News

The 2018 edition of "Regional Profiles: Indicators of Development" will only be available in Bulgarian.

The artivle will be available in English on August 3rd 2018.

The article will be available in English on July 7th, 2018.

The text will be available in English on June 8th 2018.

Sharing Income Tax Revenues with Municipalities

The last decade was characterised by the reluctance of a number of Bulgarian governments to pursue their strategic commitment to fiscal decentralisation. The last meaningful steps towards higher financial independence of Bulgarian municipalities were taken in the distant 2007, when municipal councils were given the power to determine the size of local taxes and fees within a given range. The period that followed showed that this change was insufficient and has not led to a significant change in the structure of municipal budgets.

• Municipal budgets remain highly dependent on transfers from the central government. About 2/3 of municipal budget revenues come from such transfers, while capital expenditures are almost entirely dependent on EU funds.
• Independent fiscal policy is severely hampered by the lack of own revenues. The deteriorating condition of municipal budgets and the stipulations of the 2016 “Financial recovery procedure for municipalities with financial difficulties” have led to incentives to increase existing local taxes and have created prerequisites for growing political dependence through non-interest-bearing loans and their subsequent "forgiveness" by the Ministry of finance.
• The lack of own revenues limits the role of local democracies and deprives municipalities of the tools needed to form local policies. It is questionable whether the current system allows them to carry out long-term policies in the interest of their own citizens.

The Solution: Fiscal Decentralization

Fiscal decentralisation rests on two basic principles - "local self-government" and "subsidiarity". The first principle relates to the right and the ability of local authorities to manage and be responsible for a substantial part of local public affairs, while the second principle implies that problems are resolved as quickly, easily and efficiently as possible at the lowest possible level of governance.

A real change in the financial autonomy of the Bulgarian municipalities is only possible through the restructuring of the existing tax system. There is a wide consensus that a good first step towards fiscal decentralisation would be to share one-fifth of the revenue from personal income tax with municipalities. If we look at the 2018 budget, which foresees personal income tax revenues in the amount of BGN 3,372 million, the transfer of 1/5 of the proceeds would increase the own revenues of the municipalities by nearly BGN 675 million or by 30.4%.

Sharing income tax revenues with municipalities cannot and should not be approached as an isolated and unconditional shift in the structure of the tax system. In order for such a reform to succeed, additional steps must be taken, among which:

• Transition towards effective program-based budgeting procedures, which can lead to higher efficiency and transparency;
• Improved efficiency and transparency of local finances and the way in which municipal enterprises and municipal property are being managed;
• A reform in the administrative division of the country, which guarantees the long-term demographic and financial sustainability of municipalities.

The process of financial decentralisation also suggest a shift in the democratic model in the direction of increased political accountability at the local level and the active participation of civil society in the policy making process.

Sharing income tax revenues with municipalities (and eventually the delegation of the power to determine the actual tax rate within a given range) will lead to:

• Increased financial independence of municipalities and a better connection between local government revenues and the socio-economic processes at the local level;
• Reduced political dependence from the central government;
• Incentives for local governments to create and maintain a good business environment and to attract investment that can foster employment and, thus – municipal budget revenues;
• Restoring the lost link between taxation and political representation at local level and increasing the capacity of civil society to participate in the local policy debate;
• Creating conditions for real tax competition at the local level, especially when municipalities are given the right to determine the rate of the income tax within wider range.

The full text of the report is available in Bulgarian here.

| download full analysis [BG only] |

Is there convergence in the levels of economic development within the economic centres? This is the question that the Institute for market economics’ new study attempts to answer. It is based on the “Economic centres in Bulgaria” study, and aims at explaining the processes taking place within the individual centres. In the broadest sense, the study has three goals: to establish the fundamental differences in demographic and economic development between municipalities within and outside economic centres, to assess the potential for convergence in the levels of economic development within the individual economic centres, and finally to study whether such convergence is already taking place.

From the economic perspective, the study found that in the primary economic measures (production per capita, foreign direct investment and fixed assets expenditures, unemployment and salaries) municipalities in the periphery of economic centre resemble more those outside centres than their cores. In spite of that, the differences between peripheral municipalities and those outside centres are quite noticeable, which in turn means that there can be no doubts in the positive effects of the participation in economic centres on the peripheral municipalities.

As far as demography is concerned, the results of the study are much more ambiguous. Out of the main population dynamics indicators, a significant and unambiguous difference between municipalities in and out of economic centres can be seen only in mechanical growth. In municipalities outside of economic centres there are much more people permanently leaving compared to those settling in them; in the peripheries this ratio is lower, and in economic cores there are more people settling than ones leaving. This is a result of the possibility for daily committing from peripheral municipalities to a nearby economic core, where the better and better paying workplaces are located. In other words, the ability to commute daily to a nearby core means that people take the decision to move away permanently less frequently. This, in turn, keeps smaller and less economically developed settlements in the periphery of economic cores from depopulating. The very structure of the economies of the big groups of municipalities is different, primarily in the balance between agriculture, industry and high tech. While municipalities outside economic centres and those in the peripheries have a larger share of agriculture, most cores have and industrial profiles. High tech activities are almost exclusively located in the cores and are almost absent from other municipalities.

The assessment of the potential for convergence in the levels of economic development of municipalities met the IME analyst’s expectations. Municipalities who started the period between 2011 and 2015 from a lower level of economic development have been growing faster compared to those with better developed economies. It is interesting to note that this relationship is stronger for municipalities outside economic centres, compared to those in them.

When it comes to the convergence process, some economic centres do show convergence in the levels of economic development, i.e. a shortening of the distance between core and peripheral municipalities. This can be seen in the change of the standard deviation of production per capita and unemployment. In most centres there is a relatively even distribution of peripheral municipalities in groups that converge towards their respective cores and ones that lag behind. In other words, in many centres, especially larger ones, have two “tiers” of peripheral municipalities – one whose rate of economic development surpasses that of its core and is thus gradually approaching it, and one which is lagging behind.

The most optimistic result of the study is that in centres where the data allow for comparisons I the levels of household income, the average income in peripheral municipalities is approaching that of the cores. This is yet another confirmation that being a part of an economically strong centre provides a chance for faster development to economically weaker municipalities, and to better income of their population.

The complete analysis is available in Bulgarian.

Yavor Alexiev

In 2017 the Bulgarian labour market continued its expansion, and the improvement that took place in the last couple of years is becoming more visible on the regional level. According to the last annual data provided by the Employment agency (EA) there are 30 municipalities with unemployment below 5% (marked blue on the map) and 80 more with unemployment between 5 and 10 per cent. In 2013, in the heat of the labour market crisis the number of municipalities with such levels of unemployment were 3 and 43, respectively. Compact groups of low unemployment municipalities can be found in North Bulgaria, around Varna, as well as in the area around Troyan, Gabrovo and VelikoTarnovo, and in the South – around the capital, Plovdiv, Pazardzik, Burgas, Stara Zagora and Kazanlak.

Unemployment in the Bulgarian municipalities (2017 compared to 2013)

Source: EA, IME calculations

Municipal level data

Compared to 2016, unemployment has increased only in 4 municipalities – Brezovo (+6 percentage points), Bobovdol (+2.8 pr.p.), Lisichovo (+0.8 pr.p.) and Tryavna (+0.2 pr.p.). Despite the overall improvement, compact clusters of municipalities with high levels of unemployment (above 25%) still remain. A large part of North Bulgaria is still in the red, which is also true for the mixed-ethnicity regions as well as most municipalities along the Danube. In most cases, municipalities with high unemployment are either very far from the leading economic centres and the traditional flows of daily labour commuting, or have very low levels of education and training of the labour force. This combination of negative factors does provide for a near-future solution of their problems; it is more likely that the opposite is true, as the negligibly small effect of the overall economic growth on their local labour markets points to a long-term isolation from the processes taking place on the national level.

EA data also show that:

• Vidin is the only district centre where unemployment is still above 10% in 2017. Unemployment above 5% in North Bulgaria is observed in all North-Western district centres, as well as in Razgrad, Targovishte and Silistra;
• In South Bulgaria there are only four district centres with unemployment above 5% - Blagoevrgad (6.2%), Sliven (9.6%), Karzdali (5.8%) and Smolyan (6.3%);
• Most of the tourist municipalities achieve very good results – in 2017, unemployment in Bansko, Primorsko and Nesebar was below 5%, in Pomorie, Sozopol, Razlog and Chepelare – below 10%;
• Relatively low levels of unemployment are observed also in municipalities with large companies, such as Panagyurishte (7.3%), Etropole (7.8%) and Sopot (2.6%).

Structural issues

While the data provided by EA undoubtedly provides reason for optimism, some negative long-term trends can also be observed. The primary market in many districts still has difficulty providing such a number of workplaces as necessary to reduce unemployment faster and in a more noticeable way.

In addition, 2017 EA data for the characteristics of the unemployed show that:

• 54.6% of the unemployed have no training and this share (available only on the district level) is the highest in Sliven (75.8%), Shumen (71.7%) andPazardzik (66.6%) and the lowest in the capital (23.4%), Gabrovo (28.2%) andPernik (40.2%);
• 27.8% of the unemployed have basic or no education, and this share is the highest in Sliven (52.7%), Shumen (44.2%) andYambol (43.8%), thelowest – inthe capital (4.4%), Gabrovo (6.7%) andSmolyan (11.3%);
• Unemployed for more than a year were 37% of registered in the labour offices, which is 4,5 percentage points below than the 2016 level. The most significant drop in long-term unemployment is in Gabrovo and Plovdiv, where the 2017 levels are respectively 17.3% and 28.3%. There are, however, districts where the relative share of the long-term unemployed is growing, and it reached 58% in Vidin, 56% in Montana and 48% in Silistra.

Following the above data, the claims that the labour offered in the economy does not meet the requirements of employers are far from surprising. In order to solve this issue, in the past months the government introduced changes aiming to reduce red tape in the process of hiring foreign workers – an important measure in support of the continued expansion of the labour market. The problems with the nature and quality of the active labour market policies however remains, as in 2018 the state continues to rely on subsidized labour rather than unemployed retraining and education. In addition, the effect of the record increase of the minimum wage on the poorest regions is yet to be assessed, and it appears that the debate around the mechanism for the setting of the minimum wage has died out.