Long-term projections of revenues are based on the following assumptions: Non-tax revenues and indirect tax revenues are assumed to have unitary income elasticities; therefore, their share remains constant in GDP in the long term. The only adjustment comes from small reductions, between 2012 and 2015, of indirect revenues from 17.2 percent to 16.4 percent and from non-tax revenues from 4.8 percent to 3.8 percent, which are in line with the Medium Term Fiscal Framework of the Government of Bulgaria (2012). Direct tax revenues are, on the other hand, projected to exhibit modest improvement over time, increasing from 5.4 percent of GDP in 2012 to 6.5 percent in 2050, representing better tax collection. Box VII-1 provides more information about the underlying structure of the model.
Key Findings Baseline Results In the long run, GDP growth is projected to decline. Under the baseline projections, annual GDP growth reaches 2.6 percent in 2016. It then decreases gradually to about 1 percent in the early 2040’s, and continues to decline to 0.7 percent by the end of the projection horizon. As a result, real GDP is projected to grow from about US$77 billion in 2012 to US$126 billion in 2050. Monte Carlo simulations show that, in the long term, the growth rates are expected to remain within a band of 2.2 percent and 0.2 percent with a 90 percent degree of confidence.82 The growth rate in terms of GDP per capita, on the other hand, reaches a peak of 3.3 percent in 2016, and then gradually slows down to 1.5 percent by the end of the projection horizon. This decline is largely driven by the shrinking work force. From 2021 onwards, employment is projected to depress growth as the labor force declines. In the
medium term, employment is projected to contribute positively to growth. This is driven by the fact that the assumed reduction in the unemployment rate in the medium term has a positive effect on employment, which initially outweighs the labor-force decline. Once the unemployment rate reaches its long-term equilibrium of 5 percent, only the negative effect of a decreasing labor force remains (Figure VII.1, Panel (b)). However, TFP growth and increasing capital intensity raise the productivity of labor throughout the projection horizon. On average, the GDP per worker grows by about 2.4 percent per year. Public health-care expenditures as a share of GDP rise throughout the projection period. They climb from 4.1 percent in 2012 to more than 5.1 percent by 2050 (Figure VII-2, Panel d). This increase arises from a combination of two factors: first, public health-care expenditures per person are higher for the elderly. An increase in the average age of society, thus, increases the share of aggregate income spent on health-care. Second, assuming that Bulgaria’s public health-care expenditures as a share of GDP will eventually catch up with other European countries83, health-care consumption is assigned an income elasticity slightly greater than one (1.15). As a result, even after controlling for the change in the age composition, public health-care expenditures still increase as a share of GDP. Long-term care expenditures, which are classified under the other expenditures category, are projected to increase from 0.45 percent in 2012, to 0.76 in 2050. These projections are in line with European CommisThese simulations characterize shocks to TFP growth that are identically and independently distributed with zero mean and 0.75 percent standard deviations. 83 Bulgaria’s public health expenditures as a share of GDP are very low compared to other European countries even when taking into account income levels. As discussed in Chapter IV, it is reasonable to assume the public health expenditure per capita as a share of GDP will rise. 82
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