The trust in the fiscal policy of the new government depends entirely on the thesis about the unsalvageable situation now and the promises to change the budget trajectory in the medium-term framework. If this thesis or the promises crack, trust will quickly go to waste.
Petar Ganev warned about this on "Facebook".
The government is proposing a budget with record spending (over 45% of GDP) and a record deficit (5.7% of GDP). Their main thesis is that the match with the 2026 budget is over anyway. Half a year has passed, all payments have already been updated, including public sector salaries and the upcoming increase in pensions. The excessive deficit procedure is also (almost) a fact. Politically, it does not make much sense to perform miracles of bravery with manual budget management (suspension and postponement of payments) given that you have admitted the procedure anyway and are in a position to blame everything on previous governments.
In this line of reasoning, there is (political) logic to set realistic revenues (without impossible expectations for VAT) and to pay off maximum expenses now (a serious increase in capital expenditures), so as to clear out all the skeletons in the closet, that is, the large deficit will be in 2026 and then you can more easily consolidate.
However, this also carries a great risk. By missing the deficit in 2026 (without trying to manage it manually, refusing spending now and postponing spending over time), you can enter a spiral of large deficits (5-6% of GDP) due to the inability to control the pressure for new spending. This is what happened in other CEE countries. That is exactly why it is important whether the promise of consolidation in the medium-term framework will be kept. The best news is that the increase in social security contributions is dropped - the 3 points additional pension contribution meant that we all lost disposable income to pay for the record personnel costs in the budget. This is a victory, but it is not guaranteed. Taxes are usually raised with the budget for the relevant year, and not with the table in the medium-term framework. Some structural measures towards consolidation are visible, which (practically all) have been part of the IME proposals in recent years - led by the request to eliminate automatic mechanisms for remuneration and limit personnel costs in the budget (up to 9-10% of GDP), as well as expected revenue measures (gambling, toll system, etc.)
However, I see at least two problems with the promise of a change in trajectory. The first is that consolidation depends entirely on the budgets for 2027 and 2028. This debate is yet to come. That is, now a budget with a deficit of 5.7% of GDP will be voted on, and in the fall we will enter a completely new debate about the budget and there is no guarantee that the medium-term table will be respected.
Here is an example – the table says that personnel costs will increase in nominal terms by 0.2% in 2027 and 0.6% in 2028. A total of 100 million euros increase based on these costs of 12.4 billion euros for 2026. Will this happen? Will it withstand public pressure? Just a slight change in the minimum wage will result in a much larger increase in personnel costs in the state. Yes, there will be a new mechanism for the minimum wage, but will it freeze it for two years?
Over the years, there have been many such examples of great numbers in the medium-term table, which then remain just a wish. That is why they approach the numbers beyond the current budget with a great deal of skepticism.
The second problem is the overall fiscal effect of all measures. We can endlessly debate each of the measures – whether it is the social security of civil servants, the taxation of gambling or the toll system. Ultimately, however, what is important is the fiscal effect of these measures. Is it significant at the macro level? And at the moment it is rather modest. A little from civil servants, a little from gambling and the toll system, and finally again over 3% deficit in 2027, even with the wishful numbers on the expenditure side.
It seems to me that the first thesis (2026 has already been omitted) is more likely to gain people's faith. However, the promises of consolidation may quickly collide with the freight train in the fall with the 2027 budget. And then the real test will be whether we are moving towards consolidation or are we just drawing pretty pictures, when we actually want to spend.
That's it from Grand Rapids. More live next week.