Bulgaria’s 2025 Budget Faces Challenges with a Significant Expenditure Overrun

Caretaker Finance Minister Lyudmila Petkova

Bulgaria’s 2025 Budget Faces Challenges with a Significant Expenditure Overrun

Budget revenues are growing at a much slower pace than expenditures, while EU funds remain elusive for now

Caretaker Finance Minister Lyudmila Petkova

© Юлия Лазарова


Bulgaria's 2025 budget is shaping up to be, at the very least, tense. It may require unpopular measures to increase revenues and cut certain expenditures. However, the country is on the verge of yet another parliamentary election on October 27, the seventh in less than four years. It is currently governed by a caretaker cabinet, which is expected to take action on the numbers after the vote. Following the elections, the government will initiate a debate with the parties that will enter parliament on what measures and reforms should be included in next year's draft budget. These measures must ensure the country maintains its financial stability and does not miss its chance to join the Eurozone, as it is expected to meet the price stability criterion by December.

This was made clear by caretaker Finance Minister Lyudmila Petkova in a press briefing held on the 4th of October. While she did not specify concrete parameters, she urged the public not to speculate about the numbers. However, based on the figures she disclosed, it can be inferred that there is a significant risk that next year's budget deficit will exceed the Maastricht criterion of 3% of GDP. The deadline for the government to submit the 2025 draft budget to Parliament is October 31.

Billions still needed

Petkova announced that she expects to enter into a dialogue with the political parties in parliament, after which she will be able to present the parameters of the 2025 budget draft. Meanwhile, the Ministry of Finance has analyzed revenues and expenditures from 2022 onward, showing that tax and social contribution revenues have grown by 5-6 billion levs (2-3 billion euro) annually, despite the reduced or zero rates on some taxes.

When it comes to EU funds, including those from the Recovery and Resilience Plan (RRP), the trend is more uncertain. So far, Bulgaria has received only one payment of 2.6 billion levs (1.3 billion euro) under the plan, in 2022. Since then, the country has been unable to fulfill its commitments to receive a second payment amounting to 1.277 billion levs. Whether this payment will be disbursed depends on parliament. During its last session before the recess for the upcoming elections, the National Assembly began discussing the updated roadmap for climate neutrality and revisions to the Recovery and Resilience Plan. However, the session did not result in a vote, due to obstruction from the parties Vazrazhdane and There Is Such a People (TISP).

Now, Petkova has called on parliament to give the caretaker government a mandate to finalize negotiations with Brussels, warning that otherwise, the country could lose billions of euro.

On the other side of the budget equation, expenditures have been increasing at a significantly faster rate than the state's revenues over the past three years. The most burdensome costs are for personnel, pensions, social and healthcare payments, and operational expenses. Petkova cited an example that personnel expenditures amounted to 14.6 billion levs in 2022, while this year, they have already risen to 18 billion levs. During the same period, social and healthcare expenditures grew from 25.7 billion levs to 34.9 billion levs. The International Monetary Fund (IMF) warned in the summer that the extraordinary pension increases approved in the years following the COVID-19 pandemic are contributing to the swelling deficit in the pension system, and measures are needed to reduce it.

This year also marks the implementation of a 7-billion levs investment program for municipalities, with most of the payments expected to take place in 2025 and 2026.

The trend of expenditures increasing significantly faster than revenues in the budget is expected to intensify in 2025. With the caveat that these are not official figures from the draft budget, Petkova announced that she anticipates revenues next year to be 6.2 billion levs higher (a 7.7% increase) compared to this year. Tax and social contribution revenues are expected to increase by 6.7 billion levs, but grants and donations, which include both EU funds and those from the Recovery and Resilience Plan, are forecasted to see a nominal decline of 0.5 billion levs, with uncertainty remaining over the second and subsequent payments under the RRP.

At the same time, expenditures are forecasted to increase by 18.1 billion levs, or 18.2% more than this year. Of these, 5 billion levs are for healthcare, social payments, and pensions, 4.4 billion levs for personnel expenditures, and 2.5 billion levs for operational expenses.

"The presented information does not represent the parameters of the 2025 budget, nor does it include final estimates and no speculative conclusions should be drawn from it, including false assumptions regarding the sustainability of public finances," Petkova stated. She added that the goal is to consider and outline both revenue and expenditure measures to "maintain fiscal sustainability and adhere to fiscal rules and limitations."

In plain terms, this means that even if Bulgaria manages to secure some funding from Brussels next year, measures may still be needed to bridge the gap between expected revenues and expenditures. A rough speculative calculation based on the figures provided (including the potential 6.2 billion levs deficit this year), suggests that without corrective measures, next year's deficit could exceed 17 billion levs. This would be well above 3% of GDP (which is unlikely to exceed 220 billion levs). If the situation is as dire as it seems, standard measures would include freezing public sector wages, cutting expenditures, and potentially raising taxes and social contributions.

It all depends on parliament

The caretaker government will not unveil a draft budget for next year before the elections on October 27. However, it anticipates a debate with the political forces in parliament, employers' organizations, and trade unions. The goal is to reach a consensus on the necessary reforms and measures to be included in the draft budget for next year in order to maintain the country's fiscal stability. Petkova reiterated that next year's budget deficit would be capped at 3% of GDP, although it remains unclear from her statements exactly how this goal will be achieved.

This year, Bulgaria must present a National Medium-Term Fiscal-Structural Plan for the period 2025-2028 to Brussels for approval. This document outlines a member state's fiscal policy, structural reforms, and investments for the period. "Given the mandate of the caretaker government, we believe this government shoud not develop the plan, because a caretaker government should not determine the country's economic development policies for the next four years," Petkova stated. She added that there are two possible solutions-either the plan is developed by an elected government based on its governance program, or the priority areas and policies for the country's development are pre-discussed by the caretaker cabinet with the parties and coalitions represented in the National Assembly, and upon reaching an agreement, included in the plan.

However, an elected government seems unlikely to emerge soon. The level of political maturity and responsibility displayed by members of the outgoing parliament during their last session before the elections was not exemplary either. So, to be continued

Bulgaria's 2025 budget is shaping up to be, at the very least, tense. It may require unpopular measures to increase revenues and cut certain expenditures. However, the country is on the verge of yet another parliamentary election on October 27, the seventh in less than four years. It is currently governed by a caretaker cabinet, which is expected to take action on the numbers after the vote. Following the elections, the government will initiate a debate with the parties that will enter parliament on what measures and reforms should be included in next year's draft budget. These measures must ensure the country maintains its financial stability and does not miss its chance to join the Eurozone, as it is expected to meet the price stability criterion by December.

This was made clear by caretaker Finance Minister Lyudmila Petkova in a press briefing held on the 4th of October. While she did not specify concrete parameters, she urged the public not to speculate about the numbers. However, based on the figures she disclosed, it can be inferred that there is a significant risk that next year's budget deficit will exceed the Maastricht criterion of 3% of GDP. The deadline for the government to submit the 2025 draft budget to Parliament is October 31.

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