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Thanks to its strong fiscal position prior to the crisis, Bulgaria is one of the few EU countries which plan to correct their excessive deficit by 2011, the European Commission said. This will be achieved without substantial increases in the tax burden (except for the increases in social security contributions and excise tax rates to comply with EU requirements) or cuts in wages and pensions.The budget deficit is expected to improve from 4.7 per cent of GDP in 2009 to 3.8 per cent of GDP in 2010.

After the economy`s stagnation in 2010, the recovery is set to accelerate and gradually become broad-based in 2011 and 2012, with real GDP growth reaching 2.6% and 3.8%, respectively, underpinned by both external demand as well as a pickup of domestic demand. According to the European Commission, domestic demand keeps dragging economic recovery in 2010. Bulgaria entered into recession relatively late compared with its neighbours. Economic activity contracted by 4.9 per cent in 2009 and the deterioration continued into the first quarter of 2010, when the recession is expected to have bottomed out. With the growth contribution of domestic demand turning positive again and outpacing by far that of net exports, growth drivers are expected to reverse and return to a more traditional pattern for Bulgaria, the Commission said.

The labour market worsened considerably, as the downturn led to a 2.7 per cent fall in employment in 2009 and an increase in unemployment, mainly affecting labour-intensive sectors, in particular construction. Total employment is projected to have registered a steeper decline in 2010 and to start increasing only in 2011. The subsequent gains in employment over the forecast period are expected to help recover less than one-third of the crisis-induced losses. After decelerating considerably in 2009, real wage growth is set to decline further in 2010-12. As a result of the significant fall in employment against the backdrop of stagnating output, productivity is expected to rebound strongly in 2010. The adjustment in competitiveness should continue over the rest of the forecast period, albeit at a slower pace, whereby real wage growth is projected to be broadly in line with productivity gains.

Under a no-policy-change assumption, the general government budget deficit would be contained at 3.8 per cent in 2010, while in 2011 and 2012 it would decline to slightly below per cent and 2 per cent of GDP, respectively. The 2010 budget execution could turn out better than expected if some recent improvements in revenue collection and expenditure restraint continue until the end of the year, the Commission said.