According to the medium-term fiscal framework set by the government, Bulgaria will accumulate budget deficits worth over 15 billion levs combined by the end of 2023. Moreover, a 2.5 billion levs bond issue will mature in 2022.
Faced with the pressure from the Covid-19 pandemic on the economy, the government re-introduced the requirement to set aside 5% of the ministries' budgets for response to unpredictable circumstances. However, the 5 billion levs of foreign debt that Bulgaria acquired in 2020 will hardly be enough to finance the upcoming government expenditures.
According to the medium-term forecast of the finance ministry, public debt is set to increase from 24.2 billion levs (12.4 billion euro in late 2019, which was the third-lowest level in the EU at the time, to 40.5 billion levs by 2023, or 29.4% of the projected GDP. Also, the government plans to finance by debt between 4.5 and 6.8 billion levs of expenditures per year. The debt ceiling for 2021 is set at 4.5 billion levs, or 3.6% of GDP.
Taking on new debt is not necessarily a bad strategy for the economic development of a country, provided that the funds increase the competitiveness and potential of the Bulgarian economy in the long run through structural reforms in key sectors. Also, Bulgaria will hardly be the only one in the EU with growing debts, and it is in a better starting position given that in 2019 it was among the three countries with the lowest debt in the union, along with Estonia and Luxembourg.
However, according to economist Prof. Dr.Daniela Bobeva, there is a reason for Bulgaria to be among the top three. "The eurozone, France, Germany may have a debt of 80-90% of GDP, but that does not mean that Bulgaria can afford such levels. We are a small and open economy operating in a currency board system, with a GDP per capita that is 49% below the EU average," argued Bobeva. "Debt levels reflect a country's ability to repay it," she added.
According to financial analyst Lyubomir Datsov, debt is a burden on the budget that curbs the budget's room for manoeuvring if it isn't raised with the intention to increase economic growth potential. The problem, according to Datsov, is that the government's vision for Bulgaria's fiscal stability and general economic state largely ends in 2021, without a clear plan on how to quickly restore balance in the budget. This means that, at some point, it may be necessary to quickly increase the revenue side of the budget, and in particular the main tax rates on income and corporate profits, which are the subject of debate in parliament every year. "I do not think we will see an increase in taxes in 2021. But when the budget trajectory changes and the deficit rises, the burden always shifts to debt and to talk of changing tax rules," said economist Peter Ganev of Sofia-based Institute for Market Economics.