site.btaFiscal Council Chair Djankov: Transitory Impact of Elevated Inflation on Budget Deficits

Higher-than-expected inflation may reduce budget deficits but the effect is temporary and depends on several factors, Fiscal Council Chair Simeon Djankov wrote in an analysis released on Thursday.

He points out that rising prices, wages and corporate profits increase tax and social contribution revenues, while the State also faces inflation-indexed expenditure obligations and higher spending on public procurement and investment.

The full text of the analysis follows:

Annual inflation in the European Union was 2.4% in August 2025, unchanged from July. The rate was also 2.4% in the same period last year.

The smallest annual increases were observed in Cyprus (0.0%), France (0.8%), Italy (1.6%), Denmark, and Ireland (1.9%).

Romania recorded the highest annual rate at 8.5%, followed by Estonia (6.2%), Croatia (4.6%), Slovakia (4.4%), Hungary and Latvia (4.2%), Austria (4.1%), Lithuania (3.6%), and Bulgaria (3.5%).

Compared to July 2025, annual inflation decreased in nine member states, was unchanged in four (including Bulgaria), and increased in fourteen.

Eastern European member states generally experience higher inflation rates compared to the rest of the EU. The exception is Czechia, where inflation aligns with the EU average of 2.4%.

In August, services contributed the most to annual inflation (+1.44 percentage points), followed by food, alcohol, and tobacco (+0.62 percentage points), and non-energy industrial goods (+0.18 percentage points).

Higher-than-expected inflation can temporarily reduce budget deficits, largely due to several influencing factors. As prices increase, Value Added Tax (VAT) revenues rise automatically.

The rise in wages (which in Bulgaria outpaced inflation in 2025, according to Djankov) results in higher income tax and social insurance contributions. Nominal corporate profits also increase, leading to greater corporate tax revenue.

However, the government adjusts pensions, minimum wages, and social benefits through indexation mechanisms linked to inflation, which offsets revenue growth. Public procurement and investment expenditures also rise, according to Djankov's analysis.

Eurostat data released Wednesday indicated that annual inflation in the eurozone reached 2%, a minor adjustment from the preliminary estimate of 2.1% for the currency bloc.