The “modestly redistributive effect of flat income tax” and “relatively low levels of social protection spending” mean inequality and poverty in Bulgaria are the highest in the EU, despite economic growth and low unemployment in the country.
Despite strong economic growth and low unemployment, “poverty levels and income inequality remain very high” in Bulgaria, notes a report from the European Commission, which provides an in-depth review of the progress made in structural reforms, aimed at eliminating “excessive” macroeconomic imbalances.
Between 2012 and 2016, the difference in the income of the richest and the poorest 20% of Bulgarians increased from 6.2 to 7.9, making Bulgaria the most unequal country in the EU. The reason for this is “low social protection costs, which are partly due to low tax revenues and the lack of progressive tax systems.” As a result, “social transfers have a very limited impact on the reduction of poverty and inequality,” leading to persistently high levels of poverty and inequality.
Growth in recent years is “an opportunity for structural reforms that could accelerate the catching-up of the rest of the European Union and reduce persistently high levels of poverty and inequality”, but the country is missing this opportunity and the growth is not distributed equally. As of 2016, over 40% of the population was still at risk of poverty or social exclusion, and “the percentage of people experiencing severe material deprivation (31.9%) is four times higher than the average for the EU”. The situation regarding inequality and poverty, and the impact of social transfers aimed at reducing them is defined as “critical”.
Worse, getting out of this situation is very difficult as a result of the so-called inequality in opportunities – education, health and access to quality housing. The report states that it “is among the highest in the EU, so success in life depends to a large extent on the achievements of the parents”.
Exiting the poverty cycle in Bulgaria is particularly hampered by limited access to social systems from an early age. The European Commission notes that “kindergarten fees are a barrier to full participation in early childhood education and care”. The effect of this is carried over to subsequent educational stages, where “the difference in achievement is closely related to the socio-economic status of pupils and schools.” The dropout rate increased in 2012-16, which is also counter to the European trend.
Bulgarians also experience significantly more serious difficulties than other Europeans in obtaining access to healthcare, which is related to the unusually high numbers of uninsured people (12% of the population) and to the extra payments made out of patients’ own pockets, which account for 47% of all healthcare costs, compared to an average of about 15% for the EU.
The reason for this is the limited public resources: “the budget for social policies, education, and health is much smaller as a percentage of GDP compared to the EU average.” The state cannot allocate the necessary funds to these systems as a result of the “low tax-to-GDP ratio” and is limited to “providing public goods and services that are likely to reduce inequalities that promote social mobility and economic development.”
The Commission’s report indicates that in practice the limited redistributive role of the state is a reason for high levels of poverty and social disparities. The inequality in market incomes in Bulgaria is approximately the EU average, which is a Gini coefficient of 50 points (1 is an indicator of full equality and 100 represents the concentration of all wealth in one person).
However, when countries in the community tax market incomes and redirect them through social transfers, they reduce this ratio by 20 points, while Bulgaria reduces it by only 13, which is the most limited interference in the EU. The market creates the same level of income inequality in Bulgaria as in Europe, but our country is distinguished by the lack of social measures to mitigate it. According to the EC report, this is partly due to the relatively low redistributive effect of the flat income tax as well as the relatively low level of social protection spending.
After the other problems in the tax system, the shadow economy “twice as big as the EU average” stands out, although the flat tax was introduced precisely on the grounds that it would limit this share. At the same time, the number of people working without a contract is increasing and every seventh worker declares that he receives money in an envelope that “hinders fair working conditions”.
The report also criticized the management of the state-owned enterprises as “a source of uncertainty and risk to public finances”. Their indicators are considered to be worse compared not only with the private sector but also with similar enterprises in the countries of the region and other similar states. This suggests that the problem comes not from public property, but from the politicians who should be managing it. Therefore, with regard to these enterprises, the EC notes: “The presence and role of the political element are strong. This is often done at the expense of long-term vision and coordination, transparency and high-level management standards”.