Economic Policy Review ISSN 1313 - 0544

GDP in the Second Quarter Of 2007

Author: Dimitar Chobanov / 27.09.2007
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National Statistical Institute officially released preliminary national accounts data for the second quarter and the first half of 2007. Gross domestic product (GDP) keeps growing by more than 6 percent on annual basis which is good news.

Factors determining this positive development are related to expanding of the economic freedom in the country during the last few years. An indicator for this is the last report of Fraser Institute, which poses Bulgaria 9 places higher than the last year ranking. The key aspects of economic liberty are the voluntary exchange, free entry to markets, inviolability of private property, limited government, and sound money. These elements lead, in longer term, to high average income in the country, higher economic growth, more investment, low rate of corruption, higher life expectancy and lower child mortality rates.

Reforms in taxation during the last years are substantial for the economic growth. Lower rates on direct taxes offset higher excise duties, imposed to comply with the European Union legislation. Still, lower rates on corporate income tax (10% from the beginning of 2007), on personal income tax and on social insurance contributions create incentives to people to work more, as they keep larger share of generated income. On the other hand, the tax base is wider because costs for evasion are lower.

The effect of these policies could be found in higher formal employment which is a evident in terms of new jobs created as well as declaring incomes for taxation that are closer to the actual amounts. The result is higher budget revenues over the planned and larger budget surplus though the spending is also higher. Hence, in 2007 tax rates could be lowered to larger extent (particularly taxation of labor) without posing any threat to the fiscal soundness.

Unfortunately, reforms of the other determinants of the economic freedom are slow or do not happen at all lately. Property rights are not well protected; government purposefully or not interferes on specific markets thus protecting the monopoly power of certain companies and ultimately prevents the competition instead of promoting it. The result is not optimal allocation of resources and lower growth rate than the potential.

Data show that GDP increases in real terms by 6.6% for the second quarter and by 6.4% for the first half of the year. Gross value added grows by 8.7% and 8.2% respectively which is the highest rate since 1998. The contribution of industrial sector (real growth rate for the half-year of 9.1%) and of services (8.8%), while agricultural sector is in slump again (production falls by 2.3%). This development is a consequence of investment and capital accumulation in these sectors, while in agriculture this process is too slow. Moreover, even the expected EU subsidies do not lead to positive results. Still, current state could be explained by unfavorable climate conditions in 2007 though the main problem is insufficient investment leading to low efficiency, bad crops and limited opportunities for making profits.

Final consumption slightly decreases as a share of GDP growing by 6% in real terms for the first half of the year. The contribution of investment to the GDP growth is the largest, as they rise by 29.6%. Their growth rate in real terms is slowing down in the second quarter (24.7%) relative to the first one (35.9%). This process will probably continue which will lead to deceleration of GDP growth.

National account data are not surprising as a whole. The slight acceleration of the real GDP growth could be characterizes as good news but it is probably a temporary. It is important to specify whether it is a sustainable process and are there policies that could boost the long-term potential of the economy. Reforms of the public sector would have such effect and particularly the education, healthcare, internal and external security and for public administration spending. Apart from this measures directed to liberalization of specific industries, decrease in regulatory burden and barriers to entry and exit of businesses would have a positive impact on the economy. In fact, this is and maybe the straight way to faster economic growth and higher incomes for Bulgarians.