Hidden Crisis: Central Bank Reveals How Wage Hikes and Pensions Are Draining Bulgaria’s Finances

The Bulgarian National Bank (BNB) has identified a clear trend of fiscal deterioration in Bulgaria between 2020 and 2024, primarily due to the sharp rise in expenditures for employee compensation and pensions. These costs, which account for a significant share of the state’s current budget spending, are expected to continue putting pressure on public finances because of the growing use of automatic indexation mechanisms.

The findings are part of the BNB’s report titled "Analysis of Bulgaria's Fiscal Position in the Period After 2020," which evaluates the fiscal balance in relation to the country’s broader economic cycle. According to the analysis, Bulgaria’s fiscal stance has worsened over the reviewed period, with fiscal policy becoming pro-cyclical, meaning it has fueled domestic demand and contributed to additional inflationary pressures during an economic upswing.

The central bank warns that this approach not only heightens the volatility of macroeconomic activity but also undermines the long-term sustainability of public finances. The study notes that the expansionary fiscal policy implemented in recent years, while boosting consumption and employment, has intensified inflation through the wage-price link. This, the BNB stresses, runs counter to the institution’s countercyclical policy efforts aimed at maintaining stability through macroprudential and limited monetary tools.

Between late 2021 and mid-2025, Bulgaria experienced persistently high core inflation, rising private and public sector wages, a tightening labor market, and growing private consumption and household credit. Housing prices also saw a significant increase. The BNB warns that these dynamics, combined with a structurally deteriorating fiscal position, pose risks to both economic stability and the sustainability of public finances.

According to the analysis, the main sources of risk stem from the rapid growth of current non-interest budget expenditures, which are difficult to reverse; the widening application of automatic expenditure indexation; and the prospects for a swift rise in public debt, even though debt levels remain relatively low.

To mitigate these risks, the BNB recommends fiscal consolidation measures that improve the country’s fiscal position without hampering economic growth. The report also stresses the importance of maintaining conservative national fiscal rules, especially in light of the slightly restrictive nature of the new European fiscal framework for low-debt countries, to preserve Bulgaria’s financial stability.

In the latest issue of the BNB’s quarterly publication “Economic Review,” the central bank outlines broader macroeconomic developments based on data available as of September 25, 2025. Economic growth accelerated to 3.5% year-on-year in the second quarter of 2025, supported mainly by increased government consumption and declining goods imports. Private consumption continued to be the key driver, rising by 6.9% year-on-year in real terms, fueled by higher employment and disposable income.

Labor market conditions remained tight, with employment up by 3.7% and labor shortages reaching historic highs. These factors contributed to an 18.5% annual rise in nominal employee compensation in the second quarter of 2025.

Although business activity indicators showed mixed results in the third quarter, retail sales remained strong and consumer confidence high, suggesting that household consumption would continue to play a major role in GDP growth.

Annual inflation, measured by the Harmonized Index of Consumer Prices (HICP), reached 3.5% in August 2025, compared with 2.1% at the end of 2024. The rise was largely driven by higher prices for food and services, with both categories showing inflation rates of around 6–7% in recent months. The increase in unit labor costs, coupled with robust private consumption, enabled companies to pass on higher production expenses to consumers.

Credit growth to households also remained strong. By August 2025, lending had expanded by 20.8% year-on-year, with housing loans contributing the most to this growth, another sign of the continuing strength of domestic demand and the financial risks that accompany it.