Bulgaria ended 2007 as still one of the cheapest (in terms of cost of living) but poorest (in terms of purchasing power) countries in the European Union. The year started with fears that the first months of the country’s EU membership would bring financial difficulties to household budgets and bankruptcy to small and medium-sized enterprises. The wider EU market and the weak Bulgarian economy were seen as incompatible by both producers and analysts.

Thankfully, nothing like this happened. At least not to such scale and not to everyone.

When talking about an economy, analysts usually look at inflation figures. Official data from the National Statistical Institute (NSI) said that inflation in 2007 reached a rate of 11.3 per cent, which meant an eight per cent increase compared with 2006. The increase in consumer prices was 12.6 per cent.

The result not only surpassed Government expectations for full-year inflation of 4.4 per cent, but also placed Bulgaria top of the inflation chart in the EU.

This gave more than enough reason for criticism aimed at the Government’s income policy, mainly because salaries in Bulgaria remained the lowest ones in the EU, even compared with neighbouring Romania. After all it was the Romanians who started coming to Bulgaria and spending their money, not the other way around.

Salaries indeed started to rise but still not at the desired pace. For example, the average salary in Sofia surpassed the 500 leva threshold for the first time in 17 years, according to NSI data. However, in all other Bulgarian regions, apart from the town of Vratsa, the town of Stara Zagora and the greater Sofia area, average incomes reached no more than 400 leva.

While per capita income in July was 254.51 leva, spending was 322.35 leva, the NSI said. During the same month in 2006, for example, the average income was 203.64 leva per capita while spending was 244.66 leva.

This official data revealed some of the uniquenesses of the Bulgarian economy. On the one hand there was data about income levels that showed little potential for an active economic life in any household, and, on the other hand, there was Bulgarian National Bank’s data about housing loans. For example, in April, housing loans taken out by households reached an all-time record of 10.18 billion leva, accounting for 43 per cent of all loans in general. The amount of money that companies took out in loans in April, for comparison, was 15.94 billion leva – just five billion leva more than households loans. These numbers alone showed that one of the biggest challenges Bulgaria failed to overcome in 2007 was the size of the grey sector in its economy. People still preferred to spend money in searching for ways to hide income from the state instead of declaring it.

The reason for that was simple: high income taxes for employees and and high social securities paid by employers. Because of this shared burden, both sides played against the National Revenue Agency (NRA) when it came to declaring real income. Banks quickly realised this and started offering loans without asking for the “declared” amount of income. They simply wanted a written declaration by the employer with the “real” size of the employee’s salary.

In a search for ways to cut down the grey sector, the socialist-dominated Government took two radical steps. It cut corporate income tax from 15 to 10 per cent but declined to cut social securities. The other radical step was the introduction of a 10 per cent flat tax rate. Indeed it was to be introduced from January 1 2008, but the discussions surrounding it led to changes in the income policy of both business and the Government.

The latter continued to be the largest employer in 2007 and have the biggest concerns. Because those employed in the public sector did not have the “privilege” of those working in the private sector for finding legal ways to circumvent the NRA, the money left in their pockets after taxes combined with the extremely low salaries in the first place led to three of the biggest strikes in Bulgaria’s history.

First were the drivers of Sofia Public Transport. They chose their moment well – just a week before the May 20 elections for Bulgarian members of the European Parliament. Facing a transport collapse, the Government and the municipality met their demand for salaries of 800 leva. Inspired by the drivers’ success, the medics in Bulgaria’s largest emergency hospital – Sofia’s Pirogov – went on several weeks of strike, blocking the road in front of the hospital. Unlike the drivers, however, the medics had to be satisfied with promises for reforms despite the public support they received.

Last, for the moment, were the teachers. Facing the Government’s lack of desire to hear their demands in September, teachers all around Bulgaria went on almost two months of strike.

On November 7, it all ended for the teachers after months of co-ordination among themselves and controversial signals coming from their trade union leader Yanka Takeva, who at the end, was blamed by her own people for the failure of the strike. All that teachers got, in contrast to their original request for a 100 per cent salary increase, was an 18 per cent increase for everyone employed in the education sector from November 1. An additional increase of salaries in January 2008 and July 2008 was also promised.

Pensioners protesting for pension increases became a regular sight in Sofia in 2007. Responding to the public’s support for pensioners’ demands, the Government increased pensions by 10 per cent as of October 1. The minimal pension became nearly 103 leva while the social pension reached 76 leva. Despite the increase, pensioners’ situations saw little change, as seen in the Ministry of Labour and Social Policy’s statistics. According to the ministry, the risk of poverty among people over 65 years old was 18 per cent, while for those over 75 it was 27.4 per cent.

With all that said, 2007 could be remembered as the year of strikes and record-high inflation. If one believes what the Government and analysts are saying, things did not look that bad for the active, working segment of Bulgarians. Both agreed that Bulgaria was now part of the global world economy and, as such, the country’s open economy could not be left unaffected by world trends such as the surge in prices of basic commodities, including crude oil, gas and chemicals.