News

Yavor Aleksiev

The recovery of the labor market continued in 2016 although at a slower pace compared to 2015. The improvement is clearly visible not only at district, but also at municipal level, especially with regard to the increasing number of municipalities with relatively low unemployment rate.

According to data from the Employment agency, which the Institute for market economics requested and received, there are already 16 municipalities in which the unemployment rate is below 5% (in dark blue on the map) and another 75 municipalities in which the rate is below 10% (in light blue on the map). In 2013 when the labor market crisis is at its peak the number of those municipalities was 3 and 41 respectively.

In parallel with the overall favorable trends there is also a stable high rate of unemployment in many territories. Even in 2016 there are 10 municipalities in which the unemployment rate is above 50% as well as another 56 municipalities in which the rate varies from 25% to 50%. Although, there is a decline compared to the rates of 2013, the situation in a lot of the municipalities in those two groups is similar to the levels of 2011 which means that there has not been a significant improvement of the economic situation in most parts in our country.

On regional level there is faster improvement in the Southern part of the country - compact groups of municipalities with low unemployment rates are observed near the capital city, Plovdiv, Stara Zagora and Burgas. In Northern Bulgaria such regions are Sevlievo-Gabrovo-Veliko Turnovo and Varna-Dobrich.

Additionally to the regional centers, excluding Vidin, unemployment rate below 10% in Northeastern Bulgaria is observed only in municipalities in Troyan and Apriltsi. Despite the presence of number of municipalities with low unemployment rate in the Northeastern part of Bulgaria, there are also groups of neighboring municipalities with very high rate of unemployment.

The data from the Employment agency show that in the country there are many municipalities that are still bypassed by the overall improvement of the economic situation in the country at least as far as the notable positive effects on the labor market are concerned. Among the reasons for that are weak business activity in neighboring municipalities as well as comparatively low labor mobility of the population in the mentioned regions and also because of problems with the qualification and educational level of the working population.

More and more regions in the country have already recovered from the economic crisis. This can be seen in the gross production data as well as the data on investments and employment.

In 2014 the Bulgarian economy finally managed to overcome the consequences of the crisis and the gross domestic product in real terms exceeded its pre-crisis level. The economies of 9 regions already reached the levels of the pre-crisis gross domestic product. In the other 19 regions, however, the real GDP is still lower compared to2008. It seems that all regions in Northwestern Bulgaria are yet to overcome the impact of the crisis on their economies. Meanwhile, the economies of North-central and Northeastern Bulgaria are already approaching their pre-crisis production levels. Despite the fact that in South-central Bulgaria the recovery from the crisis has not finished yet, Plovdiv is an enormous exception and already reports real aggregated production nearly 9 per cent higher than the pre-crisis rate. This is due to the considerable investments in several rapid-growing sectors such as the outsourcing industry and production of car parts, which the district attracted over the last years.

As far as investment is concerned, the recovery process is also becoming more and more visible on the regional level. While foreign direct investment stagnated in the recent years, fixed assets expenditures, which are the other key investment indicator, show a more optimistic picture. About 1/3 of the regions already report assets expenditures that exceed the pre-crisis levels. This is mainly due to the increased utilization of EU funds in the 2014-2015 period as a result of the end of the previous programming period and the last possibility to utilize its funds in 2015.

The larger issue, however, is how much do EU funds help to bridge the gap between the average European level of wealth and the Bulgarian ones, on the one hand, and to reduce the inequalities within the country, on the other, i.e. whether there is cohesion, which is the main objective of these funds. The analysis of the Institute for market economics shows that most districts report cohesion in GDP per capita with the average European level since 2007. In Sofia (capital) the GDP per capita is already equal to the EU average – in other words Sofia is already European. The capital city concentrates a growing share of the economic activity in the country (nearly 40% at last count) and creates large income gap between North and South Bulgaria. If Sofia is taken out of the accounts, the GDP per capita wages and income in North and South Bulgaria are almost equal. In the most districts, however, GDP per capita is barely between 20 and 40% of the EU. average.

In the same time there is no a significant statistical relation between the pace of cohesion, on one hand, and the absorption of EU funds, on the another, i.e. the increasing of the wealth in most districts and the “catching up” with the average European level apparently is not a result of EU funding.

Furthermore, cohesion inside the country is not observed - on the contrary, the differences between the regions are growing. This distancing process is particularly intense before 2008. After a drop before 2012 this trend is again observed in the 2013-2014 period.

The deepening of the differences in development inside the country is also substantiated by our cluster analysis which groups the regions based on similarities and differences. Only Sofia (capital) has an overall favorable socio-economic profile as once again it sets itself apart as an independent cluster i.e. there is no other district in the country which resembles its conditions and development. In the same time the group of the profiles, characterized with poor socio-economic development is still larger than that of the regions with favorable conditions. This analysis outlines the poor socio-economic conditions of Northwestern Bulgaria, and also ever more clearly the economic problems of the North-central region.

This observations support the conclusion that regional policy in Bulgaria does not bear any fruit. The goals declared in strategies and laws have not been achieved, on the contrary - the differences are deepening, and so are problems. The analysis raises the question if the reliance on utilization of EU funds is the way towards reaching sustainable and strategic development. It becomes more and more clear that the utilization of EU funds is becoming the primary goal of policy in itself, instead of means for its implementation.

The differences in development are especially visible in the labor marker. 2014 and 2015 were particularly good in terms of creation of new jobs in the country. Despite that, 8 regions did not manage to catch on this process in 2015. It is no surprise that many of those regions have serious structural problems – Vratsa, Montana, Silistra, Kurdzhali. Unemployment rates fell in all regions without exception in 2015 but in several regions (including the aforementioned four), this was due to a drop in economic activity, not the creation of new jobs. In these regions part of the unemployed stop actively seeking jobs and leave the workforce.

In the same time in a number of districts the workforce shortage problem is growing. The lack of suitable candidates with both vocational as well as higher education, in a number of fields limits the growth potential of regional economies. Currently around 1/3 of the industrial enterprises report the lack of workers as a major restraint for their further development, while more than 70 % of the small and medium enterprises claim that the shortage of workforce is the greatest obstacle for their business.

The steady decline of the range and quality of the educational system indicators in most regions deepens the imbalances between supply and demand on the labor market. The share of students leaving school prematurely in the primary and secondary stages of education now reaches a country average of 2,8 % - the highest since 2006. In the same time the average matriculation grade in ‘’Bulgarian language and literature’’ went down to 4,17 in 2016 – the lowest result since the introduction of matriculation exams. The share of “fail” grades is on a record high: almost 9 % of the students could not pass the examination. The least developed regions – Silistra, Razgrad, Kardjali and Montana, for instance – are on the bottom of the rating, which further reduces their chances for catching up in the long-term.

The negative demographic trends in the whole country also continue to put pressure on the labor market. Even the capital is not spared, since its natural growth is on its lowest level since 2007. Currently there are four regions where the people above 65 years old are twice as many as the children (0-14 years old) – Vidin, Gabrovo, Kyustendil and Pernik. Only six regions keep attracting incoming people from other regions – Sofia(district), Sofia (municipality), Burgas, Haskovo, Varna and Plovdiv. Meanwhile, among the biggest ‘’workforce donors’’ are Smolyan, Razgrad, Vidin and Vratsa, which leads to their fast depopulation and even worse perspectives for their future development.

Generally, IME’s regional development analysis shows that in 2014-2015 even more regions were able to overcome the effects of the crisis on investment and the labour market. In the same time, however, about 1/3 of the districts suffer from deep structural problems that hinder them from reaching their pre-crisis levels of production, employment and investment flows, and those districts depopulate fast. This uneven development of the country leads to a shrper increase of the differences between the regions. The intense utilization of European funds in the last two years did not help at all for overcoming those differences. An observation that comes forth is that the European funds utilization has turned into a policy goal in its own right, which substitutes the long-term regional development policy and leads to a permanent dependency of the local budgets from these funds.

November 29th, 2016 | 11:00 - 12:00

BTA Pressclub

The IME will present the fifth annual edition of Regional Profiles: Indicators of Development on November 29th, 2016. Some of the main topics that will be discussed are:

• which districts have already recovered from the crisis and which are yet to do so;
• Is Sofia the main difference between Northern and Southern Bulgaria;
• has investment turned after the crisis;
• do EU funds support the cohesion amonf districts;
• in hwich parts of the country is the labor market recovery losing momentum;
• what is the state of municipal budgets and how is the financial consolidation going;
• is there a trend towards higher taxes

The results will be presented by:

Desislava Nikolova, chief economist, IME

Petar Ganev, senior economist, IME

Yavor Alexiev, economist, IME

Aleksander Tsvetkov, Regiostat

For more information, please contact Mrs. Vessela Dobrinova (02/952 62 66, vessela@ime.bg)

Desislava Nikolova

In 2014 the Bulgarian economy finally managed to overcome the effects of the last economic crisis, as the national real GDP surpassed its pre-crisis level. Nevertheless, the recovery is yet to occur in most of the country’s regions.

Real GDP has still not reached its 2008 level in 19 of Bulgaria’s 28 districts. These districts are scattered throughout the entire country, with (unsurprisingly) the North-West region being the only one in which none of the districts (Vidin, Montana, Pleven, Lovech and Vratsa) have recovered.

The other two northern regions are still recovering, but are close to the “finish line” – i.e. the pre-crisis level of production. The districts, whose economies are front running the recovery in these regions and have already overcome the effects of the crisis, are Veliko Turnovo and Razgrad in the North Central region and Varna and Dobrich in the North-East region.

As of 2014 the South Central region is also still “under water” and its real GDP is yet to reach the 2008 levels. In this region, though, the district of Plovdiv remains the great exception. Due to significant investment in the last few years, Plovdiv’s real GDP is already 8.5% higher than back in 2008.

The South-West and South-East regions have already reached real GDP levels that are 2-3% higher than before the crisis. The districts that lead the recovery process in these regions are Sofia (cap._ and Sofia (district) in South-West Bulgaria and Stara Zagora and Yambol in South-East Bulgaria.

Considering the fact that Bulgaria’s real GDP growth accelerated to 3% in 2015 (nearly twice the 2014 level), it is quite probable that other districts have also already reached their pre-crisis levels. In 2015 employment levels increased in most of the country’s districts, which implies the continuing spread of positive economic trends. The 2015 regional GDP data will show which districts face more than simply cyclical problems, but rather structural issues such as lack of investment, rapidly deteriorating demographics, lack of qualified labour force, low level of infrastructural development or other factors, which hinder the development of these regions.

Nikolay Slavkov*

This article compares Northern and Southern Bulgaria based on three major income and standard of living indicators:

• GDP per capita
• Average annual household income
• Average annual gross salary

According to some economists a true comparison between North and South Bulgaria cannot be made without excluding the impact of the capital city Sofia of the analysis data. For years, Sofia-city has differed from any other region in the country and it is claimed that the better results shown by South Bulgaria is solely the result of this. So here after the comparison of South and North Bulgaria we added another indicator that excludes Sofia-city from the South Bulgaria.

Since the year 2000 the gap between North and South Bulgaria is constantly increasing and this effect accelerates with the onset of the economic crisis in the country in 2009. What is interesting, however, is the data for South Bulgaria excluding Sofia. It shows that there is a similar development in the region and North Bulgaria, but again a change occurred with the onset of the economic crisis in 2009. It is obvious that the economies in North Bulgaria received a  more serious blow by the crisis and then they gradually managed to overcome the consequences of the economic shock and reach the average level of GDP per capita in South Bulgaria (except Sofia) in 2014. The probable cause of the deeper crisis in Southern Bulgaria (excluding Sofia) is, on one hand, the fact that the main economic centers that attract investments are located there. On the other hand, in North Bulgaria the prerequisite for the lack of such investments is the poor demographic structure and poor infrastructure which is also an obstacle to a more rapid recovery in the region after the crisis.

The dynamics of wages in the Southern and Northern region is also interesting. As expected, the gap between South and North Bulgaria  is deepening and over the years this trend has been sustainable. It can be seen be observed, however, that comparing wages in South Bulgaria to the ones in North Bulgaria after Sofia-city is excluded from the southern part of the country, that both series have relatively identical trends over the years with minor differences. The data are surprising against the overall worse economic development of the North, and probably can be attributed to a certain arbitration of the labor force, for instance due to internal migration between regions, wages on both sides of the Balkan are almost equalized.

The last indicator used to compare the two parts of the country is household income. The capital is again the area that pulls Southern Bulgaria ahead and maintains the difference between South and North Bulgaria. In the statistical series where the capital is not included, however, there is a lag , albeit a slight one. This is due to the fact that here not only gross wages are included, but also some other indicators such as pensions, other compensations and other welfare, rent income and other income, where North Bulgaria has had an edge in the last years.

Apparently, when the the capital is exuded from the data, North Bulgaria does not yield to the southern part of the country according to any of the three indicators compared here. Unfortunately, this supports the claim thatat the better results of the south Bulgaria are owed to the capital, despite the rapid growth of Burgas and the major investments attracted by Plovdiv and Stara Zagora.

*Intern at IME

Two out of every three tax changes on a local level are in an upward direction

Yavor Aleksiev

In the period between April 2012 and June 2016 the IME conducted 5 separate surveys of the levels of local taxes and fees, as a part of the project “Regional Profiles: Indicators of Development”. Our requests were sent to all municipalities in the country under the Access to Public Information Act (APIA). The scope of the study includes five types of taxes and fees:

• Immovable property tax for legal entities (‰)
• Vehicle tax – commercial and passenger vehicles, 74 kW to 110 kW (BGN per kW)
• Annual license tax for retailers – up to 100 sq. m. of retail space - for most favorable location of the site (BGN per sq. m.)
• Annual waste collection charge for properties of legal entities (‰)
• Local tax on the sale of immovable property (‰)

Results from the Survey

During the 2013-2016 period we have identified 107 cases of a decrease of local taxes and fees and 209 cases of an increase. This means that two out of every three changes on the local level lead to higher taxes and fees for citizens and businesses. Most probably the actual number of changes (in both directions) is higher than those registered by us, but official and comprehensive information about this is absent. The data we have collected cover around 80% of the municipalities and gives a good enough idea of the changes in the main taxes and fees on a local level.

Number of cases of increase and decrease of local taxes and fees for the period 2013-2016

Source: IME, based on requests to the municipalities under APIA

When we last did a similar review (for the period 2013-2015), the waste collection fee and the license tax for retailers proved to have been more frequently decreased, rather than increased. Adding up the data from 2016 as well, however, changes the overall number of increases of the waste collection charge to 76 for the period 2013-2016, while the total number of decreases is 68. In the case of the license tax for retailers the number of increases and decreases equalize at 10. Thus, according to the most recent data that we have, there is no longer a case of a tax or a fee, which has been decreased more times than it has been increased for the period.

It is evident from the data that the trend in regard to the tax on the sale of immovable property and the immovable property tax for legal entities is one and the same – upwards. Both taxes have been increased 7 times more frequently than they have been decreased. Increases in the vehicle tax are also becoming more and more frequent.

The changes during 2016

The problems for municipal budgets in the wake of the crisis and the intensive utilization of EU funds (which implies pre-financing and co-financing from municipalities) obviously had an impact on the fiscal policy of local authorities. According to the information provided by the municipalities themselves, during 2016 there was a record number of increases of local taxes and fees – a total of 81 times. The occasions, in which a tax or a charge was lowered, are barely 17, which is the second lowest value for those 4 years.

Number of changes in the level of the local taxes and charges throughout the years

Source: IME, based on requests to the municipalities under APIA

During 2016 there are 25 occasions of an increase of both the waste collection charge and the Immovable property tax for legal entities. The number of increases of the vehicle tax is 15, and that of the local tax on the sale of immovable property is 10. The license tax for retailers has been increased barely 6 times, but this is also a record on this type of tribute, which is among the most infrequently changed.

What are the explanations?

The numerous cases of increase of the amount of local taxes and fees in 2016 act as evidence for the fiscal difficulties of municipalities at the end of the previous programming period of the EU, and indicate the lack of real tax competition between them.

The low share of local taxes in total tax burden on enterprises and businesses places objective limits to the degree of tax competition between municipalities. It is very unlikely that whether the immovable property tax is 1‰ or 2.5‰, for example, is a prerequisite for the movement of investments in and out of a given municipality. The vast majority of the tax burden is tied to the central government, which largely undermines the attempts of municipalities to compete in attracting business (not to mention citizens) by reducing the local tax burden.

The recent local elections as well as the practical discreditation of the process of fiscal decentralization during the fall of 2015 most likely also played their own role in the numerous increases in taxes and fees in 2016. In 2015 the government managed to discredit the concept of fiscal decentralization (linking it with higher taxes) and to shift the whole issue, moving the attention from the insufficient revenues of municipalities to their debt problems. In addition, we have to mention the calls by Prime Minister Boyko Borissov to increase the size and collection of local taxes and charges. Nearly half of the cases of increase (39 out of 81) are in municipalities won by his party – the CEDB. However, given the total number of municipalities in which the party won the elections, this share is rather insufficient to show some kind of pressure from the central government.

Thus, we can differentiate two main reasons for the observed increases in local taxes and charges in 2016:

1. Structural reason - lack of real tax competition between municipalities in the country which is a consequence of their limited fiscal powers;
2. Cyclical reasons - the end of the previous programming period and its effect on municipal budgets, the passing of local elections and the terminated process of fiscal decentralization.

Yavor Aleksiev

Just a year after the topic of fiscal decentralization briefly entered the public debate, the political volition for taking actual steps in this direction seems exhausted. The government stifles to a large extent the initiative of local authorities in two steps:

1. The successful transformation of the debate of last year’s fall into a debate about higher taxes. After delaying for years the discussion about transferring part of the proceeds from taxes on personal income to the municipalities, Finance Minister Vladislav Goranov made a move that largely discredited the idea of ​​fiscal decentralization. The proposal to maintain the level of taxes on personal income at the national level and to give municipalities the power to additionally "burden" workers with up to 2 percentage points increase of this tax (on the eve of local elections) silenced the local authorities to a large extent on the topic, at least for the fiscal 2016 year, and probably for later on as well.
2. The adoption of a mechanism for financial recovery of municipalities, which even though provides tools to promote higher collection and optimization of administrative costs for troubled municipalities, makes local finances even more dependent on the central government. Particularly worrying is the possibility of pardoning the accumulated interest-free loans of distressed municipalities from the central budget, in the case of satisfactory results in the recovery of the local finances – an obvious tool for favoritism towards certain mayors.

With the first step the government managed to make the concept of fiscal decentralization sound unappealing by linking it with a rise in taxes and with the second step it managed to change the subject completely by diverting the attention of municipalities from the lack of income sources towards their debt problems.  In other words, while the supporters of fiscal decentralization were trying to give Bulgarian municipalities the image of a responsible and less dependent local authority, the mechanism for financial recovery managed to portray those same municipalities as fiscally irresponsible.

Despite these steps made by the MF (Ministry of Finance), the public remains enthusiastic towards fiscal decentralization, which is why we want to draw attention towards two recent reports published on the National Association of Municipalities in the Republic of Bulgaria (NAMRB): "Analysis of the implementation of municipal budgets for 2015" and "Indicators for the development of fiscal decentralization in South-East Europe: 2006-2014."

• There is practically no country in South-East Europe, where the debt of local authorities has not grown over the last decade. In general, this fact is explained by the need for higher capital costs and relatively smaller tax powers of local authorities compared to municipalities in Central and Western Europe.
• The increased indebtedness of Bulgarian municipalities (especially in 2015) is to a large extent a direct consequence of the lack of alternatives for co-financing investments for EU projects. It should be noted, also, that 2015 was the last year in which payments for European projects from the previous programming period (2007-2013) could be made.
• Revenues of local authorities in Bulgaria as a share of GDP fell from 7% in 2008 to 5.3% in 2015. At the same time this decrease occurred at a time of a gradually rising tax burden in the economy as a whole. As part of the consolidated budget the revenue for the same period fell from 19.6% to 14.4%.
• Lacking other opportunities to raise their own funds, Bulgarian municipalities have resorted for the most part to an increase in property taxes. The collection of these taxes, however, remains below 70% in 118 of the 265 municipalities in the country.  In addition, these taxes are subject to a number of tax exemptions. Practically, all sudden increases in the revenue are observed in smaller municipalities and are due to one-time proceeds, grants or sales of property.
• The structure of the municipal revenue collection disallows the use of the budget as a policy-making tool, including debt management. Actually, the last things that depend on local spending policies in Bulgaria are decisions of municipal councils and preferences of local communities.

There exists a problem with municipal debt in Bulgaria, indeed. However, in the general case the debt is not created by arbitrariness and fiscal irresponsibility of the local authorities, but by structural problems of the tax policy. In order for a municipality to negotiate first, and then successfully repay the loan, it must manage the bulk of its revenues (i.e. its revenues have to play a significant role) and have more control over their spending. Unfortunately, except for a few major cities and resort communities, most municipalities in Bulgaria have a much lower share of disposable income and rely heavily on transfers from the central governent.

The differences in the capacities of municipalities to generate their own revenues are significant, which is a problem that will not resolve itself with remising a portion of the proceeds from taxes on personal income. However, some improving process should be initiated and the only action that is logical and technically feasible in the medium-term is namely linking the economic processes on the territory of a municipality with its budget.