“Fiscal innovations”: The Fiscal Council criticizes Temenuzhka Petkova and the 2025 Budget

The Fiscal Council has issued harsh criticism regarding the implementation of the 2 025 state budget. In its position the advisory body – chaired by Simeon Djankov – explains that the projected revenues were too optimistic and unrealistic while the expenditures were excessive, pushing inflation up with the continuing growth of public sector wages.

In its analysis the Council points out that these “fiscal innovations” by the outgoing finance minister, Temenuzhka Petkova, are harmful in the long term and will lead to problems in the coming years.

Highly overestimated forecasts

The Council criticizes the Ministry of Finance (MF) for its highly overestimated revenue forecasts. As Economic.bg wrote, the MF was the subject of similar criticism from economists, financiers and analysts throughout the past year, with repeated warnings that the projected 34% growth in VAT revenues wouldn’t be achieved.

The Fiscal Council’s analysis confirms this and states that the shortfall in tax revenues is close to 3% of GDP, mainly due to uncollected VAT revenues (-2% of GDP less collected) and excise duties (-0.3% of GDP).

Thus it appears that the margin of error between planned and actual revenue “significantly exceeds the permissible margin of error in forecasting.” The FS points out that, contrary to the mantra repeated by the Ministry of Finance in the last months of 2025 that the revenues from the Recovery Plan will help to “patch up” the situation, they actually have no “significant budgetary value in terms of deficit management” because they do not fix the structural problems.

Regardless of the coordination procedure with the EC there was a significant risk of transferring this tranche which would put the budget in an extremely unfavorable position,” the council said.

Excessive flexibility

The cash-based deficit achieved is due to a significant underperformance of planned expenditures amounting to approximately BGN 3.8 billion," the Fiscal Council further notes.

In our analysis at Economic.bg we also found that one of the reasons for the “binding” – albeit with a deviation – of the budget deficit was in fact a significant cut in the capital program and other accounting tricks.

The Fiscal Council points out that total expenditures, including the contribution to the EU, are at 41.2% of GDP, with the reduction from the planned 44.9% of GDP being covered by unrealized expenditures and higher-than-expected GDP performance compared to the forecast.

Compared to 2024, when expenditure was 38.2% of GDP, there’s a 3 percentage point increase.

This represents a huge jump in consolidated expenditure. It cannot be justified by an increase in expenditure related to EU funds, which amount to about BGN1.2 billion more than in 2024 (0.5% of GDP),” they point out.

Total capital expenditures increased by 1.8% of GDP compared to the previous year and the growth in personnel expenditures is an additional 0.9% of GDP, or a 20% nominal increase compared to 2024.

The main culprit for prices

In fact one of the big topics in the budget is precisely personnel costs.

The policy of real income growth in the public sector, combined with the rejection of a broader anti-inflationary policy, is a major contributor to price growth," according to the FS.

According to them personnel costs for another year exceed the planned amount by about BGN1.536 billion, which “again raises the question of fiscal management.” The total amount of funds was about BGN24.3 billion, or about 10.8% of GDP.

Economic forecasts

The Fiscal Council has developed a forecast for GDP growth in 2025 in an optimistic and pessimistic scenario.

Recommendations

The Fiscal Council again calls for “compliance with the spirit of the Public Finance Act.”

The fiscal innovations that were undertaken in 2025 create long-term problems. The withdrawal of advance tax from banks, the seizure of 100% dividends from state-owned companies and the capitalization of some of them through loans are decisions that will create major problems in the coming years,” they warn.

Financiers again advise that structural reforms are needed – cutting current spending, administrative reform to deal with pressure from defense, pensions, healthcare and demographics – otherwise there’s a risk of higher taxes or debt.

Translated with DeepL.