Bulgaria: Budget 2025: Revenue target set too high, debt to rise by BGN 18.9bn
Metodi Tzanov
Helping finance professionals understand what is going on in Emerging and Frontier Markets
The newly appointed ruling coalition of GERB, BSP, and TISP presented a?budget bill?with a very similar design to the parameters in the discarded caretaker government's bill from December, in our view failing to propose better ideas to address the rising challenges to the public finances. The cash-based deficit was planned at 6.4bn or 3.0% of GDP, while the deficit on accrual basis was projected to be at lower 2.4% of GDP in 2025, meeting the Maastricht criterion for the euro adoption. The finance ministry faced the same issue as the previous cabinet, i.e. the difficulty to fix the mismatch between the proposed generous expenditure-side policy and the lack of sustainable long-term revenue-side measures. While discarding some of the unorthodox ideas in the previous budget draft, such as the controversial tax amnesty, we think the ministry eventually ended up with unrealistic revenues targets and did not succeed in reducing strong expenditure growth.
The objective of securing a 3.0% of GDP deficit in order to facilitate Bulgaria's eurozone entry in 2026, resulted in a difficult choice between the necessity of unpopular fiscal decisions and concerns about breaking already made promises. The impasse reflected the ruling parties' unwillingness to propose hikes in taxes or social security contributions in 2025, aware of the potential strong political and social repercussions of such a step. The ruling coalition did not have the courage to tone down the promised public wage hikes, nor plan reforms and reduction in the numbers of public employees either. Major changes in the fiscal policy in times of increased political tension and competition could easily shake the fragile political stability at present. GERB leader Boyko Borissov tried to justify the government's passivity in tackling the budget problems by the necessity of compromising with co-ruling partner BSP's social demands in order to keep the ruling coalition stable. GERB MP Delyan Dobrev was more direct, acknowledging that the time for raising taxes is approaching, but GERB cannot afford politically to be the party initiating such a measure.
Within this limited room for manoeuvre, the finance ministry had to identify potential sources of revenue growth to keep the deficit within 3% of GDP. Not surprisingly, it decided to put the emphasis on the VAT revenues as one of the major pillars of revenue growth in 2025, planning a strong 33.7% y/y increase, which significantly exceeds their growth from the previous year. The Fiscal Council issued a statement criticising the expected increases in both total revenue and in particular VAT revenue, describing them as overestimated. The council estimated a risk of non-fulfilment of the tax revenues target of up to BGN 6.3bn, which could mess up the budget deficit target feasibility. The council urged the government to revise its plans for automatic hikes in some public sector wages and warned that the 40% of GDP limit on public spending is being surpassed. It also noted that the 12% increase in maintenance expenditure in 2025, after a similar growth in the previous year, will have a strong pro-inflationary impact and will exert strong pressure on the budget balance every year, concluding that the proposed fiscal policies do not correspond to the economic objectives and problems that a state budget should normally address. Overall, the reactions of other local experts and opposition parties were in the same vein, with some mild criticisms coming also from former ministers in previous GERB cabinets, such as Simeon Dyankov and Vladislav Goranov. We think that the government itself is aware of the budget bill shortcomings, but it has prioritised meeting the Maastricht criteria for eurozone entry as of 2026 at any costs, even at the cost of less trustworthy forecasts for the economy and revenues.
Government debt continues in upward direction
The budget deficit was planned at BGN 6.4bn and the debt refinancing will amount to BGN 3.7bn (including BGN 3.3bn expiring domestic bonds), while the government reported plans to borrow record high BGN 18.9bn in the final bill submitted to the parliament, up from the BGN 16.9bn written in the draft from one week ago. The debt ceiling was much higher than the borrowing needs, represented by the sum of the budget deficit and the expected debt maturities, which finance minister Temenushka Petkova explained with the need to recapitalise state-owned companies. The consolidated government debt is going to increase by 29.3% y/y to BGN 63.1bn at end-2025, BGN 73.7bn at end-2026, BGN 82.5bn at end-2027 and BGN 89.8bn at end-2028, with an average growth of BGN 10.2bn per year. The debt-to-GDP ratio will rise from 24.2% in 2024 to 29.3% in 2025 and 36.4% in 2028, according to the mid-term budgetary framework.
The government planned both domestic and the international borrowing in 2025, as well as structural programme loans with EIB and CEB of up to EUR 750mn for co-funding of EU projects. The nominal increase in the government debt will raise Bulgaria's interest expenses by 60.8% y/y to BGN 1.6bn as of 2025 till BGN 3.4bn in 2028, which we see as a strong systemic risk to the budget-making process in the longer run, further limiting the possibilities for public investments. The interest rates payments will rise from 0.5% of GDP in 2024 to 1.4% of GDP in 2028.
Macroeconomic forecast looks optimistic
The new government kept the same macroeconomic projections of the former caretaker finance ministry from early December. GDP growth was expected to accelerate to 2.8% y/y in 2025, up from the expected 2.2% GDP growth for 2024, according to the finance ministry's baseline scenario. The forecast was higher compared to the projections of the central bank and the IMF (both at 2.5%), equal to the latest projections of OECD and WB, as well as lower than the EC's forecast for a 2.9% GDP growth from mid-November. The Fiscal Council considered the government's economic growth forecast as overly optimistic against the background of ongoing economic slowdown in many EU countries, including Germany, the prospects for trade war with the U.S., the uncertain EU funds absorption and likely deterioration in the domestic business climate.
The finance ministry itself acknowledged the risks to the economic outlook from the geopolitical and protectionist sentiment strengthening, as well as from possible escalation of geopolitical conflicts that could limit the supply of certain commodities, raise international prices and disrupt global supply chains. On the domestic front, the political instability and the administrative hikes of public sector wages and the minimum wage will continue to nourish expectations for continuing strong wage growth spiral in the next years, the finance ministry said, noting that it could pose risks to the employment level in the country. In general, we think that the elevated risks and international geopolitical volatile dynamics necessitate higher buffers in the budget. The forecast might indeed require some downward adjustment in the next months if the EU's economic recovery stays sluggish and in case some of the mentioned international risks materialise, in our opinion. Any unexpected international shock could easily undermine the expected GDP growth, as well as the respective budget revenues and overall budget execution.
The finance ministry's baseline scenario envisaged higher public expenditure to be the main economic acceleration driver in 2025, with investments projected to return to a healthy 6.9% y/y growth in 2025 compared to their 2.7% y/y contraction in 2024. Seemingly, the government relied on implementation of projects under the Recovery and Resilience Facility (RRF) and other EU programmes to support the public investment activity. The downside risks to those plans remain elevated, as innovations minister and deputy PM Tomislav Donchev officially announced that Bulgaria will likely lose the second tranche from the RRF due to non-adopted reforms and required legislative changes. Furthermore, Donchev informed that the amount under the only received tranche of BGN 2.6bn (EUR 1.37bn) has not been absorbed yet, clarifying that only EUR 700mn for completed projects has been already paid out to companies. He also admitted that there is not much time to secure the absorption and payment of the remaining due payments, as the deadline for the completion of all payments is Aug 2026. We think his statement confirmed that the contribution of RRF-funded investments to GDP growth in 2025 might be overestimated. Private investments also faced less bright prospects, taking into account the persistent weak performance of the domestic industry and the overall slow economic recovery in both Bulgaria and its main trading partners, in our view.
The new government reiterated the former cabinet's expectations for a slight weakening in household consumption in 2025 due to expected slowdown in income growth. Private consumption was expected to rise by 4.0% y/y in 2025, at the same pace as in 2024, and slow down in 2026-2028. We think that the factors weighing on households' consumption are numerous, related to perceptions for accelerating inflation and the general economic and geopolitical uncertainty. On the upside, the record low interest rates on consumer borrowing will remain supportive of consumption in the next year, in our view. All in all, the reported projections for slowing household consumption seem to mismatch the very optimistic projections for a 33.7% y/y increase in VAT revenues, in our opinion.
The net exports' contribution to GDP will remain negative in 2025, as imports were expected to rise faster than exports. We note that previous expectations for a visible export recovery in H2/2024 were not met, mostly due to unfavourable trends for the eurozone economies, in particular in the German economy. The uncertainty around potential increased protectionism in international trade, including possible increases in U.S. tariffs on European goods, could further jeopardise the larger European economies' performance and their demand for Bulgaria's exports, the finance ministry pointed out.
Average HICP inflation will decelerate to 2.4% in 2025, from 2.6% in 2024, with the highest pro-inflationary contribution coming from the services and food prices, the finance ministry said. The disinflationary trend in the year should be supported by a downward trend in the energy goods prices, but their negative contribution to the headline index will gradually diminish, according to the finance ministry. We see upside risks to this forecast, taking into account the latest CPI figures, showing speeding domestic inflation in Oct 2024-Jan 2025, on the back of all segments. A number of domestic pro-inflationary factors will remain in place in 2025, including elevated electricity prices on both the energy exchange and the regulated market, increases in regulated water prices, the monthly gas price hikes, alongside the return of the standard VAT rate of 20% for bread, sports facilities and restaurants and the new public wage and pension hikes.
Revenues growth estimated at strong 25.4% y/y
The government cut the projected increase in total revenues by BGN 2bn compared to the former cabinet's draft budget from Dec 2024. Total revenues were expected to increase by 25.4% y/y or by BGN 18.3bn to BGN 90.3bn in 2025. The slight downward revision in revenue growth looked insufficient compared to the forecast for a 6.8% nominal GDP growth and mild 2.4% average inflation in 2025, in our view. To compare, budget revenues increased by only BGN 5bn y/y (7.3%) in 2024, as well as by only BGN 2.3bn y/y (3.5%) in 2023. Accordingly, the projected BGN 18.3bn increase in revenues in 2025 seems unrealistic, in our opinion, with strong risks to both the tax revenue targets and the grants receipt.
The revenue breakdown showed expectations for a 20.7% y/y increase in tax revenues, 24.0% y/y increase in non-tax revenues and a record 104.8% y/y increase in grants. On the tax side, the discretionary measures included a new excise calendar for the tobacco and tobacco goods, raising gradually their excise rates (worth BGN 203mn of additional revenues), the return of the preferential VAT rate for tourism, sports facilities, catering services and bread to 20% (worth BGN 464.9mn), measures against tax evasion (worth BGN 701mn), as well as the return of the VAT registration threshold for companies back to BGN 100,000 annual turnover as of Apr 1, down from the recently increased BGN 166,000 threshold.
The new government has given up the previous idea for the launch of a controversial tax amnesty, which was supposed to generate BGN 5bn of new revenues, but has still raised the projections for VAT revenues. The finance ministry set a target for a BGN 6.3bn y/y increase in VAT revenues alone (up by 33.7% y/y), while the discretionary measures related to VAT changes could account for approximately BGN 720mn of new income. Domestic consumption was not expected to accelerate and inflation was projected to stay stable, so we do not see the VAT revenue plan as realistic. The revenues from indirect taxes have a key role for the budget revenues, which means that their potential overestimation could impact negatively the budget deficit target, in our view. We think that in case of non-fulfilment of the tax revenue target, the government will most likely have to compensate by resorting to cuts in investment expenditure, similarly to previous years.
The minimum insurance income for self-employed people and farmers was confirmed to increase to BGN 1,077 as of Apr 2025. The maximum insurance income will be also raised to BGN 4,130 as of April and was expected to generate BGN 225.8mn of revenues in 2025. The ministry also calculated additional revenues of BGN 32.4mn from the social insurance contributions of public sector employees due to the 5% wage increase in public sector. Measures against tax evasion should eventually bring some BGN 501mn and another BGN 200mn were expected from the tightening the control on bills and invoices in fuel stations.
The finance ministry planned increases in pension insurance contributions as of 2027 and 2028, which should guarantee stronger revenues for the social security system after 2027. The envisaged hikes confirm that the government has no other long-term tools to sustain the consistently rising expenditure on pensions, in our view.
In terms of non-tax revenues, the government decided to continue the controversial practice of collecting 100% of the dividends from state-owned companies, expecting additional BGN 1.13bn of income. The Fiscal Council was very critical of this plan, warning that the collection of the entire dividends of those enterprises will lead to their decapitalisation and limit their competitiveness and development in the medium term.
The BNB was required to transfer BGN 550mn from its higher revenues compared to expenditure to the state. We note that BNB governor Dimitar Radev confirmed that the central bank will contribute BGN 800mn to the state budget in 2025, out of which BGN 550mn will be from the bank's profit and another BGN 250mn in the form of interest payments. We recall that the BNB transferred BGN 660mn from its profit to the budget in 2024, explaining at the time its profit with good management of the international reserves of the country in 2023.
The government also expected additional revenues from the toll system operation amounting to BGN 211.2mn in 2025, compared to previous government's estimates for only BGN 43mn of toll system revenues this year. The explanation for the gap was in the new cabinet's plans to raise toll fees and vignettes with the aim to use the funds for maintenance and development of transport infrastructure.
Grants were anticipated to rise two-fold y/y to BGN 7.4bn in 2025, considerably higher from the collected BGN 3.6bn in 2024. The grants from different EU programmes were expected to reach BGN 5.9bn. As already mentioned, a number of downside risks to those plans are in place, taking into account that the government just confirmed the almost certain loss of the BGN 1.2bn second tranche under the Recovery and Resilience Fund (RRF). The cabinet has committed to saving as much as possible from the next payments, but the already short deadline for the project implementation under RRF raises the risks for the next tranches as well. Deputy PM Donchev confirmed that a number of projects, which have not started yet, will be taken out of the plan. The government also informed about possible revision of the exact amounts of the following tranches once the EC approves the amendments to Bulgaria's national recovery fund. The finance ministry noted that the risk for the execution of the recovery plan targets was high, due to the result-oriented mechanism tying the revenues with the implemented stages and goals, instead with the real spent expenditure. On the other hand, the ministry said that the execution of the EU funds for the other operating programme projects from the 2021-2027 period was directly related to the incurred expenditure, thus having a neutral effect towards the budget balance. In case of a failure to implement these projects, both expenditure and revenues will fall short of the plan, the ministry explained.
Expenditure growth to reach 44.9% of GDP
Total expenditure was planned to increase by BGN 18.6bn or 23.8% y/y, to BGN 96.7bn in 2025 or 44.9% of GDP. The growth was significantly higher from the 7.5% y/y increase in 2024 and the 9.9% y/y increase in 2023, which we see as a negative signal. The figures also showed that the spending will surpass the 40% of GDP threshold and reach 44.9% of GDP in 2025. In a recent interview, Delyan Dobrev, a key MP from ruling GERB, mentioned that Bulgaria's taxes are the lowest in the EU, generating revenues between 37% and 38% of GDP, while the government spends up to 46-47% of GDP, thus generating a gap between revenues and expenditure worth 10% of GDP. Dobrev admitted that the policy of raising social expenditure is a snowball problem, but that no party would dare to cancel the social privileges of the public sector employees and pensioners. Dobrev argued that the problem started with the already allocated additional 6% of GDP spending to civil servants, pensioners and other social payments in the past few years, saying that these can no longer be cancelled. He confirmed that GERB cannot afford raising taxes and instead will go for a higher debt in the next years to cover the rising gap, therefore signalling that GERB has no plans to address the unsustainable increase in public spending in any way while on power. We think his statement was indicative of the burden of the domestic political instability on the public finances, as the past few years have resulted in parties' withdrawal from fiscal consolidation priorities to avoid popularity decline.
The new government decided to keep the plans for hikes in the defence and security sector wages, costing the budget additional BGN 2.2bn, as well as the teachers' wage increase to 125% of the average gross wage for 2024, which will cost the budget new BGN 499mn. We recall that the extraordinary increases in the wages of army, security agencies and police resulted from a parliamentary decision from Apr 2024, which tied the wages of the employees in defence and security to a percentage of the average wage size. At the time, MPs from all of the parties supported this move as part of their pre-election campaigns, rejecting warnings of the finance ministry against the measure. The wage calculation for the defence and security sector employees in 2025 also reflected a decision that the lowest wage for an employee in the defence sector should be raised by 31%. Accordingly, to prevent the violation of the wage differentiation structure, the authorities also decided to raise all wages by similarly high percentage.
Wages in other public administration structures, where no other wage increases are envisaged, will be raised by 5%, which will generate additional BGN 283.7mn of expenditure. This increase was lower compared to the discarded budget bill for a 10% wage hike. The increase in the minimum wage was estimated to cost the budget additional BGN 283.3mn. Conversely, the finance ministry planned 10% cuts in the current maintenance, with an effect of BGN 283.8mn reduction in state expenditure.
Public spending on pensions will rise by 11.3% y/y to BGN 24.2bn in total. The due pension indexation as of mid-2025 will require additional BGN 617.6mn, the government initially said. We note that at first, the finance ministry published figures based on a lower planned increase of pensions as of mid-2025, by 5%, which triggered strong tension both in the ruling coalition and from the opposition. Eventually, the ruling parties decided to use the Swiss formula, resulting in an 8.6% pension hike. Social affairs minister Borislav Gutsanov assured that the necessary additional BGN 417mn will come from infrastructure projects, while GERB leader Boyko Borissov said that the cost will be covered by higher debt. The final budget bill submitted to the parliament confirmed that capital expenditure was cut by around BGN 400mn and the amount was re-allocated to the pension item. Increases in social pensions for old age, the minimum pension and widow pensions were also planned, while the government decided against raising the social benefits for maternity and unemployment.
Despite the BGN 400mn cut, planned capital expenditure growth remained noticeable of 100.5% y/y, with the costs rising to a record high BGN 13.4bn, which is a highly uncertain target, in our view. We note the governments in the past few years often set higher capital spending targets and every time the lag behind the target was very significant. Most of the capital spending should be related to EU-funded investments under the 2021-2027 programme period, as well as under the RRF projects, where there are significant risks for Bulgaria's ability to absorb the funds. Capital expenditure also includes national spending on infrastructure, in particular related to the delivery of the F-16 Block 70 fighter jets to Bulgaria, the purchase of patrol ships and other defence equipment. An ongoing capital investment programme on both national and municipality level, including both national funding and EU funding, will also have a strong impact on the capital expenditure, the finance ministry said. Meanwhile, the defence ministry requested additional BGN 823mn of funds to secure army modernisation activities, warning that if the budget does not secure them, a number of key projects will be delayed or frozen. These included the acquisition of anti-aircraft missile systems, 3D radars, ammunitions for modular patrol ships, airport and port infrastructure, among others. The defence ministry's demands were not fully satisfied. Defence minister Atanas Zapryanov confirmed later that the allocated budget will suffice only for the acquisition of new 3D radars and anti-tank systems FGM-148 Javelin, but no other military projects will be launched in 2025.
The defence and security sector will be the main beneficiary from the budget, seeing a 55.7% y/y increase in its allocation in 2025. Spending on defence and security (including costs for army, police and justice system) will reach 5.5% of GDP, up from the 3.7% of GDP level in 2024, while spending on defence alone will rise to 1.9% of GDP, from 1.0% of GDP in the previous year. The increase was related to both the BGN 2.15bn of additional costs on wage hikes in the sector, as well as to the purchase of military technology for the set-up of battalion combat groups, activities required for the upcoming arrival of new F-16 military aircraft in Bulgaria, and other ammunitions and equipment.
Mid-term outlook is unfavourable
Fiscal consolidation is becoming an increasingly difficult task after the continuous setting of 3% of GDP deficits in 2023-2026 period, although the government has projected lowering of the deficits to 2.7% of GDP and 2.2% of GDP in 2027 and 2028. Deteriorating debt trajectory will raise the international borrowing costs for Bulgaria, and rising expenses on interest will reduce the budget's capacity to sustain investments, thus hindering economic growth in the medium term, in our view.
The planned increases in social security contributions as of 2027 and 2028 are already indicative of a pending turn in Bulgaria's revenue policy, which is currently based on keeping the direct taxes and contributions at a relatively low level compared to a higher weight of non-direct taxes. On the expenditure side, the rising weight of public wages and pensions is not going to ease without some unpopular actions in the future, in our view. The most troubling issue remains the absence of political will for the consideration and adoption of any measures that could prevent the worsening prospects, which sends negative signals for the public finances' quality in the next years, in our view. This unfavourable development will exacerbate Bulgaria's economic vulnerability to external economic or geopolitical shocks and extraordinary events in the next years, in our opinion.