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Photo: Stella Ivanova
On December 11, the Council of Ministers of Bulgaria approved the draft state budget for 2025. The budget plans revenues, grants, and donations to reach nearly 92.5 billion leva, with expenditures, including contributions to the European Union budget, totaling 98.9 billion leva. This results in a projected deficit of 6.4 billion leva. Over the coming articles, I will analyze the budget’s key parameters and offer my assessment.
The model of managing the state budget has evolved over recent years, particularly since the COVID-19 crisis. The current approach starts with determining the level of expected expenditure, followed by finding ways to cover the necessary funding without altering the basic tax rates. However, rising costs are not aligned with the capabilities of the Bulgarian economy, leading to the use of one-time measures and resource drains from state-owned enterprises, including those in the energy sector, the Bulgarian National Bank, and mining industries. Inadequate funds often force the government to reduce capital expenditures, which, in turn, limits the potential for economic growth and results in a growing deficit, currently around 3% of GDP, with increasing state debt.
Recent fiscal measures include raising the maximum threshold for social security income and increasing the corporate tax rate for enterprises with a turnover exceeding 1.5 billion leva, from 10% to 15%. While the first measure aims to improve benefits for those at the maximum income level, it overlooks the fact that many of these individuals are unlikely to need unemployment benefits. Additionally, the maximum pension greatly exceeds what would be provided by the standard formula in the Social Security Code, calling the fairness of this adjustment into question.
A prudent fiscal policy requires understanding the economic capabilities of the country, estimating the revenues under existing legislation, and prioritizing how the funds will be spent. The correct approach should involve maintaining budget discipline, which includes reducing barriers to economic growth. This means enforcing strict control over expenditures and adhering to the principles outlined in the Public Finance Act—such as efficiency, transparency, accountability, and sustainability.
Capital budgeting plays a key role in assessing whether investments generate net benefits for society. Before turning to debt financing, efforts should focus on identifying potential savings in current expenditures, ensuring that the same results can be achieved with fewer resources. The use of debt should be a last resort to avoid further exacerbating the fiscal imbalance.
The necessity of budgetary discipline stems from the fact that deficits and increasing debt will eventually result in higher tax rates. This is particularly true when government salary increases are consistently granted, committing the government to permanent hikes in public spending. The longer this issue is delayed, the sharper the rise in tax rates will be.
Given the ongoing deficits and the growing public debt, the Bulgarian population should brace for an eventual increase in tax burdens. Citizens, particularly those who are net contributors to the budget—those not relying on government support or public sector contracts—will bear the brunt of this burden. While these individuals already face a high tax load, this is expected to increase, and they need to prepare accordingly.
Unlike the 2024 draft budget, which overestimated GDP growth based on inaccurate base-year figures, the forecast for 2025 appears more grounded. Provided no significant disruptions occur on either a national or international level, real economic growth is projected to accelerate slightly to 2.8%, with GDP reaching 215.2 billion leva, growing nominally by 6.8%. Inflation is expected to moderate to 2.4%, while the unemployment rate should dip to 4.1%. Additionally, the average monthly salary is set to rise by 9.1%. These projections hinge on favorable global and EU economic conditions, a modest appreciation of the euro against the US dollar, a drop in oil prices, and lower market interest rates.
However, several risks could derail this optimistic outlook. Notably, challenges faced by key Bulgarian economic partners, such as Germany’s struggles with the "green" transition and ongoing political instability, as well as difficulties in France, could jeopardize the overall stability of the euro area. The economic challenges in these countries, coupled with Bulgaria’s minimum wage increases, have negatively impacted companies working with German partners, leading to plant closures and layoffs.
The forecast for 2025 suggests that economic growth will be driven by consumption and investment, with public sector wage increases and a rise in the minimum wage boosting consumption. However, there are concerns that the investment forecast may not materialize, as seen in 2024, due to unreceived tranches under the Recovery and Resilience Plan. Furthermore, the forecast for foreign direct investment seems overly optimistic, especially given this year’s decline. Schengen membership could provide a positive push, influencing both imports and exports as well as tourism.
The draft budget indicates that expenditures, excluding EU contributions, will rise by 19.7 billion leva compared to the 2024 forecast, while GDP will grow by only 13.8 billion leva. This suggests that much of the increase in expenditure will go toward imports and intermediate consumption, rather than contributing to domestic economic growth. Looking ahead, real growth is expected to slow to 2% by 2027 and 2028, reinforcing the view that exceeding a certain threshold for government expenditure as a percentage of GDP hinders rather than stimulates growth. This phenomenon, known as the crowding-out effect, could reduce private investment efficiency, further increasing the need for tax hikes.
The draft budget must adhere to constitutional and legal standards, as the Council of Ministers is tasked with its preparation, adoption, and implementation. It is required to comply with the Public Finance Act, which defines fiscal rules. Unfortunately, the proposed budget violates several of these rules. One notable breach concerns the medium-term budgetary objective, which stipulates that the structural deficit should not exceed 1% of GDP. The draft budget proposes a structural deficit of 5.5% of GDP in 2025, deviating significantly from the target. Additionally, the projected deficits over the next four years do not align with the requirements for balanced budgets, whether on a cash or accrual basis.
Another area of concern is the growth of expenditures. According to fiscal rules, their real growth should not surpass that of potential GDP, and expenditures should not exceed 40% of GDP. In 2025, however, nominal expenditure growth will be 25.5%, with real growth exceeding 20%, and total expenditures are projected to account for 46% of GDP. This is set to gradually decrease to 42% by the end of the forecast period. By adopting the current draft, the Council of Ministers is failing to comply with the provisions of the Public Finance Act.
Author: Dimitar Chobanov, financier
Sources:
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