In 2024, Romania broke the 50% government debt limit, becoming the EU country with the largest increase in the debt-to-GDP ratio since the start of the pandemic. High budget deficits – levels of 6-9% of GDP – have pushed Romania’s debt from 35% in 2019 to 52% in 2024, with a forecast of close to 60% in 2026. In just a few years, Romania will likely have a higher debt than Germany.
Against this backdrop, Bulgaria stands relatively well – holding a deficit around the 3% mark – but faces the danger of entering a period of seriously rising debt levels. Is it possible that within a decade Bulgaria’s public debt will follow the example of our northern neighbor and reach 50% of GDP?
A few days ago, Bulgaria adopted its National Medium-Term Fiscal and Structural Plan 2025-2028, which is at the heart of the reformed EU economic governance framework and provides not only the direction of public finances until 2028 but also an assessment of debt developments until 2038 under different scenarios. According to this plan, in the baseline scenario (no change in the structural primary balance) debt will reach 55.4% of GDP in 2038. Under the fiscal adjustment scenario (i.e. adjustment in the structural primary balance), debt would be 45.3% of GDP in 2038. In both scenarios, Bulgaria remains below the 60% of GDP public debt threshold but makes a very clear case for public debt to increase and practically double from the current level (24-25% of GDP) in the next 10-12 years.
This framework shows that the debate on the state budget is extremely important. The assessment of the fiscal-structural plan is entirely focused on limiting the growth of so-called net primary spending. Here, too, a big red light is on. The rule of thumb is that net expenditure growth should follow potential GDP growth and the GDP deflator – in other words, expenditure growth should be linked to the nominal growth of the economy.
This is clearly not the case with the draft budget for 2025. Current expenditure in the proposed budget – that is, money for wages, maintenance, subsidies, and pensions – is growing by 16.4% against a background of nominal economic growth of less than 7%. The magnitude of the difference is 3% of GDP, i.e. the share of current spending in the country’s economy rises by that many percentage points.
The bloating of the state’s current spending, led by the excessive increase in the salaries of police and military personnel, is the biggest problem in the budget and should be reviewed between the first and second readings in Parliament. Otherwise, we risk a departure from the fiscal-structural plan and a subsequent push to increase the tax burden – even beyond the already foreseen increase in the social security burden in 2027 and 2028. Note that the forecast for the growth of net primary spending is an average of 4.9% per year for the period 2025-2028. We are on track to consume much of this growth already in 2025.
On paper, an attempt has been made to remedy this discrepancy, with the medium-term framework assuming a near freeze in pay spending over the 2026-2028 period (growth of around 1.5% per year), which is almost impossible in practice, given the automatic pay rules in the force departments, but more generally the inevitable annual political pressures on government.
However, this is not all. The other big problem facing the budget is the injection of BGN 7.2 billion (in capital) into state companies and the correspondingly extraordinarily high growth of the state debt. The planned new debt of BGN 18.9 billion goes far beyond the funds needed to finance the deficit and the expected debt payments for the year. The difference is the BGN 7.2 billion in question, with which the state will try to manually, through state-owned companies, make various investments without this going through the budget and weighing (in accounting terms) on the deficit. The biggest beneficiary is the Bulgarian Development Bank, which will receive a capital injection of BGN 4 billion.
It cannot fail to make an impression that two draft budgets already provide huge funds for the BDB. First, the caretaker government’s draft envisaged the BDBs participation in a tax amnesty scheme, and now the regular cabinet is proposing even greater support for the bank, pursuing ‘strengthening the BDB’s financial capacity in financing national priorities and sectors of the economy‘. This general formulation in effect says that the Bank will be used as a shadow budget (below the line) to implement various policies. Against the backdrop of the BDB’s tragic public image, and the fact that a former executive director has a European arrest warrant, such budgetary equivocation is absolutely unacceptable.
The envisaged capital injections of BGN 7.2 billion will weigh exceptionally against the fiscal-structural plan. No such exceptional schemes are foreseen there. This is why there is a big difference in the government debt forecast. According to the fiscal-structural plan, the debt should be 30-33% in 2028 (depending on whether there is a deficit adjustment), while according to the medium-term framework of the draft budget, the debt will reach 36% in 2028. And here, as with the expenditure growth rule, we have a deviation from the plan already in the first year.
The overall review of the fiscal and structural plan for the period 2025-2028 makes it clear that far bolder budget measures are needed to get us back on track:
- Current spending needs to return (sustainably) to its usual levels (33-34% of GDP), which means revising the rules on excessive wage increases in certain areas;
- The revenue side can be supported by discretionary measures without penalizing all working people – by adjusting, for example, the toll system and gambling taxation, instead of raising social security contributions;
- Attempts at extraordinary increases in debt and financing of state-owned companies should also be curtailed, as an attempt is being made to create a shadow budget, which carries a huge corruption risk.
If all of this is ignored, Bulgaria is entering a path that leads us both to a higher tax and insurance burden for entrepreneurs, investors, and workers, and a serious increase in public debt in the years to come.
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