The new government in Bulgaria is proposing a budget with a deficit of 5.7% of GDP, or EUR 7.2 billion. And this is happening in the country with the lowest unemployment in the European Union — the lowest since records began; in the country that has achieved the fastest catch-up with average European incomes since the pandemic and the fastest wage growth in the EU; in the country with the highest growth in consumption in the EU and with new records in household lending and the real estate market.
For an economy in such a period of growth to blow its budget is a financial, political, and social catastrophe. Especially in the most favorable possible macroeconomic environment that any finance minister could dream of. This is a failure that will be studied in economic history textbooks. And in them, there will hardly be room for the attempts to shift blame between the parties that we have witnessed these days and in recent months.
And yes, budget revenues are growing along with the economy, at an impressive pace. Under the budget plan, revenues are expected to be nearly 13% higher than in 2025. Looking at the data from the beginning of the year, all major taxes are being collected with an enviable (at least) double-digit growth rate — VAT, for example, by 19%. But even that is not enough…
Because it is now beyond doubt that the excessive deficit is the result of the enormous growth in public spending. Even after the announced intentions and savings measures, expenditures in 2026 are expected to be 19.6% higher than last year. To repeat — almost 20% annual growth in spending, or a full EUR 9.3 billion more. Anticipating the response — yes, of that increase, EUR 3.7 billion is due to the “large absorption” of EU funds, but the remaining EUR 5.6 billion increase is entirely a national, Bulgarian political decision to spend.
The deficit must be financed, and that means an ever-growing amount of debt. This year alone, the budget law envisages new debt of over EUR 10 billion. Even if the promise to reduce the deficit to below 3% of GDP over the next two years is kept (why this will be put to a political test — [see here](https://ime.bg/articles/s-rekorden-defitsit-doverieto-v-byudzhetniya-razum-se-vryshta-trudno/)), government debt is rising at an astronomical pace — to over EUR 40 billion by the end of 2026, over EUR 45 billion by the end of 2027, and over EUR 51 billion by the end of 2028, or 35.7% of GDP. Debt is not an abstraction in some statistical table — first, it must be repaid, and second, it requires interest payments every year. And while in 2022 budget interest expenses were below EUR 350 million, by 2028 they are expected to approach EUR 1.8 billion.
A persistently large budget deficit, caused by an enormous increase in spending, leads to high inflation. The state is pouring additional fuel into an already overheating economy, and combined with the continuing credit expansion by banks, it is pushing up domestic prices and significantly increasing imports. If you are wondering why Bulgaria has the highest inflation in the eurozone, we can attribute half the blame to fiscal policy.
The promise to reduce the deficit to 3% by 2028 is both unambitious and fragile. In a rapidly growing economy with high employment and consumption, public finances should be running a surplus, not a deficit — regardless of size; this has been the case in similar periods of growth in the two decades before the pandemic. But even the 3-percent ceiling may prove not so easy to reach, and not only because of the expected strong pressure from all kinds of lobbies and professional groups for more spending, but because it assumes that the macroeconomic picture will remain just as favorable. And that means that any external shock, any deterioration in the economic environment, will reduce expected revenues, and from there — inflate the deficit again.
The article was originally published in Bulgarian at: https://ime.bg/articles/katastrofa-na-politicheskiya-oportyunizym/