Eurozone Entry and Budget Struggles: Bulgaria’s Early Steps Under New Leadership

Finance | January 27, 2025, Monday // 13:14|  views

In the early days of Bulgaria’s new government, some of the key economic policy directions have become clearer, though several warning signs have also emerged. Public meetings between the Prime Minister, the President of the European Commission, and the President of the European Parliament highlighted ongoing efforts to address necessary reforms and secure investments under the Recovery and Resilience Plan. The Prime Minister’s focus was also on preparations for joining the eurozone. Meanwhile, the new Finance Minister began meetings within the Eurogroup and with the European Commission, signaling Bulgaria’s ongoing commitment to adopting the euro.

Last week, the eurozone became a focal point of political debate, largely due to cyclical and calendar reasons. Current inflation data through December 2024 shows a slight deviation from the price stability criteria by 0.1 percentage points. However, considering the monthly inflation trends across the EU and in Bulgaria, it is anticipated that this deviation may be corrected in the coming months. Based on these developments, the government is expected to follow a structured approach. According to the Finance Minister’s public statements, the government plans to wait for the January inflation data, due to be published in mid-February, which is expected to meet the required criterion. In parallel, the government intends to submit the draft budget for 2025 by February 14 and send a medium-term fiscal and structural plan to the European Commission by February 20.

A possible convergence report will assess Bulgaria’s fulfillment of the price stability criterion and evaluate its public finances. This report will analyze the 2024 budget deficit data, which will be available in April, as well as the proposed fiscal trajectory outlined in the draft budget and medium-term plans. Achieving a deficit of no more than 3% of GDP will require negotiations and agreement within the government on balancing revenues and expenditures, a critical step in ensuring fiscal stability.

In the initial days of the new government, several key decisions were made, including the withdrawal of the draft budget laws and tax packages. This mirrors a similar move by the previous government of Kiril Petkov in December 2021, which withdrew the proposed budget and submitted a revised version in early March. The new government’s fiscal and economic framework also needs significant revisions, especially at the request of the ruling party. While the withdrawal of tax laws may indicate a desire for a fresh approach, there is the possibility of minor changes being implemented in the future. However, the government has publicly stated that it will avoid raising taxes, although the definition of tax increases and changes in tax bases may still lead to debates.

A more concerning issue is the current Prime Minister's (Rosen Zhelyazkov) hesitance to address necessary reforms that would unlock further payments from the EU’s recovery plan. These reforms are currently held hostage by internal coalition negotiations, signaling potential delays or even setbacks. The new government’s plan for deficit reduction also depends heavily on controlling government spending growth, but signals here are troubling. The Finance Minister has expressed resistance to cutting capital programs, which historically served as a buffer against budget deficits. At the same time, significant salary increases for the Ministry of Internal Affairs and other security sector services, alongside a 30% wage hike for the armed forces, will strain the budget further. Additionally, the government is extending the compensation program for non-household electricity consumers, including companies with record profits, a policy that maintains the price ceiling of 180 leva/MWh and will cost the budget approximately 440 million leva.

These actions cast doubt on the government's ability to prevent budgetary populism and manage state finances responsibly. Maintaining fiscal discipline is not just critical for meeting the eurozone criteria; it is essential for macroeconomic stability, fostering investment, and ensuring long-term economic growth. Without these fundamentals, Bulgaria risks undermining its economic prospects.

Source: Institute for Market Economics


Tags: Bulgarian, government, euro

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