Abstract
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Bulgaria is a unitary state with 7.9 millions population and territory of 111 000 km2. The process of gradual political, administrative, and financial decentralization in the country started in 1991, parallel to the transition from the centrally planned, socialist type economy towards a market based economy. During the period 1991-2008 Bulgaria has made remarkable progress in reforming the system of intergovernmental fiscal relations. First of all, the most important pillars of the legal base of local self-government have been adopted, providing a stable background of fiscal decentralization. Secondly, the importance of local governments has increased relatively to the GDP and consolidated public sector. Thirdly, local governments have been given full control over some of the own-source revenues (local fees, service prices and revenues from municipal asset management) and limited control over the local tax levy. As a result, during the period 1991-2007 local own-source revenues tend to increase gradually, from 3.9% of total municipal revenues in 1991 toward 8.3% in 1997, 18.0% in 2000, 33.8% in 2004 and up to 35.7% in 2006. Own revenues were especially high in 2007, reaching 43.5% of the total local revenues.
It is interesting to note, that since 2003 the process of strengthening fiscal decentralization has been accompanied and significantly influenced by an average annual economic growth of 5-6%, increasing economic activity, low levels of unemployment (6-7%) and consolidated budget surpluses equal to approximately 3% of the GDP. This process was broken in 2008, due to a new and deep world wide financial and economic crisis. The decreasing economic activity strongly effects public finance including local government finance by decreasing government revenues (both at central and local level) and increasing social pressure (fast growing unemployment rate). Consequently, own revenues decreased to 38.7% of the total local revenues in 2008 and hardly reached 33.9% in the first half of 2009. The economic crisis both sharply reduced local governments’ own tax revenues and – via budget constraints at the central level – increased pressure on the grant system. At the same time, since the end of 2008, consolidated public sector arrears have tripled their size, and local arrears have reached 77.5% of the consolidated amount.
This study is intended to critically examine the effects of the actual world wide financial and economic crises to local government finance in Bulgaria and identify the central and local answers to that situation in the context of specific conditions of the national economy and the stage of fiscal decentralization reform. Analysis is focused on dynamics of macro economic indicators, based on fact figures for the period 2006–2009 and forecast for the period 2010-2011, and its influence on the public finance. The most important actions, taken by the national government to consolidate the crisis are described and evaluated in the context of their effects on the local finance. Finally, some conclusions and policy recommendations are outlined, intended to improve crisis management in Bulgaria both on the national and local level.
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