site.btaIMF Mission to Bulgaria Projects Budget Deficit Exceeding 3% of GDP in 2025 and 2026

Due to this country's ongoing economic development and factors that cannot yet be assessed due to their unpredictability, including the EU exemption that allows for an increase in defence spending, Bulgaria’s budget deficit may exceed the 3%-of-GDP mark in both 2025 and 2026. This transpired from a statement made by Fabian Bornhorst, head of an International Monetary Fund (IMF) mission to Bulgaria, during a meeting with the Committee on Budget and Finance in Parliament on Friday.

Bornhorst, who presented the IMF’s analyses and assessments of Bulgaria's economic development, said that in order to improve its fiscal position, this country should consider policies focused on fiscal tightening and enhancing tax collection. The IMF suggested several measures to achieve this, including transitioning to a progressive tax system, eliminating the cap on the maximum insurable income, increasing pension contributions, controlling public sector wage costs, and reconsidering the social spending model - many elements of which are currently tied to the minimum or average wage in the country.

Bornhorst said that given the cyclical developments in the economy, their position is that fiscal policy should not be expansionary next year but should focus on fiscal tightening.

He added that the IMF’s recommendation is for Bulgaria to identify measures and policies that would reduce spending by up to 1% of GDP. This could be achieved through a combination of measures in both the revenue and expenditure sides of the budget.

Bornhorst said that this country's fiscal policy should shift its focus from supporting consumption to fostering investment.

Bornhorst’s presentation to the Committee on Budget and Finance began by highlighting three key achievements for Bulgaria this year: the adoption of the budget, the renegotiation of funds under the Recovery and Resilience Plan, and the country's progress toward joining the euro area.

He noted that the economy is developing very well, forecasting an annual GDP growth of around 3%. This growth is largely driven by consumption, fueled by rising incomes, an easing fiscal policy, and credit expansion. The record-low unemployment rate suggests that the labor market in Bulgaria is extremely tight, he added.

Building on these observations, the IMF mission concluded that Bulgaria’s economy is currently operating above its potential – one of the factors that contribute to a rise in inflation. 

Bornhorst noted that another factor driving inflation is wage dynamics - specifically, the increase in the minimum wage, which is tied to the average wage in the country and leads to indexation in the private sector and is also linked to social payments.

Bulgaria will need to make much higher investments in several areas, including the ageing population, defence spending, the education sector, and the water sector.

Bornhorst stressed that once spending efficiency has been improved, it will be important to examine whether the tax model is adequate to meet all financial needs. 

He noted that it is precisely in the medium term and in the context of these considerations that they were once again raising the question of whether it is appropriate to discuss and move toward a more progressive taxation model that would increase budget revenues and help address societal inequalities.

Other recommended measures from the IMF include improving the pension system’s second and third pillars by introducing a multi-fund model. 

As to pension insurance contributions, the IMF suggests starting an increase of 1% in 2026, rather than the government's planned start date of 2027, as outlined in the medium-term forecast.

The IMF noted that despite constant wage growth in Bulgaria, the cap on the maximum insurable income has remained relatively unchanged. 

Bornhorst said that regardless of the decisions made regarding the tax system and social payments, the policy of increasing tax collection should continue to be pursued and measures should be taken simultaneously. He added that this country will face similar challenges in the pension system in the coming years.

At the end of the meeting, Committee on Budget and Finance Chairperson Delian Dobrev thanked the IMF mission for its professionalism. He noted that the government disagrees with two of the IMF’s recommendations: transitioning to a progressive tax system and eliminating the cap on the maximum insurable income. Dobrev added that the Cabinet has no plans to take these steps.

"Everything else you have recommended will be implemented in the next budget. We agree that measures must be taken to curb rising inflation," Dobrev said.

"You have rightly pointed out the need for controlling wage growth in the public and social sectors, particularly where many wages are automatically linked to the minimum wage,” he added.

The IMF's regular mission is visiting Bulgaria from September 10 to 23, 2025. During this period, it is holding meetings with experts from the Ministry of Finance, the Bulgarian National Bank, other state institutions, the private sector, and non-governmental organizations.