News

Yavor Aleksiev, Bozhidar Radev*

The current inability of Bulgarian municipalities to carry out independent fiscal policy leaves EU funds as the only option for financing local projects. The prior statement is especially true for undertakings, which require significant capital investment, such as building a sewage-treatment plant. It goes without saying that the efficiency of the use of EU funds depends highly on how and for what purpose they are spent. This means that 1 million BGN spent in one municipality may lead to greater benefits than 10 million BGN spent in another. Therefore, the actual amount of operational program funds, provided for municipalities as beneficiaries, is one of the main indicators of the success or failure of municipal administrations – if nothing else, at least it is a signal of activity and administrative capacity.

Up until mid-May 2016 Bulgarian municipalities have received close to 5 billion BGN, as beneficiaries of the EU operational programs. This sum includes only the amounts that have already been paid (and not those that have been agreed upon) for the entire period since Bulgaria’s entry into the European Union, which means that the data is cumulative and includes previous program periods as well as the beginning of the new period. In order to make a comparison between different regions and municipalities we divide this sum by the annual average population.

Bulgarian municipalities have received 689 BGN per capita of the annual average population by the middle of May 2016 compared to the 565 BGN/capita in the beginning of 2015 and 380 BGN/capita in 2014, when our previous analysis on the subject were published.

This higher rate of absorption of EU funds during the past two years was expected in light of the end of the prior 7 year program period (2007-2013) and the opportunity for using the funds until 2015.  Of course, the more efficient utilization somewhat reflects the increased managerial and administrative capacity of some Bulgarian municipalities, at least concerning the governance of EU funding.

The analysis of the data leaves these main impressions:

• The absorption rate of EU funding of municipalities as beneficiaries of the operational program is notably uneven. Proportionally to the population this rate varies from 4,773 BGN per capita in Sozopol to 0 BGN per capita in Gramada.
• There is no correlation between the size of the municipality and the absorbed funds per capita of the local population. There plenty examples of small municipalities, with high utilization of EU funding (such as Kostinbrod, Lukovit, Sozopol, Pirdop) as well as large municipalities (such as Plovdiv, Pazardjik and Kyustedil) where the absorption rate is below the average for the country.
• The difference in the ability of municipalities to manage EU funding is increasing. While some of the municipal administrations are able to continue to win and carry out successfully EU funded projects, others are yet to adopt best practices and attain the necessary administrative capacity.

Utilization on a Regional Level

Gabrovo continues to be the district with the highest absorption rate of EU funds (166.5 million BGN up until mid-May 2016, an average of 1,444 BGN per capita. The runner up is the district of Burgas in which the utilized funds are 585.3 million BGN, but the larger local population of the region leads to a lower average of 1,414 BGN per capita.

The lowest absorption rates are in the districts Kjustendil (367 BGN/capita), Sliven (378 BGN/capita) and Ruse (472 BGN/capita). The municipalities within the Burgas district have utilized significantly more funds per capita for the period January 2014 – May 2016 (578 BGN), than these three municipalities for the entire program period.

Utilization on a Municipal Level

The worrying fact is that the number of municipalities, which utilized less than 100 BGN per capita, remains unchanged (30) since 2015. The majority of them are small and the biggest ones are Kirkovo (Kurdzhali) and Dulovo (SIlistra) with a population of respectively 21.4 and 28.0 thousand people in 2015.

Problems with the absorption of EU funds exist due to many factors such as the lack of administrative capacity of some municipalities, the low quality of their strategic development documents, the central government’s tendency to pick political favorites from certain municipal administrations, the failures of public contractors etc. In many cases the strategic documents follow pre-made templates instead of serving as long-term sustainable planning instruments for the development priorities of municipal governments.

Utilizing EU funds isn’t a panacea for the challenges faced by the Bulgarian regions. On the contrary, the fixation of municipal administrations on EU projects leads to negligence towards other aspects of regional development such as creating an environment that is favorable to investment. Unfortunately, for many Bulgarian municipalities EU projects are used not as means of increasing investment but as its alternative. This is due to the last few governments’ renouncement from a financial decentralization policy. 

The growing gap between the municipalities achieving high absorption rate and those at the bottom of the list shows that the demographic reality in Bulgaria leaves some municipal communities with serious challenges in terms of securing enough administrative capacity for managing EU funds. Despite territorial-administrative reform not being a priority, this is a process which cannot be avoided, especially if the fiscal authority of municipalities remains unchanged.

* Bozhidar Radev is an intern at the IME.

Yavor Aleksiev

The long-awaited data for the development of the labor market in the first quarter of 2016 shows dormant structural problems disguised as betterment. Just as the IME predicted, the economic activity of the population stopped increasing and remained at last year’s levels, which led to a slower increase in employment. In the period January-April 2016 the amount of people employed increased by 25.3 thousand, which is the lowest growth rate on a yearly basis since the beginning of the labor market’s recovery.

Annual change of the number of people employed (quarterly data), thousand people

Source: NSI

The slower increase of the number of people employed was expected taking into account the stagnation in the economic activity and the structural character of the unemployment in Bulgaria. More than half of the people currently seeking occupation are long-term unemployed, which means that until now the labor market recovery has passed them by. If the economic activity doesn’t begin surging again the potential rise of the amount of people employed in the following quarter may be even lower, since the economy will have to create additional conditions for including, specifically, the long-term unemployed.

The data on youth unemployment continues to disappoint. In comparison to the first quarter of 2015 the amount of young people employed aged between 15 and 24 falls by 8.4 thousand, which leaves the employment coefficient to be only 19.4%. A serious decrease can be seen in the youth unemployment – from 23.2% in the first quarter of 2015 to 18.4% for the same period in 2016. This however, isn’t caused by higher youth employment but as a side effect of their lower economic activity.

Current Situation on a Regional Level

Considering the labor market data from a regional standpoint shows that the increase in number of people employed is more evenly distributed in comparison to previous periods.  Most jobs are created in Sofia (capital) and Burgas.

Most notable is the improvement of the labor market in the capital where the employment level is growing for a 14-th consecutive quarter and already overshadows the pre-crisis levels reaching 666.3 thousand people, while it was 656.0 thousand in the same period in 2015. Sofia (capital) continues to concentrate a huge portion of the Southwestern region’s labor force - 2/3 of the employed people in this region work in the capital. A notable surge in employment can be seen in the wide Sofia region as well as in the Kyustendil region however it is too early to assume the existence of positive tendencies in the labor market of these districts.

In the Northern parts of the country there is an increase in the people employed in the districts Gabrovo (hike of 3.2 thousand people), Silistra (2.8 thousand people), Targovishte (6.1 thousand people) and Shumen (3.9 thousand people).

The number of people employed in Veliko Tarnovo and Varna falls for the first time in respectively two and three years. In Varna however, the drop is somewhat symbolic (only 700 people less than the first quarter of 2015) and the number of the employed remains close to 210 thousand people.

For a second consecutive quarter the only region in which the number of the people employed falls on a yearly basis is the Northwest.  In this part of Bulgaria there is growth registered only in the Montana district.

The Effects of the Rise in the Minimum Wage and the Minimal Thresholds

The persistent decline in employment of some of Bulgaria’s poorest regions seems to be caused by demographic processes and not by the increasing price of labor. In the Vidin district, where the last increase of the minimum wage to 420 BGN meant that it now equals 65% of the average salary, the number of people employed via labor contract has surprisingly been increasing steadily from the start of this year. The drop in the number people employed according to NSI’s analysis of the labor force and the increase in the number of people employed via labor contract is not a rare phenomenon in the past few years and it does not necessarily imply the existence of contradicting statistical data. One possible explanation seems to be the decrease of the unregistered employment especially considering the recorded upsurge in the salaries in the private sector during the last few quarters.

Of course there’s always the possibility that the increase in the minimum wage and the minimal thresholds has slowed down or stopped the job creation process in some districts.  This is one probable explanation of the sluggish increase in the number of people employed for the difficulties in including young people in the labor market. One thing is certain, at this moment the upturn in the minimum wage does not help attract more people to the labor force. In the absence of demand for low qualified workers the new minimal salary can additionally slow down the job finding process for the long-term unemployed. The cumulative effect of a stagnating economic activity and a slower transition towards employment of the currently unemployed, can lead to a lethargic increase in the number of people employed in future periods as well.

Yavor Aleksiev

The labor market in Bulgaria continued creating jobs in 2015. The number  of the employed in the last quarter of 2015 is 72 thousands higher than during the same period of 2014, while the average unemployment rate dropped below 10% for first time since 2009.

Employment prospects in early 2016 are also positive and in line with a faster than expected GDP growth in 2015 and the increase in the number of workers on a labor contract.

It is notable that unlike previous years there is a much smoother job-creation in the north and the south of the country. To some extent this can be explained by the stronger 2013 and 2014 for large parts of Southern Bulgaria. In other words, while labor market recovery in some southern areas has completed or is about to do so, in parts of northern Bulgaria the recovery is yet to begin, or has just begun.

Northern Bulgaria

Positive development

Veliko Tarnovo and Varna are the districts with the best performance of the labor market in Northern Bulgaria in the past two years. Both recorded respectively 9 and 12 consecutive quarters of growth in the number of people employed - the longest period of growth after the capital (13 quarters).

After a long period of job losses the labor market in Ruse has finally bottomed out and in the last quarter of 2015 the number of people employed is 5,600 higher than the same period of 2014.

In Pleven the number of employees remained above 100,000 people for the second consecutive quarter and is at the highest level since the end of 2012.

Negative development

The number of people employed in Vratsa continues to decrease - in the last quarter of 2015 there are 54.5 thousand employed people compared with 60.6 a year earlier. The labor market in Montana and Silistra also remains depressed. Dobrich recorded four consecutive quarters of decline in the number of people employed, but decreases have been relatively moderate and part of it can be explained by a declining population.

Shumen failed to repeat the good results of 2014, but the last quarter was relatively favorable for the labor market and the decline in employment from April-September 2015 may prove short termed.

Southern Bulgaria

Positive development

The Southeastern region is the only one in which the number of employees during the last quarter of 2015, was higher in all districts than the same period of last year. It seems that in 2015 Burgas has already surpassed pre-crisis levels of employment and the labor market in the Stara Zagora district is gradually shaking off the hardships of 2013 and 2014.

The number of people employed in 2015 in the capital is now higher than in 2008. However, it will need additional time to reach the employment levels before the crisis, as the population of the district for the period increased by about 80 thousand.

Employment data for Plovdiv also remains positive, but only as far as the last quarter of the year is concerned, when the local labor market was able to compensate for job losses that occurred in the first half of the year.

Negative development

There is a somewhat surprising inverse relationship between the improvement of the situation on the labor market in the capital and deterioration in the neighboring districts of Pernik and Sofia. The number of people employed in Pernik bottomed at 49 thousand in the third quarter, while those in the Sofia district fell to 85 thousand in the second quarter of 2015. The labor market in both areas remains highly volatile.

Conclusion

The main threats to the continued recovery of the labor market are the rapidly slowing growth of economic activity, the lack of progress in regard to employment among young people and the stubbornly high number of discouraged people. On the one hand, because of the serious labor shortages that Bulgarian companies are experiencing, we can expect a slower recovery of the labor market in 2016. On the other - if the rate of increase in employment continues, in 2016 we can start talking not only about recovery, but about an expansion of the labor market - i.e. overtaking the pre-crisis employment levels.

The data for the first quarter of 2016 is extremely important, as it will show whether and to what extent the sharp increase in the minimum wage and minimum insurance thresholds has affected jobs in poorer areas of the country. This is an important point, because even in the midst of increasing employment on the national level, the exclusion of the poorer areas from this process poses challenges not only for the labor market, but also to the overall socio-economic development of these areas.

Martina Goranova*, Desislava Nikolova

Athough there are some inevitable economic divergences between Bulgaria’s districts, it would be interesting to check the assumption about the economic discrepancy between the labour markets of North and South Bulgaria. In order to reply to this question, we will compare three indicators that define the labour market - the unemployment rate, the employment rate, and the economic activity rate.

Regarding the unemployment rate, the difference between the weighted averages for Northern and Southern Bulgaria has narrowed to 2.85 percentage points in 2014 down from 8.58 pp back in 2000. That means the unemployment rate was generally higher in North Bulgaria both during the upturn untill 2008 and during the crisis period and the post-crisis recovery following 2009. It is interesting that the gap has considerably narrowed during the the past 15 years (about 3 times), which in principle could be interpreted as a decrease in the discrepancy between Northern and Southern Bulgaria in recent years, at least in terms of the unemployment rate.

If the capital city was disregarded, the better state of South Bulgaria would have been preserved, namely the average unemployment rate in South Bulgaria would have been 0.93 pp lower than the one in Northern Bulgaria in 2014. So, it turns out that Southern Bulgaria’s better indicators are not only due to the capital city—even without it, this part of Bulgaria would have performed better in terms of its labour market. Nonetheless, the capital city accounted for 2/3 of the difference between the unemployment rates in North and South Bulgaria as of 2014, i.e. its influence should not be underestimated.

The employment rate generally increased in Bulgaria from 2000 to 2008 and it grew again following a drop in 2009-2010.

In respect of the employment rate, the capital city’s influence has also been considerable. The discrepancy in the employment rate between Northern and Southern Bulgaria, excluding Sofia, would be almost double. The divergence between both parts was 5.81 pp in 2014, and if the capital city was disregarded, it would have been 2.95 pp. And still, as it is visible from the figures, the employment rate has been higher in South Bulgaria, notwithstanding the capital city’s influence. In 2014, this rate was 44.23% in North Bulgaria, and 50.05% in South Bulgaria.

It is notable that the difference between Northern and Southern Bulgaria in terms of employment rates has remained stable in time, fluctuating from 5 to 7 pp. Thus, if the data about the unemployment rate supported the assumption that North and South Bulgaria had developed more closely in recent years, then the data regarding actual employment would have firmly rejected it.

The labour market has gradually recovered in recent years, but the employment rate and the unemployment rate have not reached their pre-crisis levels. The differences between both parts of Bulgaria, in respect to employment, have not significantly changed in time, which constitutes another indicator of the insufficient effectiveness of the regional policy and the ongoing discrepancy between Northern and Southern Bulgaria. The interesting point is that Sofia (the capital city) is not the only “culprit” for South Bulgaria’s better rank — South Bulgaria has performed well even without Sofia, in respect of all basic labour market indicators. It should even be noted that role of Sofia (the capital city) concerning South Bulgaria’s advantage has gradually decreased. For instance, if the difference in the unemployment rates between North and South Bulgaria, excluding Sofia, was about 7 pp in 2000, it dropped to barely 1 pp in 2014. The same applies to the employment rate, even though the role of Sofia has slightly weakened—the difference between North and South Bulgaria, excluding Sofia, was 4.4 pp in 2000, and it decreased to about 3 pp in 2014.

* The author is an intern at the IME.

Yavor Aleksiev

The IME conducted 4 individual studies from April 2012 to April 2015 regarding the levels of local taxes and fees. For this purpose, every municipality received inquiries under the APIA during the spring of every year.

Five types of taxes and fees are included into the scope of the study:

• The Immovable property tax for legal entities (‰),
• The vehicle tax (commercial and passenger vehicles, 74 kW to 110 kW),
• The annual license tax for retailers (up to 100 sq. m of retail space – for most favourable location of the site) (BGN/sq. m),
• The annual waste collection charge for properties of legal entities (‰),
• The local tax on the transfer of property (‰).

General Comment

There have been no significant changes in the size of local taxes and fees in recent years. Changes regarding the annual license tax for retailers have been the most uncommon, and the most frequently atered fee is  the annual waste collection charge for properties of legal entities. With regard to the entire period 2013–2015, the waste collection charge was decreased more times (58) than it was increased (48).

We have observed 86 instances of decreases and 122 instances of increases of the local taxes and fees under consideration . Most probably the actual amendments (in both directions) have been more than the ones registered by our team, but provided there is no official database to enhance the analysis, we present to your attention the results of our study of the information gathered under the APIA.

Number of instances of increasing and decreasing local taxes and fees from 2013 to 2015

Source: IME on the basis of inquiries to municipalities under the APIA

It is notable that:

• The levels of local taxes and fees are largely a result of the availability, or the lack, of investments and functioning businesses. The levels of local taxes and fees remain relatively high in the biggest economic centres, and relatively low in the low developed ones.
• Neither high taxes and fees discourage investors from starting businesses, and the people from migrating to districts possessing relatively high tax burden, nor low taxes and fees manage to attract entrepreneurs and immigrants in the less developed districts.

It is clear that the factors defining any decision for starting a business, or migrating to a municipality/district, are rather related to the size of the local market, the quality of infrastructure, the availability of workers, job opportunities, the social environment, etc.

In other words, there is no observable tax competition between municipalities. This is not surprising in view of the fact that the main part of the tax burden, for any company, is actually towards the central government (via labor and corporate taxes, social security contributions and indirect taxation), and not to the municipalities. No matter how much a municipality tries to decrease the size of the taxes and fees collected by it, it is hard for it to achieve such an effect on the overall tax burden that is able to offset other flaws of the local investment environment (for instance, the small size of the local market, the remoteness of the region, or the poor infrastructural development of the district).

The proposal for granting more tax powers to municipalities, which was revoked several weeks ago (the ability to collect 2% income tax in addition to the already collected one) could theoretically spur tax competition, but it would also increase the overall tax burden on the economy.

Increasing the financial independence, accompanied by a territorial and administrative reform, constitutes a strategy whereby the depressed districts could regain their attractiveness for people and businesses. In order to achieve this, however, it is necessary that the financial decentralisation should not only be discussed, but it should be set forth within the clear framework of the current tax burden. The best method is to gradually grant an increasing share of the revenues that are already collected to municipalities untill achieving a degree of differentiation that would allow the more depressed districts to offer much better business conditions than the more developed ones.

Zornitsa Slavova

The 2015 edition of “Regional profiles: Indicators of Development” which was presented in the beginning of November 2015, was the first to include indicators for security and justice on regional level.

We observe an interesting correlation between the indicators that describe crime and the work of courts on one hand, and economic development on the other. In economically developed districts there are more crimes against the person and property and the work of local justice systems is more problematic.

For instance, the most economically developed district – Sofia (cap.) – is also the one with worst indicators in the sphere of security and justice. The same goes for districts like, Blagoevgrad, Burgas and Varna. On the other side, districts such as Kurdzhali, Smolyan, Silistra and Lovech are characterized with low criminality and relatively effective local justice system, but poor economic development. As usual, there are exceptions –Gabrovo, while among the districts with best economic indicators also registers relatively low crime levels, moderate work load and relatively effective work of criminal judges at district courts. Yet the districts Kyustendil, Sliven and Montana illustrate combination between economy and performance of security and justice, both at poor level.

Crimes

In the last 15 years, registered crimes against the property on a national level declined from average 105.8 per 10,000 people in 2000 to 89 per 10,000 people in 2014. A slight increase is noticed in the crimes against person: from 4.5 per 10,000 people in 2000 to 5.9 per 10,000 people in 2014. In 2014, the districts Smolyan, Kardzhali and Silistra are characterized with the lowest crime levels in the entire country, as they demonstrate the lowest number of crimes against local population in both categories. Crime levels in Sofia, Varna and Burgas are nearly 4 times higher than this within districts Smolyan, Kardzhali and Silistra.

It should be mentioned that our analysis is based on registered crimes in only, Presumably in some districts the effectiveness of the police and/or the social trust in its work are lower, which may lead to artificially low levels of registered crimes. In the recently published issue of Index of Economic freedom, Bulgaria is distinguished as one of the countries where people have the lowest trust in the police, so this is probably a serious factor when interpreting the data.

Courts of justice

The data about the workload of judges in district courts also display a proportional relation with the state of regional economic development. In more developed districts such as Sofia (capital), Stara Zagora, Plovdiv, Varna and Burgas the workload of courts is higher. It is interesting to note that both in courts with high workload and in courts with low workload, effectiveness measured as the share of pending penal cases and the share of penal cases finished in a 3 month period is relatively low. From 2010 to 2013 the workload of judges from penal departments of district courts has decreased from 10.8 to 8.3 cases per month per judge. At the same time this does not reflect the duration of cases.

Although that measured against 2010 the workload of judges declines with over 30% in 2013, the share of cases completed in a 3 month period, decreases with barely 2.7 percentage points (from 91.1% to 88.4 %), and the share of pending cases increases with 0.7 pp (from 7.8 % to 8.5%). This is a sign for deepening ineffectiveness of law enforcement system on local level.

Yavor Aleksiev

Two weeks ago we showed what would happen to the country’s average levels of  unemployment, employment, and economic activity, provided Sofia was excluded from the calculations. While the deterioration of certain indicators is to be expected, provided the leading economic centre of Bulgaria is not considered, their dynamics suggest some interesting observations. Here we  focus on two additional indicators: the GDP per capita (in current prices) and the salaries of employees. Regarding both indicators, the capital city’s effect on the national averages is considerable.

GDP per Capita

If we exclude the capital, the GDP per capita would decline from 11,283 BGN per capita to 8,347 BGN per capita in 2013, or by 26% (Figure 1). In the period from 2000 to 2010 the effect of the capital city on the average per capita GDP increased steadily. Disregarding Sofia would have caused a drop of 12.1% from the national average in 2000, while this figure would have already been 27.9% in 2010. This effect slightly weakened in 2011 and 2012 to 25.8% in order to increase again to just over 26% in 2013.

Figure 1: GDP per capita (2000–2013, BGN)

Source: NSI, calculations by IME

If the capital city is not considered, a total of seven districts would surpass the national average level of the GDP per capita. These are Varna, Sofia (region), Burgas, Plovdiv, Gabrovo, Ruse, and Vratsa.

Figure 2: GDP per capita in 2013, BGN

Source: NSI, calculations by IME

Salaries of Employees

Wages in Sofia (cap.) play an ever larger role in determining their average size on the national level. While the difference between the wages of employees, including and excluding the capital city, was barely 5.9% in 2000, in 2013 it was as high as 16.7%. The effect of the capital city’s salaries on the national averages considerably increased from 2006 to 2008 because of the economic boom in Sofia.

Figure 3: Average annual salary (2000–2013, BGN)

Source: NSI, calculations by IME

If we exclude Sofia (cap.), the average annual wages would have been higher than the country’s average in the districts of Sofia (district), Varna, Burgas, Plovdiv, and Gabrovo. Compared to the year 2000, the districts of Pernik and Kyustendil have lagged the most. These two districts would have reported higher salaries compared to the country average in 2000 if the capital city was disregarded. A possible explanation for that could be the decline of some local industries and also the intensification of the daily labour migration to the capital city. The reason thereof is that the statistics calculate wage levels depending on the place of work, and not on the residence.

Figure 4: Average annual salary (2013, BGN)

Source: NSI, calculations by IME

These calculations demonstrate that the capital city has an increasing impact on the country’s average values of GDP per capita and wages since the beginning of the new millennium. This effect has increased more slowly since 2008 (regarding wages) and has slightly dropped compared to its peak levels (regarding GDP per capita). Nevertheless, it seems that this trend will also continue in the coming years. One of main reasons for that, of course, is the ongoing concentration of businesses and the increasing population of the capital city. In 2013 some districts, such as Burgas and Plovdiv, succeeded in not only maintaining the growth rate of wages and the GDP per capita of the capital city, but they considerably offset their lagging in terms of investments. Other districts, however, continued to lag behind.

The observations above presuppose higher attention to the implementation of policies based on national-level indicators. Despite the common acknowledgement of this conclusion, its actual implementation has continued to be more of an exclusion than a rule. This constitutes a kind of political and institutional sloth that the regional development of Bulgaria cannot afford.