Budget 2025 proves unworkable – the reasons, and what lies ahead

Bulgaria’s state budget for 2025 does not add up. “The genie is out of the bottle – the state has never spent at such a pace,” warn financial experts. With only a few months left in the year, and despite the strenuous efforts of institutions such as the National Revenue Agency and the Customs Agency, it is increasingly clear that budget revenues will fall short of target.

When parliament adopted the budget at the end of March, it included ambitious revenue collection assumptions, including a projected 33 per cent increase in VAT receipts compared with the previous year. At the time, almost all analysts dismissed these targets as unrealistic.

The Ministry of Finance’s delayed data, released in early September, showed a deficit of €2.19 billion – equivalent to 1.96 per cent of GDP – at the end of July. Traditionally, the government’s finances deteriorate further in the final months of the year as spending accelerates sharply.

According to Finance Minister Temenuzhka Petkova, VAT takings have increased by 22 per cent, while overall tax revenues have risen by 16.7 per cent year-on-year. However, expenditure is growing even faster, at 17.7 per cent. The fears of budget-watchers have therefore been confirmed: Budget 2025 is unworkable.

This outcome was foreshadowed as early as April, when the Fiscal Council projected a shortfall of €2.15 billion in the government’s planned revenues.

“The most important element in finance – whether in private banking or public budgets – is trust, and the signals you send: banks to their clients, governments to their taxpayers,” said Lyubomir Datsov, a former deputy finance minister. “Unfounded actions undermine that trust. In recent months the Ministry of Finance has, without justification, lowered its standards for publishing budget data. Once again, the figures were released late this month – a fact which inevitably breeds suspicion, regardless of the results themselves.”

“As for the numbers, nobody can really be surprised. Both revenues and expenditure are moving exactly as expected; nothing new has emerged. Yes, tax collection looks solid in relation to economic performance, but it is not significantly different from previous months. The July uptick in VAT revenues, which the government has highlighted, is mainly due to higher public spending, which generated additional VAT,” Datsov explained.

Datsov, now a member of the Fiscal Council – the independent watchdog responsible for scrutinising Bulgaria’s budget framework and safeguarding public finances – added: “The National Revenue Agency and the Customs Agency are doing their job as well as could be expected given the economic backdrop. But it is unrealistic to hope for improved collection in the final months of the year – there is simply no basis for it.”

In his view, even the government’s target deficit of 3 per cent of GDP – the ceiling for eurozone accession – was “unrealistically high” from the outset.

“The budget is running a deficit that is far too high relative to the size of the economy. Without commenting on the reliability of projected revenues or whether all capital expenditure will actually take place, our calculations indicate that the maximum deficit this year should be no more than 0.8 per cent – ideally, it would be close to zero. Currently, however, the budget assumes a 3 per cent deficit, and tax revenues may fall short by around BGN 5–6 billion. Continuing to apply automatic formulas for indexing spending, such as pensions and public-sector wages, is simply not a good idea,” Datsov said.

He emphasised that the Fiscal Council’s role is to provide the best possible macroeconomic guidance, rather than political guidance. At the same time, he acknowledged that it is somewhat normal for politicians to implement measures aimed at winning voter approval.

According to Datsov, the current, so-far unachievable, budget parameters are not set to ensure Bulgaria meets the Maastricht criteria for eurozone entry – deficit, inflation, and debt levels. Rather, they reflect an inertia built up over the past four years, during which generous spending across multiple sectors became the norm. “This cannot continue,” Datsov insisted. He said that the 2026 budget will require two urgent measures:

“The two key issues are whether there will be the political will to eliminate the automatic formulas that determine income and expenditure in the budget, and whether next year’s deficit will be capped at a maximum of two per cent.”

However, there is little sign that the government will heed this advice. If serious reforms were intended, they would already have been proposed and debated by policymakers. Against this backdrop, Fiscal Council chairman Simeon Dyankov recently warned that a VAT increase from 20 to 22 per cent might become necessary due to the government’s excessive spending.

On this point, Datsov said: “For at least two years, I have been warning that unless measures are taken, we will reach a point where tax hikes become unavoidable, because financing through debt alone will no longer suffice. On the issue of VAT, I share Mr Dyankov’s view. However, it is important to clarify that we are not recommending an increase in VAT; rather, we are saying that, without spending-side measures, pressure to raise taxes will inevitably grow.”

For now, ordinary citizens need not worry. Prime Minister Rosen Zhelyazkov has been unequivocal: the government has no plans to increase taxes or social security contributions.