After weeks of tension, public protests and shifting budget drafts, the immediate budget crisis has been resolved. For the fourth time since the pandemic, the country will begin the year operating under an extended budget framework. Given the initial proposals and the developments that followed, this outcome appears relatively balanced. Taxes will not be raised, spending will not reach record levels, and the temporary framework ensures a degree of legal and institutional continuity for the functioning of the state.

Income policy at the center of the debate

As expected, wage policy became the most sensitive issue surrounding the extension law. The first version of the failed regular budget envisaged significant salary increases for certain administrations through automatic mechanisms, while others were left with limited or no rises. A revised version later proposed suspending these mechanisms and introducing a uniform 10 percent pay increase across the public sector, exceeding both inflation and nominal economic growth.

The key uncertainty was how this issue would be handled in the extension law.

From freeze proposal to partial indexation

The government initially opted for a full salary freeze. The draft text proposed suspending all wage increases in the public sector, including the automatic adjustment mechanisms, until a regular budget is adopted. This approach followed the logic that an extension budget should be strictly temporary and emergency-oriented, without introducing new income policies.

Recent practice, however, points in another direction. The current year also began under an extension law, but without restrictions on salary mechanisms, leading to exceptionally high wage increases of 30 to 40 percent in some sectors.

Ultimately, parliament adopted an alternative proposal introduced by the opposition. It provides for a one-off horizontal indexation of public sector wages at the end of the year, linked to annual inflation. While the exact indicator has yet to be clarified officially, the increase is estimated at around 5 to 5.5 percent. This approach is more restrained than the government’s earlier regular budget drafts, yet it departs from the idea of a complete wage freeze. In practice, it reflects the model proposed earlier by the Institute for Market Economics in its Alternative Budget.

Assessment from a fiscal stability perspective

Setting aside the legal debate over what policies an extension law should contain, the adopted solution can be viewed as reasonable from a public finance standpoint. Automatic wage mechanisms for elected bodies have proven problematic, driving excessive spending and creating inequalities within the public sector. A total freeze would have eased pressure on the budget balance, but it also carried risks, including rising social tension and the likelihood of future political commitments to compensate public sector employees more generously once a regular budget is passed.

Limits of the extension law

It is important to recognize that an extension budget cannot address the deeper structural challenges facing public finances or correct the medium-term fiscal trajectory. Its primary function is to prevent further deterioration. The responsibility for fiscal consolidation and improving spending efficiency will fall to the next government and parliamentary majority, whenever they emerge.

Unresolved legal and institutional questions

The scope of an extension law remains an open issue. Existing budget legislation provides for automatic continuation mechanisms even without a special law, yet does not clearly define the role or limits of such an extension framework. In recent years, special laws have been adopted to fill these gaps and ensure legal certainty.

Whether an extension law should be purely technical or have the authority to shape policy is a question that likely requires deeper legal interpretation, possibly by the Constitutional Court. Without clearer rules, prolonged political instability could encourage populist income policies introduced through temporary budget measures. In this sense, the existing provisions of the Public Finance Act, with their defined limits and safeguards, play an important stabilizing role.

The analysis is based on a commentary by Petar Ganev, senior researcher at the Institute for Market Economics, published in the institute’s weekly bulletin.