The Draft State Budget Puts the Economy Under Pressure and Threatens Fiscal Sustainability

Position of the Institute for Market Economics (IME) on the draft state budget for 2025 and the updated medium-term budget forecast for 2025-2028.

• The Ministry of Finance has unreasonably delayed presenting the state budget framework, failing to comply with the requirements and deadlines set by Article 71 of the Public Finance Act. Instead of showing the budget to the public and allowing time for public discussions, the Ministry of Finance conducted closed discussions with selected groups and entered a “rumour management” mode, testing various proposals and measures in the public sphere;
• The proposed budget suggests a shift in the model and broad consensus for the country’s financial management, introducing a new philosophy of excessive state intervention in the lives of Bulgarians – record-level spending, new taxes, and a clear signal of increasing the tax burden on working Bulgarians and businesses “in the open”;
• The budget plans for a huge increase in expenses by over 20 billion BGN next year – a 25% increase compared to 2024, with expected inflation of 2.4% and a real GDP growth of 2.8% in 2025. Expenses are projected to total 98.9 billion BGN, which is 46% of GDP – a record in Bulgaria’s modern economic history, with a 7 percentage point increase compared to the current year;
• A path is being taken towards a sustainable increase in the tax burden, with the opportunity for the legalization of undeclared income on one hand, while punishing honest taxpayers and businesses “in the open” on the other:
  • A tax amnesty framework with a one-time and highly controversial effect – the expected revenues are set at 4.5 billion BGN. The budget balance in 2025 will largely depend on the outcome of this measure, with failure to achieve the projected revenue from the tax amnesty leading to a missed budget deficit;
  • A new tax on underground resources, an increase in excise duties on tobacco products and alcohol, and the cancellation of the increase in the VAT registration threshold, which should have relieved tens of thousands of entrepreneurs. It is noteworthy that an entirely new tax is introduced – on underground resources, fundamentally changing the rules of the game in one of the key sectors of the Bulgarian economy in a short time, with no supporting arguments or impact assessments;
  • An increase in the social security burden by 5 percentage points by 2027. This automatically means a loss of disposable income for all working Bulgarians – the measure will take over 3 billion BGN from the disposable income of employees by 2027. The combination of increased social security burden and an increase in the maximum insurable income will lead to a loss of competitiveness, including a severe blow to industry, which is under pressure from rising wages, and to the digital sector, which is losing competitive advantages compared to other countries in the region;
• In general, the Ministry of Finance refuses to conduct sensible fiscal policy concerning expenses, as no measures are proposed to curb the rise in expenditures. The wage increase in the Ministry of Interior (MoI) and the Ministry of Defense (MoD) already has significant macroeconomic implications – an additional 2.148 billion BGN, or 1% of GDP in new expenditures. Instead of structural solutions aimed at creating a favourable environment for innovation, investment, and high economic growth, the project relies on one-time financing measures (tax amnesty), followed by tax increases for all working people;
• Revenues in the budget will reach 43% of GDP. This means that redistribution levels in 2025 will be at a record high. This is nearly 10 percentage points above the level of tax redistribution in Romania (33-34% of GDP);
• The budget framework for the period 2025-2028 forecasts a total budget deficit of over 25 billion BGN, with the deficit expanding to 3.6% of GDP by 2026. The combination of a high budget deficit, pressure on expenses, and disputed revenues from one-time measures and tax increases raises a strong red flag for fiscal sustainability in the country. Approving the budget in this form means losing competitiveness, sending a strong negative signal to entrepreneurs and investors, taking away disposable income from Bulgarians, and endangering the sustainability of state finances.

IME proposes the following budgetary measures:

1. Reduction of consolidated public expenditures to below 40% of GDP for 2025, with their increase in line with the nominal growth of GDP;
2. A revision of the decisions taken by Parliament between February and April 2024 and a refusal to excessively increase personnel expenditures in the MoI and MoD;
3. Rejection of the increase in the social security burden and commitment to maintaining the tax environment in the medium term;
4. Rejection of the introduction of a new tax on underground resources;
5. Rejection of the proposed tax amnesty and measures to legalize labour income;
6. Cancellation of all tax preferences and subsidies – different VAT rates, food vouchers, electricity compensation;
7. Increasing revenue collection from sectors that currently receive inexplicably favourable tax treatment, including gambling and the toll system;
8. Redirecting 1/5 of the income tax to municipal budgets;
9. Updating property tax assessments to current market levels.

IME also proposes the following measures aimed at increasing investments and economic activity:

1. Accelerated depreciation (100% in the first year for machines, equipment, transport vehicles, computers, and software);
2. Tax incentives for innovation and research and development (recognizing R&D expenses at double the amount when determining taxable financial results);
3. Lower taxation of sole proprietors and small businesses;
4. Reduction of the social security burden by at least 2 percentage points.

IME will continue to monitor the discussions surrounding the adoption of the 2025 budget and will provide an expanded opinion during the bill’s review in the Budget Committee of the National Assembly.