The risks in front of Bulgaria’s 2023 budget

With or without a regular cabinet, this parliament will probably have to vote on the 2023 state budget but it is hard to expect that it will have the will to cut spending. So the raging fiscal populism is unlikely to end anytime soon and will cost more and more.

No more cheap debt

The short-term risks are related to rising interest rates and the price at which the state is financed at the moment, which is what Borisov was trying to say.

Recently placed domestic government bonds have attracted little interest combined with rapidly rising yields and risk assessments. The projected budget deficit for 2022 is 6.2 billion levs (3.1 billion euro). The external and domestic debt maturing during the year is over 2.5 billion levs, so the finance ministry needs nearly 8.5 billion levs. However, almost 6.65 billion levs have been raised since the beginning of the year, so it seems that more debt issuance will be needed.

In a slightly longer-term plan, the forecasts are for a budget deficit in several years to come.

As Lachezar Bogdanov, Chief Economist at the Institute of Market Economics, says - any new debt will come with annual interest costs that have to be provided for by any future finance minister before allocating funds for pensions, salaries, or hospitals.

And interest rates will rise further. In an attempt to control the galloping inflation, the U.S. Federal Reserve System and the European Central Bank continue to raise their policy rates, and the expectations are for this to continue at least until the spring of 2023.

"This means that the future administration should not live with the illusion that it can spend without limits," says Bogdanov.

And there is no budget without a deficit

At the same time, caretaker finance minister Rositsa Velkova has already announced that if the state doesn't take measures to reduce costs, the potential budget deficit will amount to 11.3 billion levs next year. Conservative estimates show that this winter the Eurozone will go into recession, and this will affect both the Bulgarian economy and the state's revenues.

In addition, the implementation of the National Recovery and Resilience Plan, for which Bulgaria expects to receive nearly 2 billion euro for next year from the EU, has been delayed.

Against this background, regardless of whether a government is formed or whether a draft budget prepared by the caretaker cabinet is voted on, if populism in parliament prevails and expenses rise, the probability of a budget deficit above the permissible level increases.

If the parties in parliament fail to reach an agreement to form a government, it is highly likely to see a repetition of what happened during the vote on the budget updates in 2022 and 2021 - massive pre-election populism and allocation of spending to everyone. The result, however, will be a gradual spiral of pension and wage growth, followed by chronic deficits and increasingly expensive debt to finance them. And with such a policy, even if we somehow miraculously manage to fit into the budget deficit criterion for adoption of the euro, hardly anyone will want Bulgaria in the Eurozone.