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For the second time in a row, right on the eve of local elections, the idea of fiscal decentralization through personal income tax increase has emerged. In 2015 this happened after a statement of the Minister of Finance Vladislav Goranov and this year the occasion was an interview given by the deputy prime minister Tomislav Donchev. Although he later advocated for decentralization by sharing a portion of the already collected income tax, the discussion had an initial false-start.

In 2015 and also this year, the focus is put on the income tax increase (of up to 2 percentage points) benefiting the municipalities (10+2) instead of implementing the strategic commitment to share part of the collected tax (8+2). For a second time in a row, right on the eve of local elections, the decentralization debate turns into a debate for higher taxes - a topic that, as we reviewed a month ago, is taboo for the local authorities as elections approach. Nobody has an interest to discuss higher taxes, while the voters are headed to the ballot boxes, including the prime minister Boyko Borisov, who promptly tried to put an end to the debate.

We remind you that the failure of several governments to implement the idea of fiscal decentralization as promised a long time ago, is clearly described in the Decentralization Strategy 2016-2025 that is already in force. Regarding the execution of the previous strategy (2004-2015), in the new one it is stated: The decentralization process was blocked [...due] to the refusal of the central government to transfer part of the personal income tax proceeds to the municipalities as their own revenue. 

Imagine how different the pre-election debate would look like if the candidates for municipal council and municipal mayors were able to freely manage a portion of the collected taxes instead of having the right to increase them. This would constitute the preconditions for a genuine political competition, based on identifying local problems and offering local solutions, which is a far cry from the typical bragging/dissatisfaction with the results of the European projects. Sharing part of the already collected personal income tax with the municipalities would decrease the level of government dependency, namely the constant requests to the Council of Ministers for additional funds for the local authorities, but it would also make them less dependent on the European funds. The structural effect that the “8+2” model would achieve on public expenditure distribution between central and local authorities would even purely mathematically be more clearly defined than the alternative “10+2”. In the best-case scenario, the municipalities would not only be entitled to a portion of the proceeds, but would also have the authority to set the tax rate within certain limits. This would better enable the municipalities to impact the business and the living conditions, compared to the alternative which would increase the burden on taxpayers.

In addition, if the fiscal decentralization process takes an upward direction, it would set a precedent that would be difficult to overrule in the following years. If the central government keeps the whole amount of the 10% on the personal income, it is logical to expect the following steps towards fiscal decentralization to be related again to heavier tax burden in general. This approach: 1) would make each step towards local financial independence harder and publicly unacceptable and 2) would leave the taxpayers foot the bill and at the same time lead to decrease of the external competitive power of the Bulgarian economy.

As the end of the current Programming period of the European funds approaches and 2020 is knocking on the door, we are witnessing a significant increase in the amount of funding. This is clear from the annual review conducted by IME of the allocated European funds at the district and municipal level. Besides the considerable increase, in most regions the ranking of districts and municipalities is basically unchanged compared to last year. The same goes for the nature of the larger projects.

Source: ISUN, ISUN 2020, IME calculations

As usual, most European funds per capita have been awarded in the capital city and Gabrovo district - 3129 leva and 3234 leva per capita respectively. This is calculated by using the average annual population in these regions for 2018. Relatively large amounts of money from the European funds are awarded in the Northwestern districts of Bulgaria, but this is partly due to the faster pace of population decline there. On the contrary, in Sliven, Kyustendil and Pernik districts, European funds are estimated to be less than 1000 leva per capita, but there is a high probability that by the end of the programing period these districts would exceed this amount.

The largest projects are in the infrastructure - for instance, the extension of the Sofia metro system, construction of roads and water cycles, due to their nature, require larger investments compared to other activities. This could be observed in the capital city, where the actual amount received for the Sofia metro improvement exceeds 500 million leva and in Blagoevgrad, where the funding for Struma highway construction amounted to 329 million leva.

Compared to the small number, but costlier infrastructure projects, there are many other projects that cost less. They are mostly focused on the improvement of urban environment, educational infrastructure and providing social benefits. The last two groups are key in the Southern regions in the country and especially in Kurdzhali the most expensive projects are precisely for renovation and reconstruction of schools and providing warm lunch.

Source: ISUN, ISUN 2020, IME calculations

Undoubtedly, more interesting is the data regarding the distribution of European finding at a municipality level, because it reveals in greater detail the regional imbalances in the fund utilization. The most visible in the distribution at a municipality level are the projects concerning water supply improvement and construction of waste disposal systems. These projects are usually shared between several municipalities and their cost significantly exceeds the cost of the projects that each municipality (especially the smaller ones) is able to use on its own. This is evident in several municipalities at the seaside, as well as in Pleven, Vratsa and Montana.

Since the beginning of the European funding distribution in our country until the middle of 2019, the largest amount of European funding per capita is in the districts:

• Dobrich - 5683 leva, due to a big project for a water supply improvement in the city; 
• Kostinbrod - 5402 leva, due to a number of projects related to energy efficiency;
• Sozopol - 5172 leva, substantial part is from the previous programming period.

On the contrary, Kovachevtsi municipality has acquired only 32 leva per capita and is still the only municipality that does not have a single project in the new programming period. Similar situation could be observed in Dulovo (62 leva) and Dobrichka (116 leva). We could also add some of the smallest municipalities in the country that have only one project each for insignificant amounts of money. The major reason for that could be the limited administrative capacity of the small municipalities that does not allow them to compete effectively for European funding.

Most municipalities in the country acquire funding less than 1000 leva per capita- including 161 out of 265 municipalities in Bulgaria in total. Between 1000 and 2000 leva are another 70 municipalities and 7 are above 4000 leva.

When reviewing the utilization of European funding, we have to take into account that there is still no evidence of achieving the main purpose of the funds - cohesion, within the country as well as the towards the average European level of economic development. Furthermore, the local administration might focus mainly on the European funds instead of attracting private investments. The latter is proven to be more effective in creating new jobs and improving the living standard at a local level. This controversy highlights again the necessity for a reform in municipal finance and fiscal decentralization, combined with administrative reform and increase in the capacity at a local level. 

At first it may seem that the matriculation exam results published by the Ministry of Education show significant decrease in the average grade in Bulgarian Language and Literature - from 4.24 last year to 4.06 in 2019. On the national level this is the sharpest fall from one year to another since the beginning of the matriculation exams in Bulgaria. The data on the regional level reveal a different situation that we will examine in detail in this article.

District level results in Bulgarian language and literature

Source: Ministry of education, data requested by the IME

As the map above shows, there are barely any changes in the order of districts as compared to 2018 - those that typically score high are leading the ranking, whereas regions with weak performance are again at the bottom. Sofia City continues to get the highest score in the country (4.53, which is of even greater significance taking into account that in this district the largest number of students sat the exam) followed by Varna, Plovdiv and Smolyan which have similar results. There is a shift in the districts with the worst performance - this year the students in Silistra have scored the lowest (3.77) followed by Kardzhali (3.78), Razgrad and Yambol (3.80 in both districts). Most districts score close to “Good” 4.

Source: Ministry of education, data requested by the IME

Much more interesting dynamics can be observed on the district level - although the overall grade on the national level presented by the ministry of education has fallen compared to the previous year, in 23 out of the 28 districts, there is an increase compared to 2018. There is no district, where the decrease is as sharp as the one on the national level - within a year, Smolyan district has lost 0.14 of its average grade compared to 0.18 for the country as a whole, and this is the most substantial drop. In the other districts, where a decrease is present, it is less severe. This contradiction indicates that probably this year there were some specifics in calculating the overall grade for the country. We would be able to check the factuality of this statement when the open data on the school level is published, including the number of students that sat the exam.

Apart from the above-mentioned districts, almost all of the regions have improved in Bulgarian Language and Literature. This is particularly valid for districts with weak performance - Yambol has improved by 0.25, Pleven - 0.23, Vidin and Kardzhali - 0.22. There is still no district that has reached its best results from the past decade, but this could be explained by the different exam structure and stricter control during examination. It is too early to discuss an upward trend in general - the increase within a year could be due to specifics in the edition of the exam; furthermore, matriculation exam results are merely one of many student performance indicators. 

Source: Ministry of education, data requested by the IME

The percentage of students that failed the matriculation exam by district comes as no surprise. The most fail grades are in the regions where students have performed poorly - Kardzhali (20.4%), Yambol (18.2%), Silistra (17.7%), while in districts that typically perform better, the share of failed students is smaller – Sofia City (2.64%), Smolyan (4.18%).

It is more disturbing that next to the improvement of the average grades in 2019, we can observe a considerable increase in the number of failed students, which is an (anti)record for the whole history of matriculation exams. Compared to the year before, the most significantly has raised the number of “fail” grades in Razgrad (6.4 pps) and Shumen (6.1 pps); the slowest increase is in Montana (0.9 pps), Gabrovo and Pernik (1.1 pps) and in most districts it is close to 3-4 pps. As with the outcome discussed above, it is possible that the result for 2019 is an abnormality; a mere deviation from the trend in the matriculation exam performance. Otherwise, the greater number of “fail” grades reveals a negative tendency in the literacy of the students and their inability to cover the minimum educational requirements.

Source: Ministry of education, data requested by the IME

In conclusion

The regional results from the matriculation exam this year outline two opposing trends – a considerable rise in the average grade in most districts, but at the same time significant increase in the number of “fail” grades. In other words, students who have not received a “fail” grade have improved their results, but the problem is that the number of failed students increases. Although these trends are contrary to the ones from the previous year, when there was a decrease in the share of “fail” grades, but also a fall in the average grade, we are not able to comment on the long-term performance of the students. It is still unclear how the average grade on national level is calculated, which has dropped dramatically compared to the increase in most districts.

Over the past 10 years, the Bulgarian economy has changed dramatically. The manufacturing sector is gradually shifting towards higher value added production. The number of employed in traditional industries, for instance the clothing industry and furniture manufacturing, has dropped significantly. At the same time, the production of machinery, electrical equipment and auto parts has grown, hence more hired individuals in these sectors. However, the most remarkable increase of employed in a single industry is not in the classical manufacturing, but in the ICT sector (Information and Communications Technology) – an increase of 31,000 hired for the period from 2009-2017. In the beginning of 2019, this upward trend continues including around 8,000 new jobs in the ICT sector compared to 2017.

The sector deserves our attention not only because it is the most dynamic one in the Bulgarian economy, but also due to other factors. First, the increase of the employed in the ICT is almost entirely on the account of information technology - around 50,000 individuals are hired in the IT sector, compared to less than 20,000 10 years ago. Secondly, the highest salaries in the country are in the ICT sector – the average salary is typically close to the maximum insurable income. The trend remains the same for the current year - the average salary exceeds 3000 BGN in March 2019. Thirdly, this is the sector, where the majority of the hired are young and qualified specialists.

The mix of these three factors is quite interesting, because it is new to our economy. This is the first time when a sector was formed within the service industry that was different from tourism, where a great number of young people could earn high salaries without occupying a managerial role. This is important, because a weak service sector - one that only serves the local community and is not able to provide high salaries, is practically a guarantee of demographic problems. Urban areas in our country are the most dynamic in those regions, where young people could find alternatives that provide high remuneration.

Namely these considerations - demography and urban area - make the regional outlook on the ICT sector important.
Which are the regions that benefit from the increase in the number of employed in the IT sector?

Unfortunately, the answer is short. The increase of 31,000 hired for the period from 2009-2017 broken down by regions is the following - rise of 31,000 in Sofia (City), 1,700 in Plovdiv and 1,100 in Varna. All other districts have either a slight increase, or even a decline in the number of employed in the ICT sector. This huge concentration in Sofia is one more factor that contributes to the progress of the city, whereas in the other parts of the country, the processes are much harder. 

In fact, one of the most essential questions regarding the regional development in Bulgaria is to what extent the ICT upsurge would affect the other cities in the country? It is important not only income-wise, but also considering the urban area and stopping the outflow of young people, which could be observed even in the top 10 cities in the country. A positive impact from the ICT expansion is perhaps most visible in Plovdiv.

In 2008, 2,250 people are employed in the ICT sector in Plovdiv and their avarage salary is relatively high - around 1.4 times higher than the average salary for the district. However, in 2017 the situation is quite different. The number of employed people in the ICT sector in Plovdiv is 4,000 with salary (close to 2,050 BGN in 2017) that is 2.3 times higher than the average for the district and 2.2 times above the average salary in the manufacturing industry in Plovdiv. Practically, the development of the ICT sector in Plovdiv had led to the formation of a group of roughly 1,700 young people, who found a well-paid job in the service sector. For the majority, the alternative would be to start a job that pays at least two times less or migrate to the capital city or move abroad looking for a better-paid job.

It does not come as a surprise that within the same time frame, the urban area in Plovdiv has changed - the latter is supported by other factors. However, in other major cities one could hardly observe the same trend. For instance, in Stara Zagora 690 people are employed in the ICT sector in 2017 with a slight increase only in the last 2-3 years (around 70-80 people). The average salary in the sector barely surpasses the average for the region. Veliko Tarnovo also registers some positive trends. Within a 3-year period (2015-2017), there is an increase of about 120 hired with an average salary in the sector 1.6 times above the average in the region. The scale is still relatively small to talk about a spillover effect on the local economy and urban area.

As we mentioned in the beginning, in 2019 the number of people employed in the ITC sector continues to grow with roughly 8,000 new hires after 2017. There is still no data what their regional distribution is, therefore we could only speculate. Indisputably, the majority would be in Sofia, probably we would observe an increase in Plovdiv and Varna. It is unclear whether other districts have managed to achieve growth. It is a fact that some of the smaller district towns in the country, including the northwest region, have different initiatives aimed at developing the ICT sector on a local level. We have yet to examine whether they will be able to foster more complex process.

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

After we presented two weeks ago the data for the size of the average gross wage on municipal level, our analysis of the labour market continues with a review of the dynamics of the number of employed people. Since the differences in the number of workers on municipality level are considerable and depend highly on the size of the local population, the map below shows the relative change in the number of workers in 2017 compared to 2011. This approach to the presentation of data also implies certain conditionality and because of this our analysis focuses its attention only to municipalities in which lasting trends are observed, regardless of their demographic developments.

It is important to note that the data presented on the map show the workers based on their place of work and not on their domicile. Because of this, for example, it is not surprising that in the municipalities around Plovdiv, where most of the newly founded industrial zones are situated, register a higher relative growth of employees in the local centre.

Compared to 2011, the total number of employed people in the country in 2017 has increased by 2.9%. On the municipal level the situation is the following:

• 78 municipalities register an increase larger than the average for the country: from the district centres here we can find the capital, Plovdiv, Sliven, Targovishte, and Kardzhali;
• 29 municipalities register an increase, despite being lower than the average for the country; from the district centres here we can find Montana, Pazardzhik, Yambol, Razgrad, Varna and Burgas;
• in the remaining 155 municipalities the number of workers has declined; moreover, in 57 of them the decline is more than 10%. From the district centres here we can find Lovech and Dobrich;

The good examples

The municipality of Letnitsa in the Lovech district has experienced the highest increase in the number of employed people compared to 2011, which has also been accompanied by a significant growth in the payment of the already hired 1500 people in the same municipality. The average gross wage in the municipality has increased by 56%, reaching 1,425 leva, which is 18% more than the average for the country. One of the main factors behind the good performance of the municipality of Letnitsa is the presence of “Walltopia Ltd”, but companies from the ceramic and food industries also operate in the municipality.

In second place in terms of increase in the number of workers is the municipality of Bozhurishte (with an increase of 62% ) where the average wage of the 2500 employed people there is nearly 1,150 leva in 2017, exceeding by 10% the average levels for the country. Near the capital, apart from Bozhurishte, a considerable increase in the number of employed people (with around 1/3) has also the municipality of Botevgrad where the daily employed increase with around 500 people, reaching 12,600. This positive trend has not stopped since 2012 and is accompanied with an increase in the wages which is higher than the average for the country. Moreover, since 2017 the level of pay in the municipality is above the average for the country. In 2017 there was also an increase in the number of workers in the municipality of Mezdra (with around 1900 people), mainly because of the production of auto parts. The wages in the region, however, remain low and the unemployment level is considerably high.

The success of the “Trakia” economic zone is clearly seen on this map as well. The municipalities around Plovdiv have some of the best results in the country – in 2017 in the municipality of Rodopi the increase in the number of employed people is 48% compared to 2011, 39% in the municipality of Saedinenie, 28% in the municipality of Rakovski, 23% in the municipality of Kuklen, and 15% in the municipality of Maritsa. In each of these municipalities, with the exception of Kuklen, the level of pay is increasing quicker than the average for the country as the average wage in the municipality of Maritsa, where the most people work (if we exclude Plovdiv itself), is already 1% above the average for the country.

With over 50% is increasing the relative share of the employees in the municipalities of Aksakovo and Suvorovo (Varna region). In Aksakovo there is a lasting trend toward an increase, as the interest for investing in the region continues to be significant. In the meantime, the result from the smaller local labour market in Suvorovo can be mainly attributed to the one-time expansion in 2012, followed by a period of stagnation in the number of employed people.

The municipalities in the “red” zone

The negative demographic development of a significant part of the Bulgarian municipalities has a profound effect on their potential to reach an increase in the number of employed people on their territory. In the same time, like in the case of successful municipalities, this effect can be softened or strengthened depending on the condition of the local economy.

The highest decline in the number of employed people is observed in the municipality of Miziya, in the district of Pleven (a decline of 40%), as well as in the municipalities of Bobov dol and Trun (with 33,8%). It is important to note that in this case we are talking about a municipality which ran a referendum against the development of heavy industry, and a municipality in which companies have serious problems in the same sector which in turn leads to the closing of mines and to job cuts.

Nearly 1400 out of the 1700 total jobs in the municipality of Bobov dol disappeared during 2016 and 2017 which is related to the crisis in the coal mining sector – the closing of the “Babino” mine and the cuts in the “Fundamental” mine (later closed in 2018). The “bottom” in the labour market in the municipality of Tran was reached relatively late – in 2015, whereas the subsequent increase in the number of employed people was rather small and we could hardly talk about a real recovery. In the same time in Tran, and in other relatively small communes like the already mentioned Miziya, Georgi Damyanovo, Bregovo, Brusartsi, etc., wages are increasing faster than the average for the country, mostly because of the immediate effect from the increase in the minimum wage.

Despite this, in all these municipalities, the average gross wage remains lower than 65% of the average for the country as in most municipalities the “catching up” is only a couple of percentage points, and as we already mentioned, the employed people decline drastically.

Highly worrying is the situation in Bolyarovo (Yambol region), where the decline in the number of employees of 25% is accompanied by a relative decline in the wages – from 69% to 59% of the average. Keeping in mind the problems in the key for the municipality livestock sector in 2018 (the euthanasia of thousands of small ruminant animals), it can be expected that the situation is even worse. An even more drastic decline in wages, again accompanied by a significant decline in the number of employees, is registered in Bobov dol and Belene – from 109% to 83% from the average for the country and from 97% to 66% from the average for the country, respectfully.

The data for the levels of the gross wages and for the number of employees on the municipal level show that the recovery of the labour market and the subsequent expansion are going on unevenly on the territory of the country. The improvement of the overall economic conjuncture does not seem to have a strong positive effect on the labour market in the very poor municipalities, especially in those in which strongly negative demographic processes are observed. Despite the fact that most of the increases in the number of employed people comes from the South, some of the best performing local labour markets are in the North. As is clear from the map, however, we can hardly talk about a homogenous development in the North-West and the North-Central regions. The impression of a presence of separate “islands” of economic activity is confirmed from these data.

Petar Ganev

Which is the municipality with the highest average wage in the country? This question does not have a straight answer. The reason behind this is that the data in the country for the employees and the wages on the municipal level are not published, but must be requested from the National Statistical Institute (NSI). On the regional level, the information is often related only to the wages on the district level, which does not tell us much – it pools together the big regional centre with the small village commune, and those are clearly very different. The discourse about regional inequalities is more precise when we have in mind the municipality level.

Exactly because of this, after we published the municipal map of unemployment rates for the 2011-2017 period, today we also publish an interactive map with the municipal wages for 2017. It is important to note that the data for the municipal level wages for 2018 are still not available. However, from the country-level data we already know that the average wages in 2018 have already grown 10% compared to those in 2017. This means that when you look at the municipality wages on the interactive map, you must keep in mind that the average wage in the given municipality is most probably rising – the mark is a rise of around 10%. It is clear that the rates of increase will be different for each municipality, but, in general, we should expect a rise in all averages – the comparison between 2017 and 2016 confirms this.

The municipalities with the highest average wage in Bulgaria are not the big district centres. The leaders are, in fact, fairly small municipalities, in which there are large employers – usually in the energy and manufacturing sectors. These big companies pay high wages and also dominate the local labour market – in other words, a big part of the workforce on the territory of the municipality works exactly for them. This is very clearly expressed in the municipality of Mirkovo, since it remains the only municipality for which we do not have available data for the average wage - the data is confidential. 

The highest average wage in Bulgaria for 2017 is registered in the municipality of Chelopech – here there is a big mining company which leads to an average wage of 2,178 leva for the municipality. After the municipality of Chelopech we have the municipality of Kozloduy with its nuclear power plant – with an average wage of 1,790 leva; the municipalities of Radnevo and Galabovo, with their big companies in the energy sector, have average wages of 1,657 and 1,610 leva, respectively. After them, we have the municipality of Pirdop – an average wage of 1,562 leva (again, thanks to a big mining company) and the municipality of Devnya – an average wage of 1,442 leva (with its developed manufacturing sector).

The capital Sofia is placed 8^th in 2017 with an average wage of 1,433 leva. Despite leading many other economic rankings, here the municipality of Sofia cannot take the top spot since the economic profile of the capital is highly diverse and, although wages are high, they cannot reach the average levels of pay in some of the small municipalities where a considerable share of the workers are hired in the energy or manufacturing sectors. After Sofia in the ranking comes Panagyurishte (9^th place) with an average wage of 1,285 leva in 2017. Again, this is an example of a municipality which reaches the top positions thanks to its big mining company. The other municipalities in the top 20 include municipalities with a heavy manufacturing sector – usually near a big city, with well-developed industrial zones. Examples of such municipalities include Kostinbrod, Elin Pelin and Bozhurishte (near Sofia), Suvorovo, Aksakovo and Beloslav (near Varna), and Maritza (near Plovdiv). All these municipalities had an average wage between 1,000 and 1,200 leva in 2017.

A look at the municipal level map of wages allows us to see clearly the leading economic centres, as well as the regions which experience difficulties. The differences between North and South Bulgaria can also be seen clearly. In the South centres with higher wages are formed around Sofia and Plovdiv, as well as around Burgas and Stara Zagora. Centres which are well connected and can truly interact in a positive way. To these big cities we can add also the mining sector in the small communes in the Srednogorie Region.

In the North the only centre with high wages around a big city is Varna. The other examples, like Sevlievo and Letnitsa, are good but they cannot have a considerable influence on this part of the map. This is one of the arguments which we have mentioned previously when we talk about regional development. The problems of the North are not related only to the depopulation of certain municipalities in North-West Bulgaria, but also to the absence of strong economic centres, which can interact. Some of the big cities in the North, like Pleven, are actually losing workers and they do not offer high wages.

In fact, if we take a closer look at the map, we can also see big clusters of municipalities with low wages in the South, especially around Blagoevgrad. A year ago, there was a discussion about why the wages in Blagoevgrad are so low and comparable to those in Vidin. The municipal map can give us a reasonable answer. In the municipality of Blagoevgrad, the wages are not so low, but the situation in the nearby small municipalities has seriously deteriorated. Less than 1/3 of the workers in the Blagoevgrad area work in the local centre. The rest of them work in nearby municipalities where the wages are some of the lowest in the country.

This map is an excellent example of how the availability and the clear presentation of municipal level data can explain the many processes on a regional level. In this case, IME made a modest investment in order to make this data available to all.