Djankov: Tax increases are inevitable – VAT is the best option

Tax increases in Bulgaria are inevitable, according to Simeon Djankov, chairman of the Fiscal Council. In an interview with BGNES, he cites as reasons for this the inflated expenditures in this year's budget and the "unrealistic" revenues projected, which only add to the chronic deficits that finance ministers have been projecting for the past four years.

It should not be forgotten that Bulgaria has committed to increasing its defense spending in the coming years from 2% to 5%. According to Djankov, this means BGN 10 billion in spending on this item per year. And even if the European Commission allows part of this to be excluded from the formal deficit rule, in reality this will be a shortfall in funds that will have to be found from somewhere – either through more revenue or through loans, as is currently the case.

Of course, the government will immediately say that it does not want to raise taxes under any circumstances. But first, they will have to reveal the truth about the deficit, which has been pushed into the background because of the country's entry into the eurozone," says Djankov.

He fears that the drafting of the 2026 budget will, on the one hand, be "a huge circus" because of the behavior of some opposition parties, which will use it for all sorts of other things, but also "a very serious issue for Bulgaria, because we have been accumulating a serious deficit for five years now.".

The chairman of the Fiscal Council believes that the government will initially try to keep taxes unchanged and increase tax collection. However, he reminded that the 2025 Budget included "absolutely unrealistic revenue collection forecasts."

The most striking example is VAT, whose collection is expected to jump by 32% compared to last year.

The data we have for June shows that VAT is indeed increasing. This is good, but it has increased by an average of 14% by the middle of the year. The idea that it will double in terms of collection is simply not feasible," Djankov said categorically.

He also drew attention to the fact that other taxes, such as corporate tax, are being collected very poorly this year. "Revenues will certainly not be covered, and we will need even more money next year," Djankov warned.

He is adamant that the proposed increase in social security contributions for businesses and workers in 2026 and 2027 by a total of 3 percentage points is "the worst idea" that could be put forward.

It directly hits businesses and working Bulgarians and has the most distorting effect on the economy. In recent months, the Fiscal Council has published several analyses emphasizing how bad this idea is and that if the government needs more money, it should find it elsewhere," Djankov said.

The easiest way out of the situation is to raise VAT to 22% because this tax is the easiest to collect.

It comes from consumption, not production, so it is a much less distorting tax than the social security contributions we talked about. Its collectability is over 90% and it is easier to collect," the former finance minister explained.

But Djankov is skeptical that the government will do so, because such a drastic decision would be difficult to find support for in the broad coalition governing the country.

Translated with DeepL.