site.btaInstitute for Market Economics Discusses New Government's Path Forward

Bulgaria has a regular government now. The emergence of a ruling majority has unlocked the possibility to put the National Assembly into working mode and implement a host of policies which were stalled for a long time. One specific fact about the new ruling coalition is that its legislative and governance programme was unavailable by the time the government was voted into office. The programme is expected to crystallize in the next 30 days. This provides an open ground for ideas and reform proposals, Institute for Market Economics (IME) senior research fellow Petar Ganev says in an analysis published on the IME website on January 17.

Based on the IME White Paper, Unlocking Growth: The Path Forward After the Elections (October 2024), Ganev makes the following recommendations for the powerholders' main legislative and governance policies:

The state budget will be one of the first tasks of the new majority. The finance minister needs to revise the public finance framework for 2025, and the budget should be adopted by the end of March. The big challenge here is to contain the increase on the expenditure side, including the steep rise in personnel costs, and to keep the government deficit within 3% of GDP without raising taxes. The latter objective requires cutting on Bulgarians' disposable incomes and cooling off an already subdued investment activity.

A medium-term fiscal structure plan should be drawn up without delay, to provide a fiscal framework for the nation in the coming years and set out commitments for reforms and investments. Dealing with the public finance deficit goes precisely through such a plan. The medium-range goal should be to bring consolidated expenditures sustainably back to about 38% of GDP, which is a prerequisite for a balanced budget and steady rates of the main taxes.

A euro changeover in Bulgaria as of January 1, 2026, is emerging as a perfectly feasible scenario. Current inflation data and forecasts for 2025 show that the country will meet the price stability criterion early in the year. Therefore, Sofia should ask in the coming weeks for an extraordinary convergence report which can give it the green light this spring to adopt the euro at the beginning of 2026. This objective calls for additional attention to the state budget and fiscal sustainability.

Financial stability and the euro changeover may be the main macroeconomic anchors, but they cannot, in themselves, ensure prosperity and should not be the ultimate goals of the government. A fundamental goal over the medium range could be, for example, to achieve 75% of the average EU level of GDP per capita based on purchasing power parity (PPP). The current ratio is 64%. Reaching the 75% mark means sustainable economic growth in the years to come and catching up with the "new" EU member states in Central and Eastern Europe, where per-capita GDP (PPP) is usually between 75% and 90% of the average rate in the bloc.

Sustainable catch-up growth requires a package of measures to boost investment activity such as incentives to invest in fixed capital and a fast-track approach to preparing industrial sites, efforts to maintain high employment and a targeted policy on economically inactive people, as well as strenuous work in the field of education, with a focus on building up knowledge and skills. By increasing labour productivity, it will be possible to boost added value and disposable incomes. Without higher investment activity and targeted policies in support of human capital, it will be impossible to achieve compensatory growth and catch up with the more successful economies in the region.

Basically, there are no insurmountable difficulties for these policies, and the new majority has every chance to carry them through. The main challenges have to do not just with the desire of the new government ministers to act as reformists, but with the need for deeper structural changes concerning the distribution of power and dependencies. A pertinent issue in this respect is financial decentralization and the municipalities' use of their own resources, which has stood for decades and has been carefully avoided by every government in Sofia. Regional imbalances in Bulgaria will remain strong unless local authorities have more resources of their own and more political leverage.

The biggest stumbling-block is in the judicial system and the regulators. All international surveys show that Bulgaria has its competitive advantages but does not match up to the success stories of Europe due to its rule-of-law situation and the less-than-satisfactory work of its public institutions.

If the new government coalition uses a "hush" approach to the judicial system, all efforts recommended above will have a very limited effect and Bulgaria will remain at the European bottom.