"People who create wealth should not be happy about the 2026 budget - businesses that create value and people who work and fill the treasury will pay more", economist Petar Ganev told DV.
DV: We have learned about the outrageous far-left first Eurobudget, but let's turn the question around: who should be happy about it, including the exorbitant state spending?
Certainly, the people who create wealth in Bulgaria should not be happy about it. These are the businesses that invest and create value, and the people who work and fill the treasury. These two groups will pay more in the 2026 budget. Civil servants and public sector employees, who receive guaranteed salary increases, as well as politicians who use the budget to gain power, can certainly enjoy it. Again, the most expensive departments, which are the power ministries, will receive the largest increase. There is a political deal here, not economic logic.
DV: Because I am always looking for an “alternative point of view“: can you briefly explain how we will suffer from these large expenditures and possible loans in, for example, the medium term? When will we “pay the bill“ - in 2027?
"Politicians believe that you can postpone paying the bill"
The budget is not like a hot stove. You may not get burned in a second if you act stupidly. Politicians believe that you can either postpone the payment of the bill for a long time or simply blame someone else. We are still far from the situation in Romania - they have long been in excessive deficit and with a debt of almost 60% of GDP, that is, they are on the verge of overtaking Germany in terms of debt level.
And yet, we must not forget that we are in the most difficult period in terms of (in terms of duration and depth) of the budget deficit since the introduction of the board and the stabilization of public finances in the late 1990s. When you are faced with a decade of budget deficit, and with a worsening trajectory, this means only one thing - raising taxes and increasing debt, respectively, interest costs. The first step in taxes is raising social security contributions, but without a change in spending policy, this step will be followed by more such steps. Despite the tax increases, the budget deficit will remain large and the debt will go up - over 35% of GDP by 2028 and over 40% of GDP after 2030.
The "flat tax" generation (all under 40-45 years of age), which entered the labor market in an environment of low taxes and shrinking public debt, will now find itself in the opposite situation - rising taxes and increasing debt. And just one example of the burden of interest payments: much has been said about the projected costs of nearly 1 billion euros for the judiciary in 2026. Well, the costs of interest on the state debt alone will exceed the 1 billion euros mark in 2026, that is, they will "beat" the entire judiciary. And they are expected to double by the end of the decade.
DV: What would you change in the draft budget if you were in the place of Finance Minister Temenuzhka Petkova?
Cancellation of the automatic increase in salaries in the public sector
There are thousands of details in the state budget, but there are also several major markers that can be followed and guarantee stable finances and peace of mind regarding the tax burden. The main one is the level of redistribution through the budget, i.e. how much the state spends. Bulgaria traditionally, i.e. two decades before the pandemic, spent under 40% of GDP through the budget, including the National Social Security Institute, the health fund, municipalities and everything in general. When you are below 40 percent, the budget is tied up and we are left with the lowest direct taxes in the region. Currently, the Finance Minister is proposing a budget with expenditures amounting to over 45% of GDP. This is the reason for the deficit and the tax increases.
So first, I would make a budget with expenditures up to 40% of GDP. This would mean, for example, canceling the automatic mechanisms for increasing salaries in the public sector and revising the record personnel costs in the budget - for the first time in 2025 and 2026, over 10% of the entire economy will go to salaries in the public sector.
Second, I would set realistic VAT revenues, because currently they are written in such a way as to tie some kind of framework to a 3% deficit. VAT revenues in Bulgaria have never exceeded the 10% of GDP limit. For 2025, they set them at 11.5% of GDP in order to tie some kind of framework, and today they already admit that they will actually be 9.8% of GDP. For 2026, they have set them at 12.5% of GDP. This additional 2.5% is fake, it will never come together.
And thirdly, I would look for measures that would give an impetus to economic growth. A tax incentive for investment and development would give companies a breath of fresh air and an opportunity to unlock additional potential. A transition from a centralized municipal investment program to more own resources and powers for local authorities would give municipalities an incentive to work to improve the business environment and attract investors, as well as to have a clear commitment to investing in the quality of life in the regions.
DV: Why shouldn't we raise taxes? Why should our model be different from that of Western countries?
"This is certainly not the path that will make us richer"
Because it is a fallacy that by raising taxes and redistribution, we will pay a price, but in return we will receive better public services and a better quality of life in general. The two things are not directly related. The political and budgetary reality in our country at the moment is that we are raising the tax burden on workers in order to pay for the political deals of the government. I don't know if this is the price of the political instability of recent years - a kind of "you will pay to have a government in this environment", but this is certainly not the path that will make us richer.
It is interesting that just when we approached the mark of 70% of the average European level (according to the classic indicator of GDP in purchasing power parity) and the social dynamics in society began to change (for example, migration reversed), we are questioning the economic and tax model that brought us out of the crisis in the late 1990s and allowed us to go through two decades of outpacing growth.
DV: You said that we are in our most difficult fiscal period in at least 25 years. Are there no right-wing politicians left who are looking for a change in this trajectory? And is it even possible to get out of this mess without ending up in the Romanian scenario?
It is good for politicians to know that a budget crisis usually leads to a change of government. At the same time, timely management of public finance problems has the potential to be a factor in political stability. At first glance, it seems that the political majority has taken a turn towards a looser fiscal policy - the 3 percent deficit is already a kind of success, whereas before the pandemic it was seen as a failure. However, the strong public reaction against the idea of increasing the tax burden should not be underestimated.
The big risk for Bulgaria
At this stage, economic growth can also (partially) pull us out of the swamp. When the economy is growing, it is much easier to find measures to consolidate the budget. Even holding back the growth of spending is sometimes enough, if at the same time the economy “catches up” public finances. The big risk, however, is if a crisis comes and finds them in bad shape and with a large deficit. Then the Romania scenario could develop very quickly, and the political price will undoubtedly be very high.
Petar Ganev is a senior researcher at the Institute for Market Economics (IME). Ganev was the chairman of the Board of the Bulgarian Macroeconomic Association in the period 2016-2017. He is the author of numerous articles on economic topics. Ivaylo Tsvetkov spoke with him.