Bulgarian Industrial Capital Association (BICA)

The following is the full text of the position of the BICA dated 21.02.2025 on the drafts of the State Budget Act of the Republic of Bulgaria for 2025, the State Social Security Budget Act for 2025 and the National Health Insurance Fund Budget Act for 2025.

TO

MR. TOMISLAV DONCHEV, DEPUTY MINISTER-PRINCIPLE ,
MINISTER OF INNOVATION AND GROWTH, CHAIRMAN OF THE NCTS

Regarding: Project of The Law on the State Budget of the Republic of Bulgaria for 2025, the draft Law on the State Social Security Budget for 2025 and the draft Law on the Budget of the National Health Insurance Fund for 2025.

DEAR MR. CHAIRMAN,

The Bulgarian Industrial Capital Association has thoroughly examined the above-mentioned draft laws and, taking into account the current economic and political situation in Bulgaria , expresses the following opinion:

On the draft Law on the State Budget of the Republic of Bulgaria for 2025

We are satisfied that the draft Law on the State Budget of the Republic of Bulgaria for 2025 proposed by the current regular government demonstrates a controlled approach to the management of public finances, with budget consolidation in the medium term meeting the criteria for stability of public finances necessary for entry into the Eurozone.

Strengths of the draft state budget of Bulgaria for 2025

1. Budget consolidation and stability: The budget deficit is expected to decrease, with the deficit for the General Government sector on a cash basis is projected to be 2.9% of GDP in 2025, 2.2% in 2026, 4.1% in 2027 and to decline to 1.9% in 2028. The temporary deterioration in the deficit on an accrual basis caused by the acquisition of military assets is estimated at 0.5% in 2025 and 1.6% in 2027. Excluding these expenditures, the deficit stabilizes at around 2.4% of GDP in 2025 and 2.5% in 2027. The budget balance under the CFP shows a deficit in the range of 2.2% to 3.0% of GDP over the period 2025-2028, with a gradual decrease to 2.2% in 2028.
2. Reduction of current expenses: A 10% reduction in current expenses is proposed, excluding independent budgets and delegated state activities, which will lead to savings of BGN 283.8 million.
3. Changes in VAT rates: Restoration of the standard 20% VAT rate for restaurants, bread and flour, as well as the elimination of the reduced rate for tourist services and sports facilities, is expected to stimulate revenues.
4. Development of the toll system: Expected additional revenues from the toll system – BGN 211.2 million in 2025 and BGN 56.1 million in 2026, respectively with an increase in fees for heavy goods vehicles, which aims at more effective maintenance and modernization of the transport infrastructure.
5. Expected recovery of vignette prices: Their return to pre-pandemic levels will bring additional revenues of BGN 12.4 million in 2025.
6. Improving tax legislation: Changes related to transfer pricing and related party transactions will be in line with OECD international standards, which will increase tax transparency and efficiency.
7. Support for the cultural sector: An increase of BGN 50 million is foreseen for delegated state activities in culture, which will support the growth of the minimum wage and the provision of financial resources for museums, galleries and libraries. We would support the planning of additional funds in the 2025 budget in connection with the emerging need to modernize Bulgarian museums and the begun updating of some of their expositions, as well as an increase in expenses for community centers and their union.
8. Eurozone Integration: Bulgaria's indicative adjusted capital contribution to the European Stability Mechanism, totaling BGN 1,110.0 million, will be payable in equal annual instalments over the first five years after Bulgaria's accession to the eurozone. Assuming that Bulgaria will adopt the euro in 2026, BGN 222.0 million per year is foreseen for the period 2026-2028. This request in the 2025 SSAP is important for the government's commitment to action towards the country's accelerated accession to the Eurozone.
9. Capital expenditures: Significant increase in capital expenditures for 2025 to BGN 13,852.9 million compared to the 2024 implementation of 6 705.4 million leva. Public investment spending is important for economic growth not only for the current year, but also has an effect on increasing growth in the next few years. Therefore, it is necessary to develop and support the building of capacity to implement the capital expenditures set in the budget.

Weaknesses of the draft state budget of the Republic of Bulgaria for 2025

1. Medium-term forecasting of budget deficits: Budget deficits during years of economic growth are not acceptable, especially when they are mainly due to wage and pension costs, rather than capital expenditure and investment. Such an approach is unsustainable and could lead to the collapse of public finances. It is necessary to propose balanced budgets so as not to burden future generations with debt. Responsible management of budget resources is key to long-term economic stability and sustainable development
2. Increased personnel costs in the public sector:

- Increase in personnel costs in the Defense and Security sector, in accordance with the mechanisms adopted by the Ministry of Interior Law, the National Security Service Law and the Defense and Armed Forces of the Republic of Bulgaria Law and current policies in the sector, as of 01.01.2025 - effect on costs - 2,148.5 million BGN.

- The policy of increasing the remuneration of teaching staff in secondary education by 125% of the average gross salary for 2024 (2,284 BGN) has been maintained - effect - an increase in expenses of 499 million BGN.

- The remuneration of the academic staff and of the persons under Art. 53, para. 1 of the Higher Education Act in state higher education institutions and scientific organizations, in connection with adopted amendments to the Higher Education Act (SG, issue 25 of 2024), as well as the updating of these remunerations for 2025 in accordance with the achieved amounts of the average gross salary for the country for the last 12 months, published by the National Statistical Institute.

- Additional funds are provided for indexing the basic and additional remuneration of those employed in the judicial system, which are determined according to the mechanisms set out in the Judicial System Act (pursuant to Art. 218, Art. 233, para. 6 and Art. 345, para. 5). Over 10 thousand BGN is SRH in the judicial system.

In the context of excessive deficit and the need for stability of public finances, these increases are, to put it mildly, unjustified. Wage costs are among the most inelastic and, once increased, are difficult to reduce. Instead of increasing, these costs could have been postponed, adjusted or even canceled. It is detrimental to link the amount of remuneration in the public sector to the average wage, as this automatism will increasingly worsen the state of the budget in the coming years. It is unacceptable to pour funds into unreformed and relatively overfunded systems, without regard to achieving certain goals such as the quality of the services provided. An increase in remuneration should be accompanied by a reduction in total costs by reducing the number of personnel in the budgetary sphere, including by gradually releasing working pensioners in the “ Defense and Security ” sector , where personnel costs exceed THREE times the average costs per employee in the real sector.

3. Increase in social security contributions: Starting from January 1, 2027, the social security contribution to the Pension Fund will increase by 1 percentage point and from January 1, 2028, it will increase by 2 percentage points, which is unacceptable. Once again, the bill for the unreasonable fiscal policy of the ruling politicians will be paid by Bulgarian workers in the real sector.
4. Increasing the redistributive role of the state: The projected total level of revenues for the period 2025-2028 is in the range of 40.0 - 41.9% of GDP. A similar increase is observed in expenditures, which are expected to be in the range of 44.9 - 42.4% of GDP.
5. Unrealistic tax and social security revenues: The projected growth in tax and social security revenues is BGN 12,143 million, which represents an increase of 20.7%.

VAT revenues will increase significantly – from BGN 18,576.2 million in 2024 to BGN 24,833.6 million in 2025, which represents an increase of BGN 6,257.4 million (33.68%). The share of VAT revenues in GDP grows from 9.2% in 2024 to 11.5% in 2025.

These very optimistic forecasts create the risk of a possible under-realization of budget revenues.

6. Rising public debt: Public debt is projected to increase to BGN 59.7 billion (27.7% of GDP) in 2025, BGN 70.5 billion (31.0% of GDP) in 2026, BGN 79.5 billion (33.5% of GDP) in 2027, and BGN 87.0 billion (35.2% of GDP) in 2028. Such an increase in debt raises concerns about long-term fiscal sustainability.
7. Rising level of state-guaranteed debt: As of December 31, 2024, state-guaranteed debt reached BGN 1.7 billion (compared to BGN 1.6 billion at the end of 2023), with a decreasing ratio to GDP – 0.8% compared to 0.9% the previous year. New state guarantees are planned, including up to BGN 6.8 billion.

We express our abstention from supporting the planned "National Program for Energy Efficiency of Multi-Family Residential Buildings for the period 2025-2029", which will be financed by the Bulgarian Development Bank (BDB) through a loan guaranteed by the state in the amount of BGN 2.5 billion. Even if we leave aside the fact that with this financial resource, collected from the taxes of Bulgarian citizens and businesses, only 2% of multi-family residential buildings in Bulgaria will be renovated, the first stage of the program already demonstrates inefficient spending of public funds.

We believe that rehabilitation assistance should not be 100% grant aid in any case, in order to ensure the commitment of property owners in multi-family residential buildings and to stimulate their interest in exercising control over the contractors of the construction activities. We also suggest the use of ESCO contracts to finance such schemes, as they ensure automatism and renewable resources, while at the same time increasing the scope of potential users. These approaches could lead to more efficient use of public funds and real improvements in the energy efficiency of housing.

8. High interest costs: Interest costs for debt service in 2024 increased to BGN 953.3 million (BGN 830.9 million on external debt and BGN 122.4 million on domestic debt). For the period 2025-2028, the trend of increasing interest costs is expected to continue, reaching BGN 3,324.4 million in 2028 - 1.3% of the estimated GDP for 2028.
9. Increase in the minimum wage: The increase in the minimum wage from 933 BGN to 1,077 BGN from January 1, 2025 - effect on costs - an increase of 283.3 million BGN. A gross error in the application of the relevant directive and law, which led to a 67% ratio of basic minimum to basic average wage, with a desired result of up to 50%.

10. Increase in personnel costs by 5% , for which no other increases are foreseen in implementation of adopted regulations and current policies, including for the municipal administration, and this increase amounts to BGN 283.7 million. It is important to note that even without this increase, average net wages in the public sector are already 26% higher than average net wages in the real sector. The real sector, which generates revenues and fills the budget from which civil servants' salaries are paid, is burdened by these costs. Such an increase in costs could put additional pressure on public finances and negatively affect long-term fiscal sustainability. No cuts to the administration are planned and funds are being poured back into unreformed systems.

11. Increasing social transfer costs and pension modernization: The projected increase in social transfer costs of 14.2% in 2025 is primarily due to the increase in pension costs, which will increase by BGN 2,501.1 million compared to the 2024 budget.

The additional funds planned for updating pensions by 8.6% from July 1, 2025 amount to BGN 1,034.6 million.

Increased social spending puts the budget under pressure, while also raising questions about the sustainability of social protection.

12. Compensation of employees: Compensation per employee is expected to increase by 9.1% in 2025, driven by a 15% increase in the minimum wage and wage growth in certain budget sectors of up to 75%. This could put additional pressure on public finances and inflation as productivity gains do not match the growth in compensation of employees.

13. Tax transparency requirement: Expanding the scope of the definition of “employment relationship” to achieve greater tax transparency and equality for workers may lead to additional administrative costs and complications in the implementation of the legislation. Careful planning of changes in definitions is necessary to avoid negative consequences for businesses.

14. Expected dividend income: Higher dividend income is expected with a plan to distribute 100% of the profits of state-owned enterprises, including an interim dividend based on the adopted and audited interim financial statements of these enterprises. The deduction rate for the period 2025-2028 is 100%. The planned dividend income is:

• for 2025 – 1,927.7 million BGN;
• for 2026 – 828.5 million BGN;
• for 2027 – 1,181.8 million BGN;
• for 2028 – 1,166.5 million BGN.

This dependence on dividends can have a strong impact on the budget, especially given uncertainty about the financial performance of state-owned enterprises and their ability to sustainably generate profits.

15. Lack of program budgeting: The draft budget lacks program budgeting. There are no basic objectives and performance indicators. Without clear objectives and performance measures, it is difficult to track the effectiveness of public spending and assess the results achieved. This can make it difficult to manage the budget and ensure targeted reforms.

16. Macroeconomic forecasts: The macroeconomic forecast prepared by the Ministry of Finance predicts economic growth of 2.8% in 2025 and 3% in 2026. It is necessary to express some skepticism about these expectations, as the European countries, which are Bulgaria's main trading partners, are experiencing stagnation and without a significant economic revival in them, domestic consumption could not stimulate the necessary growth of Bulgaria's GDP.

Data from early 2025 show inflationary growth in the first two months, which gives us reason to believe that inflation will likely be higher than projected. These factors generate the need for a more in-depth examination of the economic prerequisites and adequate measures to address these challenges.

17. Measures to increase revenues and accompanying challenges: A new excise calendar for excise rates on tobacco and tobacco products has been proposed, which should contribute to increasing revenues (projected effect +203 million). l v. ). We express doubts about the effectiveness of measures to illuminate the shadow economy in the field of fuels. Limiting the possibility of using unreceived cash receipts from gas stations to issue invoices and illegally deduct VAT tax credits is expected to lead to additional revenues of BGN 200 million in 2025, but its realization is uncertain. Optimization of the analysis of overdue liabilities, directing administrative resources to liabilities with the greatest fiscal effect, suggests a positive effect of BGN 189 million for 2025, which is also a major challenge for implementation. The introduction of a Standard Audit File for Tax Purposes and other measures against tax fraud will yield results in an increase in budget revenues in the period after 2029 and requires legislative and regulatory amendments.

These weaknesses in Bulgaria's draft state budget for 2025 highlight the need for strategic planning and the need for reforms in various areas to ensure long-term fiscal sustainability and economic growth. The Ministry of Finance, instead of seeking opportunities for more tangible fiscal consolidation, continues the policy of increasing budget expenditures, new budget deficits, financed with new government debt.

Such a budget does not invest in reforms, continues to distribute money " indiscriminately " and carries a significant risk of excessive deficit.

These are sufficient reasons to refrain from supporting the proposed draft of the State Budget Act of the Republic of Bulgaria for 2025.

On the draft Law on the State Social Security Budget for 2025 .

Strengths of the draft state social security budget for 2025

1. The amounts of insurance contributions for the Pension Fund and the Pension Fund for Persons under Art. 69 of the Social Insurance Institution in 2025 are maintained at the level of 2024. The amounts of insurance contributions for the other Social Insurance Institution funds are also maintained, as well as the ratios between insurers and insured persons;
2. Compared to the 2024 State Budget for Social Welfare, an increase in the transfer from the central budget to cover the shortfall of funds by BGN 669.9 million is planned. As a percentage of the total expenditures of the State Budget, the transfer to cover the shortfall will decrease from 45.3% in 2024 to 42.7% in 2025. Transfers from the central budget – BGN 12,751.5 million (for pensions and supplements to them, and cash benefits and assistance at the expense of the state budget – BGN 678 million and to cover the shortfall of funds – BGN 12,173.5 million) ;
3. The required age and insurance period for retirement for those working under the conditions of the third category of labor are increased, as well as the minimum retirement age for persons under Art. 69, Art. 69a and Art. 69b of the Code of Civil Procedure ;
4. In 2025, the maximum amount of one or more pensions received remains at BGN 3,400 ;
5. The minimum daily amount of unemployment benefit is maintained - BGN 18.00, as well as the maximum daily amount - BGN 107.14;
6. The period of payment of the cash benefit for pregnancy and childbirth is maintained - 410 days and the amount of the cash benefit for raising a child up to the age of two - 780 BGN;
7. The two-month period of payment of the cash benefit for raising a child up to the age of 8 by the father (adoptive parent) is maintained, as well as the amount of the benefit - 780 BGN;
8. The period for which income is taken into account when calculating the amounts of cash benefits is maintained – 18 calendar months for cash benefits for temporary incapacity for work, and for pregnancy and childbirth and unemployment – 24 months;
9. The new procedure for calculating unemployment benefits for persons with acquired insurance experience under the legislation of a country with which the European regulations for the coordination of social security systems are applied, introduced in August 2024, is maintained. When determining the the amount of compensation for the said persons should take into account the income received by them during their last job, as well as all income in Bulgaria for the last 24 calendar months preceding the month of termination of their insurance;

Weaknesses of the draft state social security budget for 2025

1. The minimum wage for the country increases from BGN 933 to BGN 1,077 per month, effective January 1, 2025;
2. The minimum social security income for self-insured persons increases from BGN 933 to BGN 1,077, effective April 1, 2025;
3. The maximum social security income for all insured persons increases from BGN 3,750 to BGN 4,130, effective April 1, 2025;
4. The minimum amount of the pension for insurance length of service and old age and the related minimum amounts of pensions for work activity shall increase, as of July 1, 2025, by 8.6%;
5. Growth in the number of newly granted disability pensions, as well as in state social security expenditures. With PMS No. 13 amending and supplementing the Regulation on Medical Expertise (published in the State Gazette, issue 10 of 31.01.2023), the Methodology for determining permanently reduced working capacity has been changed. Before the change in the Methodology, the basic rule when determining permanently reduced working capacity/type and degree of disability in the case of multiple disabilities was to take the highest percentage at the respective starting point of the most severe disability, and the remaining percentages corresponding to the concomitant disabilities should not be taken into account. After the change in the methodology, the total percentage of permanently reduced working capacity/type and degree of disability is determined by adding 20% of the sum of the percentages of all concomitant disabilities to the highest percentage of the most severe disability ;
6. The average pension amount of a pensioner in 2025 is expected to reach 975.18 BGN. The nominal increase is 10.4 percent with an average amount of 883.14 BGN in the Pension and Disability Insurance Act for 2024. A real growth of pensions of 7.8 percent is expected in 2025. , with a projected average annual inflation rate of 2.4 percent in the harmonized index of consumer prices for 2025. The gross income replacement rate for 2025 is expected to be 53.6 percent, and the net replacement rate is expected to reach 69 percent. All this is far ahead of the development of the economy, the corresponding level of labor income in the economy and the capabilities of the budget ;
7. Pension spending in 2025 is expected to be around 11.2% of projected GDP for the same year, which is a record level ;
8. The regime of payment of cash benefits for temporary incapacity for work according to Art. 40, para. 5 of the Social Insurance Code is maintained - the first two working days are paid by the insurer, and from the 3rd day of the onset of temporary incapacity for work - by the DOO .

These weaknesses are sufficient reasons to refrain from supporting the proposed draft of the State Social Security Act for 2025.

On the draft Law on the Budget of the National Health Insurance Fund for 2025

BICA has repeatedly recommended increasing the share of spending on prevention and prophylaxis at the expense of the share of spending on hospital medical care and medication. We have always advocated for the introduction of a model in which the aspiration and emphasis is for people to not get sick and to diagnose deviations in health status at an early stage, and not to profit from expensive treatments for serious diseases when it is already irreparably too late for successful treatment. We have also insisted on the introduction of intelligent IT solutions for constant control at all levels that spend money in the healthcare system.

We note with dissatisfaction that the additional funds directed to the "Healthcare" function are again being directed mainly to medicines and hospital care.

The health insurance system urgently needs a development plan that would ensure the implementation of specific reforms. For example, the increase in the share of funds for screening should be carried out on the basis of new, European standards for preventive examinations of the population. The proposed draft Law on the Budget of the National Health Insurance Fund for 2025 , despite the growth of the budget , lacks a request for the long-awaited reform, which is sufficient reason for the BICA to refrain from supporting the draft Law on the Budget of the National Health Insurance Fund for 2025.

Recommendations and proposals for amendments and supplements to the drafts of the State Budget Act of the Republic of Bulgaria for 2025, the State Social Security Budget Act for 2025 and the National Health Insurance Fund Budget Act for 2025.

In order to increase the efficiency and sustainability of public finances, the AICB makes the following recommendations:

1. Freezing public sector wages in 2025: In the last three years (2022-2024), the average public sector wage has increased by 32%, while inflation for the same period is 25.1%, meaning that wages are increasing in real terms. With an inflation rate of 2.4% projected for 2025, real wage growth will remain unchanged. In addition, the average net wage in the public sector is 26% higher than in the private sector, which generates revenue for the state budget.
2. "Freezing" pensions in 2025: In the period 2022-2024, the average pension increased by 70.6%, and the minimum pension by 57%. at an inflation rate of 25.1%. This indicates a real increase in pensions. With an expected inflation rate of 2.4% for 2025, the real increase in pensions will be maintained. Currently, the net replacement rate is approaching 70%, while the average level in Europe is 60%, which suggests the need for stability and prudent management of the pension fund.
3. Abolition of the automatic linking of wages to the average wage: Regulations that link wage increases in the Defense and Security, Justice and Higher Education sectors to the average wage do not take into account real needs and the results achieved. The increase in wages leads to an increase in the average wage, creating self-fulfilling growth. These sectors are becoming the "spoiled children" of society.
4. Correct calculation of salaries: If the formulas for calculating salaries in the public sector are based on the average salary, it is necessary to apply a correct relationship - calculating gross salary from gross or basic salary from basic, in order to avoid distortions and accumulations in the calculated new remuneration amounts.
5. Administrative reform: Closing unnecessary or duplicative departments and services functions. Optimization of the composition of ministries, departments and services, as well as closing positions that have been vacant for more than two years. This reform will lead to efficient use of resources and better management of the state administration. The budgets of the reformed state services should be preserved, with the savings made being directed entirely to increasing staff salaries.
6. Change in insurance rules: Public sector employees, who are currently 100% insured at the expense of the state, should start paying insurance contributions themselves in the same way and in the same proportion as private sector employees. This would ensure a fairer distribution of the insurance burden and eliminate discriminatory treatment of different workers and employees.
7. Removal of COVID pension supplements: These supplements, which were introduced as a temporary measure to deal with the consequences of the pandemic, should be removed, restoring the normal structure of pension payments.

If all or some of our proposals for reforms aimed at increasing the efficiency of public spending and ensuring long-term fiscal stability are taken into account and implemented, BICA is ready to reconsider its position and support the projects for the state budget, the state social security budget and the National Health Insurance Fund budget for 2025. Our readiness for cooperation is an expression of responsibility for the sustainable development of the Bulgarian economy and from there - a sustainable increase in the standard of living of the people.

RESPECTFULLY,

VASIL VELEV, CHAIRMAN OF THE BOARD OF DIRECTORS OF THE BULGARIAN INDUSTRIAL CAPITAL ASSOCIATION