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Addressing the Medium- and Longrun Challenges: the Overall Policy Framework Lyubomir Datzov Deputy Minister of Finance Republic of Bulgaria May 2007 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 GDP growth 7 6 5 per cent 4 3 2 1 0 2000 2001 2002 2003 EU-25 2004 2005 Bulgaria 2006 2007 (f) Source: Eurostat 2008 (f) 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 mln. EUR 4500 4000 3500 3000 2500 2000 1500 1000 500 0 2001 2002 Total FDI 2003 2004 privatization free 2005 2006 Source: BNB 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 Labour market Employment is increasing steadily, employment rate still to catch up with EU averages Unemployment decreasing, reaching recordlow levels Some sectors report labour shortages, but evidence is still somewhat contradictory 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 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 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 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 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 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 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 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 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 longterm 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 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 Thank you for your attention!