Economists: 2027 Budget Poses Risk of Inflation and More Expensive Debt

The 2027 Budget could intensify inflationary pressure and increase the cost of servicing the public debt if the deficit remains high and structural reforms do not begin. This was stated by economists Mihail Krastev, Lachezar Bogdanov and Lyuboslav Kostov on NOVA.

The three gave different assessments of fiscal policy but agreed on the need for more effective management of public funds. At the beginning of the discussion, correspondence between the government and the European Commission concerning the possible redirection of part of the contributions for supplementary pension insurance to the state social security system was discussed.

Mihail Krastev called for the focus to be placed on the measures actually set out in the draft law. “It is time to return to the expert debate on the budget and not trivialize the most important discussion for the country – the one about fiscal policy for next year and at least the following three years,” he said.

Different assessments of the draft budget

Krastev identified as positive signals the limiting of redistribution through the budget to below 40% of gross domestic product, the more moderate growth in public-sector remuneration and the more realistic revenue planning. According to him, a sustained increase in living standards depends on economic activity and labor productivity, rather than solely on income-related budget policy.

Lyuboslav Kostov described the budget as “boring,” but said that this was precisely the approach the country needed. In his words, €840 million in lower spending than in the previous year had been planned. He also highlighted the more realistic capital program and the limitation of spending, but warned that some of the increases would not offset the accumulated rise in household costs.

Lachezar Bogdanov gave the most critical assessment. According to him, the reduction of the deficit is too slow and the government will not make sufficient efforts to bring it below 3% as early as next year.

“When you run a budget deficit of more than 4% in an overheating economy with virtually zero unemployment, you are obviously adding more fuel to the market. And that manifests itself, on the one hand, in imports and, on the other – in inflation,” Bogdanov said.

Dispute over public-sector reforms

Bogdanov called for structural changes and optimization of employment in the public sector. According to his calculations, the number of people working in publicly funded activities should be approximately 100,000 lower relative to the population and the active business sector.

Krastev objected to the mechanical dismissal of employees. “The reform needs to be much deeper. There must be genuine remuneration for employees who create value and manage to stand out among their colleagues,” he stressed. According to him, some administrations lack qualified experts, while other structures could be optimized following an in-depth analysis.

Interest on the debt is rising

The participants in the discussion also commented on the rising cost of government financing. Krastev said that investors on international markets were interested in financial indicators, not political arguments. In his words, a country subject to an excessive deficit procedure is financed at a higher cost.

Bogdanov pointed out that next year Bulgaria would pay €1.5 billion in interest alone, whereas four years ago the amount had been below €300 million. According to him, delaying reforms could further increase pressure on public finances.