News

Peter Ganev

Last week, the National statistics institute published the data on the regional gross domestic product (GDP) for 2017. These data allow us to map economic processes on the regional level, even though with a one-year lag. Traditionally, news on regional GDP focus on the differences between the regions. As usual, in 2017 Sofia is far ahead of the pack in terms of GDP per capita with 30 295 leva, and Silistra ranks last with only 6 687 leva. The details on the industry structure of the regions, however, are often left behind. In this article we focus on precisely this, though the gross value added (GVA) of the different industries on the regional level.

The overall structure of the country’s economy is pretty clear – services form 67% of it, industry – 28%, and agriculture is only 5%, and this distribution has been pretty stable. In the past five years (2013-2017) industry has gained only one percentage point, resulting from small decreases both in the shares of services and agriculture. What are, however, the distinct profiles of the separate regions, and which are the industry and agricultural regions in Bulgaria? In order to answer this question, we the shares of the primary industries in gross value added on the regional level. Separately, we shall review the value added by industry per capita in the regions, in order to assess whether the separate economic sectors are creating real value, or they just have higher shares as a result of the weak development of the other spheres of economic activity. It is important to note that the data are weighed relative to the population of the regions, as otherwise larger regions will always have a significant lead.

What industries are prevalent in the regions of Bulgaria?

Industrial regions – Stara Zagora, Sofa (district), Vratsa and Gabrovo

Data on the regions where industry is prevalent are absolutely clear. The four regions are the only ones where industry creates at least half of the gross value added – 66% in Stara Zagora, 61% in Sofia (district) and about 50% in Vratsa and Gabrovo. It is interesting that in all of those regions industry has increased its share in value added, by 5-6 percentage points in the past five years. Should we look at not only the share, but the nominal value added by industry per capita, those very same regions take the top four spots, and in the same order – 9985 leva per capital in Stara Zagora, 8177 leva in Sofia (region), 5305 leva in Gabrovo and 5300 in Vratsa.

The reason behind this industry focus of those regions is no surprise either. They all have major industrial companies - the large electrical producers of Radnevo and Galabovo in Stara Zagora, Kozlodui NPP in Vratsa, as well as some larger mining companies in the Srednogorie (Pirdop and Chelopech, for instance) in Sofia (district). Gabrovo is the only example of an industrial region that lacks a major energy or mining company, the regional centre has a longstanding industrial traditions (and is known as the “Bulgarian Manchester” for a reason), and the large factories in Sevlievo are also in the region.

Services regions – Sofia (capital), Varna and Burgas

Defining the regions with a pronounced services profile is not such a simple task. Only the capital city of Sofia is obvious, as services have a significantly higher value added (22 575 leva per capita) and a grand total of 86% of the gross value added in the region. Varna is second, but the share of services is 69%, the nominal value of GVA – 8320 leva per capita. Burgas is also at the top of the list, but far behind the others – the share of services is 64% (still high, but close to that of Pleven and Veliko Tarnovo), but the gross value added per capita is 6790 leva, which puts it far ahead of the rest of the regions, excluding Varna and the capital city.

Services-focused regions actually also contain the largest regional centres in the country – only Plovdiv is missing, but we will cover its case separately. The economies of Sofia and those of Varna and Burgas are, however, very different. More than 10% of all employees in Sofia are in ICTs (as of 2017), and this is the high-tech part of the service sector, which pushes wages higher. In Varna and Burgas this sector is not as widespread, and only 1-2% of all employees work in ICTs. In the same time, tourism plays a very important role in the economies of the two regions, as 14% of the employees in Burgas and 9% in Varna work in hotels and restaurants, while the share of this sectors of services is only 4% in Sofia as of 2017. In other words, while the service economy of Sofia is more focused on high tech, Varna and Burgas still haver more pronounced traditional sectors.

More agrarian regions – many and getting poorer

Finding the agricultural regions is likely the hardest task, because they are more and relatively poor. The poor development of the other sectors sometimes makes the share of agriculture seem as if it is of importance for the regional economy. In spite of this, the following regions have the highest shares of agriculture relative to the other parts of the country - Silistra (23%), Vidin (18%), Montana (16%), Razgrad (16%), Dobrich (16%), Kardzhali (15%), Targovishte (14%), Shumen (13%) and Yambol (13%).In these regions, the gross value added per capita of agriculture is also the highest, about 1000 – 1300 leva.

It is evident that the regions where agriculture generates more than 10% of gross value added are also at the lower end of the spectrum in terms of wealth, and are among the lowest in GDP per capita. The reason behind this is that the value added in agriculture remains quite low – even in the region where GVA per capita in agriculture is the highest (Silistra, 1327 leva per capita), it is still three times lower compared to the country average for industry (3522 leva) and sic times lower than the country average for services (8281 leva). Silistra and Vidin are also the only regions where value added per capita in the industry is so low, that it is lower than agriculture in those particular regions.

What are the dynamics and where is Plovdiv?

The common regional dynamics in the past 5 years shows that the increases in the share of industry in value added are in the regions with the most pronounced industrial focus. The regions dominated by services, with the exception of the capital, also show some increases in the share of industry, mostly in Burgas and less so in Varna, but in those regions services create more value added in general. In the relatively agricultural regions, with the exception of northwestern Vidin and Montana, the share of agriculture is dropping. The case of Vratsa, where there is a giant leap in industry at the expense of both services and agriculture, is quite curious. This is a consequence of the good financial results of NPP Kozlodui – 100 million leva more income in 2017.

The exclusion of Plovdiv from the regions with well-defined profiles is a consequence of the diversity of the region’s economy, with combines powerful industry and services, which, as we have seen, are inevitably in the lead in the regions with the largest cities. Based on the value added of industry and services Plovdiv sits right behind the abovementioned regions in both categories – 5946 leva per capita in services and 4 143 leva per capita in industry. After a more defined growth of services in the past few years, the ratio in Plovdiv has settled at 56-57% services and 40% industry in the overall value added. Similar developments can be seen in Ruse, which ranks close to Plovdiv in terms of value added per capita in industry and services, and has a pretty similar sectoral structure.

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.

| 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.