of 40% of GDP has been

established for budget expenditures Higher expenditures efficiency needs to be

sought in order to obtain higher value of public services for a unit spent on them

Increased productivity of the public sector has to be targeted at all levels of administration

Program budgeting – a way to boost efficiency of the public sector A transition to result-oriented spending is

indispensable The policy framework of budget-related decisions is

shifted from planning of inputs to planning of outputs Currently program budgeting is introduced and

implemented in all line ministries The long-term vision is to allocate funds per policy

fields and priorities and not per institutions Result-oriented measures are also envisaged at the

individual level in order to stimulate the productivity of civil servants

Fiscal decentralization and public spending efficiency Reform started in 2002 Still to improve:

Standards for public services delivery Matching revenue collection with expenditure

needs Higher level of citizens’ participation in the

planning and execution of municipal bugdets

Important sectors that need urgent policy attention: Healthcare A key sector with a view to the ageing

population; Posing significant risks to long-term

sustainability of public finances; A ‘higher value for money’ approach is

indispensable Higher quality of the medical service is

demanded by citizens

Important sectors that need urgent policy attention: Education Mismatches between labour supply and labour

demand need to be addressed by adequate reforms in the area human capital formation;

Higher expenditure efficiency of spending should be required from schools and universities

The channels of public funding to education should be transformed and follow closely the students

Consolidation of universities and school networks is exigent

Financing of research should be shifted from subsidies to project financing

Other relevant reform areas

Business environment and administrative reform: to reduce the burdens to businesses and facilitate growth;

Innovation and R&D: to enhance the long-term growth potential of the economy at the micro and macro levels

Labour markets: to increase flexibility and reduce the social payments burden to the budget

Envisaged short-term policy formulation actions The National Reform Programme will be reviewed

and a monitoring of goals achievement will be performed until the autumn of 2007

New goals and targets will be defined in order to match better economic developments, problems and prospects

The medium-term budgetary framework will be elaborated and announced until mid-2007

The annual update of the Convergence Programme will be submitted to the Commission until December 1, 2007

Thank you for your attention!