Comment by Emilia Milcheva:
When reason in fiscal policy is dormant, crises are born. Bulgaria is on the verge of one. And at a time when it should avoid it at all costs - on the eve of the historic exchange of the lev with the euro on January 1, 2026. Unless the government aims to compromise the process while shining the fanfare with which they announce "successes" and "stability". However, it is more likely that they are simply getting ready for the elections - next year is the presidential election, and early parliamentary elections will not be a surprise either.
The draft budget for 2026 - the first in euros - is far from any strategy and has provoked unanimous criticism from economists and financiers with different political views. Added to this is the ringing of the bell by the International Monetary Fund (IMF), the Fiscal Council, the Bulgarian National Bank and various organizations - from the Institute for Market Economics (IME) to employer communities. The criticism is in several directions - the lack of reforms and long-term priorities, the too high personnel costs, the increase in social security contributions by 2 percentage points and another one in 2028, an increase in the deficit. Added to all this is the intention to increase the dividend tax from 5 to 10%.
Bacchanalia of populism
The IPI calculated that over 10 years, budget expenditures for remuneration have increased by over 15.6 billion leva, with more than half of them accumulated in the last 3 years alone. A significant part is due to automatic mechanisms for the formation of salaries in a number of areas, led by law enforcement institutions, where the increases reach 30-40%. They were laid down by parliamentary decisions in 2024 and are a "engine" for an explosion in the expenditure side of the budget, warns the IPI.
In addition, a large share of pensioners continue to work in the Ministry of Internal Affairs, for example - 13%, who receive both a pension and a salary, and their number is growing, signals MP Bozhidar Bozanov (PP-DB). The co-chairman of "Yes, Bulgaria" announced that they will again propose to gradually release pensioners from the Ministry of Interior.
However, the political forces do not dare to propose the abolition of the automatic increase in the salaries of "security forces" and other sectors - even temporarily. ΠIn terms of spending on "Internal Order and Security" Bulgaria is in the lead in the EC - 2.7% of GDP, while the average for the EC is 1.7% of GDP. The findings are from the Fiscal Council - an independent advisory body established by a special law, which monitors whether the government complies with the rules for financial sustainability.
They also draw attention to the large number of people working in the public sector in labor and civil service - in 2024 they will number 558,399 people. This is approximately one fifth of all those employed in Bulgaria. Next year, the government will again guarantee them a salary increase. And how they will pay off, the election results will show.
Most people are employed in education
According to the analysis of the Fiscal Council, the largest share - about 28%, is employed in education. Education Minister Krasimir Valchev has already assured that in 2026 there will be an increase in teachers' salaries - so that they "do not lag behind the average for the country and follow the policy of being 125% of it". And this means reaching 3300 leva.
Second in number are those employed in healthcare, who are about 24%, and according to the Fiscal Council, this sector reports almost a doubling of salaries over the five-year period - from 1.7 billion leva in 2020 to 3.4 billion leva in 2024. Next year, the authorities promise that young doctors will receive a minimum of 1860 euros per month, and nurses and other middle-level staff - 1550 euros through over half a billion leva planned for salaries through the NHIF budget. But there are still negotiations ahead on the methodology and conditions for their payment. The third largest are civil servants in the state administration with a share of nearly 20%. The Fiscal Council notes that these three sectors account for about 72% of all wage costs.
And wages are growing, although the quality of public services remains stagnant - fiscal generosity is not repaid with better education, healthcare or administration. The demographic crisis continues to serve only as political chewing gum. For 2024, all regions in Bulgaria have negative natural growth.
Estonia is the good example, Bulgaria - the anti-example
The government ignores not only institutions and experts, but also the useful lessons of other European countries such as Estonia. In addition to the high level of digitalization and quality education, Bulgaria cannot catch up with the small Baltic state in the policies it implemented before entering the eurozone in 2011. The global financial crisis hit Estonia, whose economy, heavily dependent on exports and construction, shrank by over 14% in 2009. But the government did not devalue the Estonian kroon, but decided to maintain the fixed exchange rate to the euro and carry out the so-called internal devaluation.
Salaries and expenses in the public sector were cut by 10 to 20%, with the reductions reaching 25% for senior positions - ministers, chairmen of agencies. In a year, state administration was cut by 8 to 12% in various sectors. Social benefits such as child and maternity benefits were temporarily frozen and pension contributions for the second pillar were also temporarily reduced. The austerity policy was implemented to restore competitiveness without touching the exchange rate. The result is that Estonia became the first country from the former Eastern Bloc to be admitted to the eurozone, with balanced finances and low debt - below 10% of GDP.
Bulgaria is doing the exact opposite - personnel costs are growing enormously, and liabilities are also growing. At the end of August this year, gross external debt (public and private) increased by 20.2% on an annual basis to 53.605 billion euros, according to preliminary data from the Bulgarian National Bank. The government's gross external debt for the year has ballooned by over 73% to 17.686 billion euros.
Even more grey economy
The proposed increase in social security contributions by 2 percentage points has caused a negative reaction among employers. Both they and analysts warn that the measure will lead to a decrease in net salaries and an increase in labor costs. The proposal that civil servants and police officers pay their personal social security contributions, which has been periodically raised in the last twenty years, is again hanging in the air.
Recently on bTV, Rumen Radev from the Association of Industrial Capital in Bulgaria pointed out that 2 percentage points are not 2% - the increase in pension contributions will actually be 10.1%. The effect of such a measure is very doubtful - thousands will go back into the gray sector, which is over 1/3 in Bulgaria and is almost not getting any brighter.
And contrary to sound economic logic, the Joint Management Council intends to increase the "dividend" tax from 5% to 10%, in order to "brighten up the economy". At least, this is the explanation given on BNR by Dragomir Stoynev, chairman of the BSP-United Left parliamentary group: "When one tax is 10%, and the dividend tax remains 5%, all revenues go through the dividend tax."
This statement shows ignorance of the tax system. A company first pays 10% corporate tax on its profit. If it then decides to distribute a dividend, another 5% dividend tax is due on this already taxed profit. So there is no way that the profit can "pass through dividend tax", because the tax is paid on the remainder after profit tax - and not instead of it.
Propaganda will run wild
To the populist bacchanalia in the 2026 budget, more aggravating factors are added - creeping inflation and the government's complete helplessness to activate price control mechanisms, as well as uncertainty in fuel supplies due to the upcoming change of ownership of Lukoil abroad, including Bulgaria. The only positive effect of the increase in gasoline prices would be increased VAT revenues.
Bulgaria is moving along the path that other countries have already slipped on - between "social generosity" and the reality of fiscal collapse. Without reforms and with the constant inflation of expenses for administration and law enforcement agencies, as well as pouring billions into state-owned companies such as BDB and BEH, the budget is becoming not an instrument for growth, but a machine for postponing the crisis.
And when society understands that "stability" is bought with debt that is paid while the Ministry of Interior, services and the prosecutor's office protect the back of the government, the propaganda against the euro will have already taken enough victims.
History has repeatedly shown how this scenario ends - not with fanfare, but with fiscal shock, painful cuts and political ruin. When reason in economic policy sleeps, awakening is always painful.