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The article will be available in English on February 17th 2019.

The article will be available in English on February 7th 2019.

For the seventh year in a row, the Institute for Market Economics presents the study “Regional profiles: Indicators for Development” – the only comprehensive yearbook on Bulgarian regional development. The Regional profiles, as the study is better known, has become an indisputable trademark of the IME.

|IN BULGARIAN download the complete study or see the profiles of the separate regions |

Thanks to the work of the institutions gathering and providing statistical data, every year the study includes more recent and more comprehensive information on the economic and social conditions in the country’s regions. The majority of data included in the current editions are for 2017. There are a few exceptions for data that are published with a delay longer than a year – regional data for GDP per capita and wages, as well as some indicators concerning investment, the environment, infrastructure and education. The analysis also includes some data for 2018 (in the field of administration, local taxation and matriculation exam results) where such were available in the middle of 2018.

This publication can be used both by the central and local authorities, businesses and the media, as well as educations, experts and representatives of the non-governmental sectors who deal with regional development. We believe that it would be interesting for everyone to check how his region is doing compared to others in the separate fields of economic and social life.

Economic development

In 2016-2017 Bulgaria’s economy has increased its growth to about 4% annually, as all regions showed increases in the standard of living and economic wellbeing as measured by gross domestic product per capita, wages of the employed and household income. While in the previous years of the economic recovery following the 2009 recession the positive processes took place only in parts of the country, in the past two years economic developments has taken over the territory of the entire country.

Some regions, however, do have visibly faster growth rate sin all of the aforementioned indicators, mostly as a result of booming local economies and catch-up growth of wages and income. Such a local “economic tiger” in the last edition of our study in Plovdiv region, which has a 10% growth of GDP per capita and 9% growth in wages in 2016 alone. Given that incomes in the region grew by 16% in 2017, it is highly likely that that year was also very good for the local economy. Other regions with relatively high GDP per capita growth in 2016 were the strong economic centres of Burgas and Stara Zagora, as well as the smaller, but quickly catching up economies of Pernik, Lovech, Targovishte, Razgrad and Gabrovo.

The growth of household income and spending led to improvements in almost all regions in the primary absolute poverty indicator – the share of people living in material deprivation.

Good economic growth also went hand in hand with improvements in the labour market in most regions. Even more – 2017 had record employment rates in the economically active population (ages between 15 and 64) in most regions. Employment is about 70% for that cohort on average in Bulgaria, and well above 70% for the strongest economic centres, like Sofia, Plovdiv and Stara Zagora.In most regions unemployment is also approaching the record lows of 2008, but there still remain regions where the coefficient is in the double digits – evidence of serious structural problems of local labour markets, low population mobility and even statistical inadequacies of regional data. Almost all regions with unemployed rates above 10% (in the 10-64 age group) are located in North Bulgaria – Vidin, Vratsa, Pleven, Silistra, Targovishte, Shumen. The only ones in the South are Sliven and Smolyan.

The region’s abilities to attract local and foreign investment is a key driver of good economic development. Once more, the regions with growing foreign investment stocks per capita in 2016 are among the strongest economic centres – Sofia-capital and the wider Sofia region, Plovdiv, Burgas, Gabrovo, Ruse, as well as the lesser-developed Targovishte, where investments are bringing rapid growth of employment.

Unfortunately, developments in infrastructure, and particularly road infrastructure are not as positive. Despite the continued construction of new lots of highways currently under construction, the share of highways and first-class roads remains virtually unchanged. In the same time, the share of roads with good quality pavement has dropped in 2017 and is not below 40% of all roads, which points to problems in maintenance of the existing road system.

Social development

In 2017 the demographic conditions in the country continued to worsen as a result of low birth rates and migration. The regions with the fastest aging populations are the less developed ones, like Vidin, Kyustendil, Montana, Vratsa. Gabrovo is also among them; despite the fact that the region has one of the best rates of economic development in the past years, the age dependency ratio hits record lows every year, both for the region and in the country as a whole. In 2017, only six regions attracted more people than they lost – the capital, Plovdiv, Burgas, Varna, Pernik and Kardzali.

Education indicators continue to improve, albeit at a glacial pace. There is an increase in the school enrolment rates in the country, as well as (tiny) decrease in the number of school dropouts and class repeaters in primary and secondary education. Smolyan maintains its leading position as a result of the very high grades of local students on the matriculation exams and high rates of retention of students and teachers in the system of education. Sofia, Gabrovo, VelikoTarnovo, Varna and Blagoevgrad are among the regions scoring well in this category, while Sliven, Pazardzik, Yambol and Dobrich form the bottom of the ranking. The education system is performing poorly in the least developed regions in economic terms, and this is leading to a worsening structural unemployment and thus obstructing the development of the local labour market, the attraction of investment and the improvement of the population’s income.

The quality of healthcare on the local level is also important for human capital. Traditionally, Sofia and Pleven top this ranking. As a whole, in 2017 the provision of healthcare staff relative to the population remains constant in the country, but in some regions, such as Kardzali, Sliven, Targovishte, Silistra and Razgrad the shortage of medical personnel is significant. In the 207 there was also a decrease in the number of beds in multiprofile hospitals in the country. The limited relative number of doctors and beds in local hospitals forces the citizens of a number of regions to seek medical aid outside of their region. Such regions with significantly smaller numbers of patients are Dobrich, VelikoTarnovo, Pernik, Shumen and Yambol.

Good social environment also requires a high degree of security and an effective justice system at the local level. The workload of the police and regional courts of the larger and more developed regions however leave them in the last place in the raking, while in the smaller and less developed regions registered crimes are relatively few, and justice relatively swift.

Yavor Aleksiev

The trend of rising local taxes, established in recent years, continues also in 2018. The Bulgarian municipalities are increasing key local taxes in order to secure the funds they need, but in some cases to also fulfill their commitments to the Ministry of Finance resulting from interest-free loans received in recent years. This development is not surprising given the stalled process of fiscal decentralization, though higher local taxes cannot address the structural problems of the municipal budgets.

What the data shows

Between 2012 and 2018, IME conducted 7 separate annual surveys on local tax levels as part of the Regional Profiles: Indicators for Development initiative. The data was collected through applications under the Access to Public Information Act (APIA) to all municipalities in the country, as well as online tax rate checking. We looked at four of the key local taxes:

• real estate tax - non-residential property of legal entities;
• tax on transport vehicles and passenger cars with engine power between 74 kW and 110 kW;
• annual patent tax for retail trade up to 100 m² commercial area;
• transfer of ownership tax.

The results obtained are unequivocal: the number of increasesin the observed local taxes issignificantly higher than the number of reductionsin the local taxes, the trend being particularly noticeable in 2016 and 2017, just after the entry into force of the so-called „Rehabilitation of municipalities mechanism”.

We see that:

• The trend inincreasing key local taxes continues in 2018. IMEregistered 37 increases compared to 2017, while reductionswere only 4 - a record low for the period.
• For the period between 2013 and 2018, there were 254 registered cases of increase in local taxes, while the cases of reduction were nearly five times lower.
• Two-thirds of the increases were recorded in the last three years.
• Most often, the annual property tax was increased, followed by the tax on property gains and taxes on transport vehicles.

Why increasing local taxes will not help

According to the latest comparable Eurostat data, local governments’ revenues in Bulgaria amounted to only 7.3% of GDP in 2017, which is more than two times lower than the EU average of 15.4%. Although raising the level or collection of key local taxes may lead to some improvement in the state of municipal budgets, the problems with their structure remain.

• Bulgarian municipalities remain highly dependent on transfers from the central government, which account for nearly 2/3 of all their revenues. This ratiocreates not only theoretical but also real political dependencies and cannot be overcome within the existing local tax framework.
• The enforced channels for securing funds (mainly from property taxes) provide limited fiscal space and do not create a real opportunity for tax competition. Given the fact that the relative share of local taxes in the total tax burden of citizens and businesses is insignificant, changes in both directions have no particular effect on the decisions of the economic agents.
• With very few exceptions (large cities, resort municipalities, and municipalities with large concessions), municipal budgets do not reflect what is happening in the local economy.
• The low share of own revenues leads to the inability to implement local policies, even if there is a public and political consensus at the local level, which in some places leads to a senseless democratic voting process.

The simplest and most easily applicable method for changing this status quo is to remit some of the proceeds from the personal income tax to the municipalities based on the principle "money follows the ID card". Assigning one-fifth of the revenues coming from income tax on natural persons projected for 2018 will increase municipal revenues by nearly 675 million leva (i.e. nearly a third) and will create real incentives for local authorities to work to attract investment and opening new jobs. The necessary steps to achieve a real change in the structure of the municipal budgets were discussed by IME in the study "The Road towards Fiscal Decentralization", published in April 2018, where an estimate of potential revenues to be received by each municipality upon adoption of this step was also provided.

The road towards fiscal decentralization

The transfer of part of the revenues from the income tax for individuals to the municipalities cannot and must not be an isolatedand unconditional change on its ownin the structure of the tax system. In order to ensure its success, further steps need to be taken, including:

• Moving towards an effective program budgeting system at the local level, which is to lead to greater efficiency and transparency of local finances;
• Improving the efficiency and transparency of finances and the management of municipal enterprises and municipal property;
• Territorial-administrative reform to ensure long-term sustainability of spatial planning;
• Sharing the income tax with municipalities also implies changing the democratic model by enhancing political responsibility at the local level and actively involving civil society in the process of local policy making.

Sharing the proceeds from the income tax for individuals with municipalities, and eventually assigning authorities to determine this tax within a given range, will result in:

• Enhancing the fiscal autonomy of the municipalities and better linking the budget revenues with the social and economic processes taking place on their territory;
• Reducing the existing political dependencies of the local government;
• Creating incentives to maintain a good business environment and attract investment to increase employment, thus increasing revenues from the personal income tax in the local budget;
• Restoring the lost link between taxation and political representation at local level and increasing the capacity of civil society to participate in the formulation of local policies;
• Creating an environment promoting real tax competition at local level in the future when municipalities are given the right to set the personal income tax rate in a wider range.

Since Bulgaria's entry into the EU and the launch of operational programs in the country, Bulgarian municipalities have absorbed a total of BGN 10.7 billion (data as of 15 June 2018). Compared to the population, municipalities received an average of BGN 1513 per person. The biggest chunk of the funds went to the municipalities of Sozopol and Kostinbrod - the only ones with more than BGN 5000 per person while the least went toKovachevtsi and Dulovo - the only ones with less than 100 leva per person. Kovachevci has no project in the new administrativeperiod (2014-2020),whileDulovohas only one.

A total of 9 of all 265 municipalities have received funds for only one project in the new administrative period, with only Dulovo having a population of over 10,000. The reason for this can be found in the limited administrative capacity in the smaller municipalities.

50 municipalities have received under BGN 2 million under the operational programs so far, while the number of municipalities with over BGN 10 million reached 103.In 16 of them the amounts actually paid are over BGN 100 million. They include almost entirely district centers, and the capitalof the country, which is a leader with a big difference, absorbing 3.6 billion leva, most of which is for metro-related projects. In regard to the population, Sofia Municipality also stands out compared to other districts by BGN 2726 per person. A little lessreceived the municipalities in Gabrovo District - BGN 2623. On average, the least funds absorbed are by the municipalities of the regions of Sliven and Kyustendilwith less than BGN 800 per person (this amount does not include the funds paid to the regional administrations - the total data by districts up toMay 1^st 2018 is available HERE).

The most expensive projects are mainly for transport infrastructure (highways, roads, urban transport), water cycles and water treatment plants and projects aiming to improve the urban environment and the educational structure.

Compared to the previous administrative period (2007-2013), the smallest growth rate in the absorption of the European programs per capita is observed in the coastal municipalities of Nessebar, Sozopol and Primorsko, which, however, received relatively big amounts of money before 2014 and are currently also well-performing absorbershaving two more years until the end of the current administrative period.

The municipalities of Nevestino, Alfatar and Simeonovgrad show the highest rate offunds absorbed after 2014 while in the previous administrative period theyabsorbed very little - on average, less than BGN 5 per person.Now they reached more than BGN 300 per person, which is relatively smallerthan the country average, but this shows the activation of the local administrations and the propulsion of more projects. Some of the highest fund absorption rates are in the municipalities ofGramada and Sarnitsa, which is, however, entirely due to the fact that they have not absorbed European funds in the previous period. The municipality of Gramada is the only municipality that had no projects before 2014, and the municipality of Sarnitsa did not exist until 2015. As of June 15, 2018, the absorbed funds were about BGN 400 per person.

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.