Addressing the Medium- and Long-run Challenges: the Overall Policy Framework

1. Addressing the Medium- and Long-run Challenges: the Overall Policy Framework Lyubomir Datzov Deputy Minister of Finance Republic of Bulgaria May 2007

2. Macroeconomic developments • Increasing activity of the economy, GDP growth rate accelerating to about 6.3% on average in recent years; • High rates of investment and potential GDP growth • Positive real convergence prospects

3. External sector developments • The current account deficit increased to around 16%, but • The inflow of FDI was also impressive: EUR 4.1 billion in 2006, covering 103% of the CAD • The FDI inflows were exclusively non-privatization related

4. Inflation rate • Single-digit since introduction of the CBA • Accelerated to 7.4% in 2006 mainly due to adjustments in administrated prices and excise taxes • Expected to decelerate in 2007 and following years

5. Labour market • Employment is increasing steadily, employment rate still to catch up with EU averages • Unemployment decreasing, reaching record-low levels • Some sectors report labour shortages, but evidence is still somewhat contradictory

6. Overall policy framework • Outlined in three major strategic documents: • The Convergence Programme (2006-2009) • The National Reform Programme (2007-2009) • The National Strategic Reference Framework (2007-2013) • Full consistency among goals and policy actions is implemented in the three documents

7. Main challenges before the fiscal policy • Three main strains of challenges: • Macroeconomic imbalances and adequacy of budgetary policy • Structuring and re-structuring of budgetary expenditures • Structural reforms in all areas of public spending

8. Macroeconomic imbalances and budgetary responses • Output gaps: adequate fiscal surpluses need to be achieved in order to counter-balance eventual demand-pull inflationary pressures • Expenditures need to be constrained in order not to stimulate imports and CAB deterioration • In cases of economic downturns the fiscal policy should react properly to provide the required recovery impulses

9. Achieving public spending efficiency • Increasing budget revenues has an upper limit • A ceiling of 40% of GDP has been established for budget expenditures • Higher expenditures efficiency needs to be sought in order to obtain higher value of public services for a unit spent on them • Increased productivity of the public sector has to be targeted at all levels of administration

10. Program budgeting – a way to boost efficiency of the public sector • A transition to result-oriented spending is indispensable • The policy framework of budget-related decisions is shifted from planning of inputs to planning of outputs • Currently program budgeting is introduced and implemented in all line ministries • The long-term vision is to allocate funds per policy fields and priorities and not per institutions • Result-oriented measures are also envisaged at the individual level in order to stimulate the productivity of civil servants

11. Fiscal decentralization and public spending efficiency • Reform started in 2002 • Still to improve: • Standards for public services delivery • Matching revenue collection with expenditure needs • Higher level of citizens’ participation in the planning and execution of municipal bugdets

12. Important sectors that need urgent policy attention: Healthcare • A key sector with a view to the ageing population; • Posing significant risks to long-term sustainability of public finances; • A ‘higher value for money’ approach is indispensable • Higher quality of the medical service is demanded by citizens

13. Important sectors that need urgent policy attention: Education • Mismatches between labour supply and labour demand need to be addressed by adequate reforms in the area human capital formation; • Higher expenditure efficiency of spending should be required from schools and universities • The channels of public funding to education should be transformed and follow closely the students • Consolidation of universities and school networks is exigent • Financing of research should be shifted from subsidies to project financing

14. Other relevant reform areas • Business environment and administrative reform: to reduce the burdens to businesses and facilitate growth; • Innovation and R&D: to enhance the long-term growth potential of the economy at the micro and macro levels • Labour markets: to increase flexibility and reduce the social payments burden to the budget

15. Envisaged short-term policy formulation actions • The National Reform Programme will be reviewed and a monitoring of goals achievement will be performed until the autumn of 2007 • New goals and targets will be defined in order to match better economic developments, problems and prospects • The medium-term budgetary framework will be elaborated and announced until mid-2007 • The annual update of the Convergence Programme will be submitted to the Commission until December 1, 2007

16. Thank you for your attention!