- Following the COVID crisis, the country's finances have lost direction and are spiraling downwards, economists warn.
- Next year's budget will be burdened with numerous new expenditures approved by previous parliaments.
- While a specific proposal is yet to emerge, discussions about increasing the tax burden are becoming more frequent.
October is typically the month when debates about the state budget for the following year begin-at least, that's what the law mandates. By now, the Ministry of Finance should have presented its draft budget. However, this year, much like the past few, no proposal has been introduced yet, as the budget remains hostage to the political deadlock in the country. This time, however, things appear slightly different: indications suggest that, rather than approving additional populism-driven spending, MPs will have to grapple with unpopular measures to tighten public finances. Without a majority willing to assume political responsibility, the risk remains that parliament will again indulge in reckless populist bidding, exacerbating the situation. Meanwhile, protests have already begun, demanding higher wages in certain administrative sectors.
Data on this year's budget execution reveal that public finances are already under pressure. As of October, the deficit stands at 4 billion levs (2 billion euro), equivalent to 2% of the projected GDP, even before billions earmarked for investments have been disbursed. The budget gap is expected to widen next year when pension expenditures will increase and a host of promised wage hikes in the public sector will take effect from January 1. So far, the Finance Ministry has relied on high inflation to boost budget revenues, but forecasts for next year predict consumer price growth of nearly 2%.
As a result, there is a growing consensus that Budget 2025 can achieve a deficit of no more than 3% of GDP, which is one of the Maastricht criteria Bulgaria needs to meet to join the Eurozone, only if some spending is cut and/or taxes are raised.
Since the COVID crisis, financial support measures have been approved haphazardly. Many of them transitioned from temporary to permanent. Additionally, automatic spending increases based on formulas have been embedded into various expenditure categories. Perhaps even more troubling is the broader fiscal policy environment: the country's financial strategy has lost direction, with deficits now viewed as the norm, ad hoc measures adopted without clear objectives, and public finances undermined by corporate interests. This sentiment was echoed by economists and financial experts during a discussion on would-be Budget 2025 organized this week by the Institute for Market Economics (IME).
Without a pilot
The caretaker government is currently stalling, awaiting the formation of a new parliament to start working and, ideally, a majority willing to take political responsibility for the country's finances. Before the October 27 snap election, caretaker Finance Minister Lyudmila Petkova issued a stark warning about a potential sharp rise in expenditures of 18 billion levs (9.2 billion euro) for next year, against expected revenues of just 6.2 billion levs, potentially leading to a deficit of at least double the 3% threshold. After the vote, the rhetoric softened, with Petkova indicating that a draft budget with a deficit within the allowed limit would be submitted once parliament convenes. She also outlined various measures to achieve this goal.The Ministry of Finance has yet to announce specific figures or proposals publicly. Whether it will do so will likely depend on political developments. If an elected government is formed, it would take responsibility for the budget. However, if the country heads towards eighth election in four years, no budget draft may be presented at all, and an extension law could be passed to maintain the current budget framework until spring.
Some of the measures the Ministry of Finance has reportedly considered were mentioned by GERB leader Boyko Borissov. These include a windfall tax on bank profits, higher excise duties and social security contributions, increased taxes on gambling, and restoring the standard VAT rate of 20% for restaurants and bread. On the spending side, already planned salary hikes for public sector employees, such as teachers, military personnel, and police officers, may be deferred to 2026. Whether any of these ideas materialize will depend on parliament. Borissov's initial reaction, however, was clear: his party "will not vote for such a budget."
The prescription
Detailed calculations for next year's state finances are not yet available, making it difficult to draw definitive conclusions. Still, some experts argue that tightening the 2025 budget could be achieved by limiting certain expenditures and improving revenue collection. Cooling the growth of public sector wages is one of the essential measures, according to economists at the (IME). Wage increases of 10-15% may have been justifiable during the latest period of double-digit inflation, but planning similar hikes now would necessitate cutting other expenditures or raising taxes."This doesn't mean salaries should be reduced but rather that their growth should be capped at more reasonable rates," Lachezar Bogdanov, chief economist at IME, told Capital Weekly.
He also highlights that while the working-age population has shrunk by over 300,000 people in the last five years, public sector employment has risen by more than 15,000, including an increase of over 1,000 in public administration jobs. This, he argues, defies economic logic, necessitating deregulation, digitalization, and process optimization in the state sector. However, such reforms require political will-something seemingly absent-and they are unlikely to be implemented within a short timeframe.
Potential sources of additional revenue
Where could additional revenues come from next year? Measures to improve collection rates could focus on the toll system, property taxation, and gambling, according to IME. For example, real estate transactions are often recorded at prices far below their actual market value, and transport companies pay significantly less for tolls in Bulgaria than in neighboring countries. Notably, the previous elected government proposed raising property tax valuations, but the initiative was rejected in parliament.
Some experts, however, believe the situation is so dire that tax hikes are almost inevitable.
"It's an illusion to think budget stabilization can be achieved without raising taxes," argues Lyubomir Datsov, a former Deputy Finance Minister and a member of the Fiscal Council. He notes that the only reason for this year's budget deficit remaining below 3% is the under-execution of the capital expenditure program. Without tax increases, the only way to keep next year's deficit under 3% would be to maintain capital expenditures at their current level of about 7 billion levs, he says.
- Following the COVID crisis, the country's finances have lost direction and are spiraling downwards, economists warn.
- Next year's budget will be burdened with numerous new expenditures approved by previous parliaments.
- While a specific proposal is yet to emerge, discussions about increasing the tax burden are becoming more frequent.
October is typically the month when debates about the state budget for the following year begin-at least, that's what the law mandates. By now, the Ministry of Finance should have presented its draft budget. However, this year, much like the past few, no proposal has been introduced yet, as the budget remains hostage to the political deadlock in the country. This time, however, things appear slightly different: indications suggest that, rather than approving additional populism-driven spending, MPs will have to grapple with unpopular measures to tighten public finances. Without a majority willing to assume political responsibility, the risk remains that parliament will again indulge in reckless populist bidding, exacerbating the situation. Meanwhile, protests have already begun, demanding higher wages in certain administrative sectors.
