AIKB: And in 2025 we continue to distribute money to the kalpak

The Association of Industrial Capital in Bulgaria (AIKB) issued a statement regarding the draft budget for 2025. In it, AIKB highlights the weaknesses and strengths in the draft of the Law on the State Budget of the Republic of Bulgaria for 2025, the draft of the Law on the State Social Security Budget for 2025 and the draft of the Law on the Budget of the National Health Insurance Fund for 2025.

According to the association, the state budget does not invest in reforms, it continues to distribute money "to the kalpak" in an untargeted manner and contains a significant risk of excessive deficit.

Here is the entire position of the AIKB without editorial intervention.

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 fulfilling the criteria for stability of public finances necessary for entry into the Eurozone.

Strengths of the draft State Budget of Bulgaria for 2025.

• Budget consolidation and stability: A reduction in the budget deficit is expected, as for the "General Government" sector The cash-based deficit 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 accrual-based deficit 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 in the period 2025-2028, with a gradual decrease to 2.2% in 2028.
• Reduction of current expenditures: A 10% reduction in current expenditures is proposed, excluding independent budgets and delegated state activities, which will lead to savings of BGN 283.8 million.
• 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.
• 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 to more effectively maintain and modernize the transport infrastructure.
• Expected restoration of vignette prices: Returning them to pre-pandemic levels will bring additional revenues of BGN 12.4 million in 2025.
• Improvement of tax legislation: Changes related to transfer pricing and transactions between related parties will comply with OECD international standards, which will increase tax transparency and efficiency.
• Support for the cultural sector: An increase of BGN 50 million is provided 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 planning additional funds in the 2025 budget in connection with the emerging need to modernize Bulgarian museums and the begun updating of some of their exhibitions, as well as increasing spending on community centers and their union.
• Integration into the eurozone: Bulgaria's indicative adjusted capital contribution to the European Stability Mechanism, which amounts to a total of BGN 1,110.0 million, will be due in equal annual installments during the first five years after Bulgaria's accession to the eurozone. Assuming that Bulgaria will introduce the euro in 2026, BGN 222.0 million per year is planned for the period 2026-2028. This request in the 2025 SSBP is important for the government's commitment to actions towards accelerated acceptance of the country into the Eurozone.
• Capital expenditures: Significant increase in capital expenditures for 2025 to 13,852.9 million BGN compared to the implementation for 2024 of 6,705.4 million BGN. 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 for the implementation of the capital expenditures set in the budget.

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

- Increase in personnel costs in the "Defense and Security" sector, in accordance with the mechanisms adopted by the Law on the Ministry of Interior, the Law on the National Security Service and the Law on the Defense and Armed Forces of the Republic of Bulgaria and current policies in the sector, as of 01.01.2025 - effect in 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) is maintained - effect - increase in costs of 499 million BGN.

- The remuneration of the academic staff and the persons under Art. 53, para. 1 of the Law on Higher Education in State Higher Education Schools and Scientific Organizations, in connection with adopted amendments to the Law on Higher Education (SG, issue 25 of 2024), as well as the updating of these salaries 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 salaries of employees in the judicial system, which are determined according to the mechanisms set out in the Law on the Judiciary (according to Art. 218, Art. 233, para. 6 and Art. 345, para. 5). Over 10 thousand BGN is SRH in the judicial system.

In the conditions 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, they are difficult to reduce. Instead of increasing, these costs could have been postponed, adjusted or even canceled. It is detrimental to tie 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 through the gradual release of working pensioners in the "Defense and Security" sector, where personnel costs exceed THREE times the average costs per employee in the real sector.

VAT revenues will increase significantly - from 18,576.2 million leva in 2024 to 24,833.6 million BGN in 2025, which represents a growth of 6,257.4 million BGN (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 possibility of incomplete realization of budget revenues.

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 2.5 billion BGN. 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 the renovation assistance should in no case be 100% grant aid, 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 propose the use of ESCO contracts to finance such schemes, as they ensure automatism and renewability of 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.

The additional funds planned for the 8.6% pension modernisation from 1 July 2025 amount to BGN 1,034.6 million.

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

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

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

These weaknesses in the draft state budget of Bulgaria for 2025 emphasize 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 state 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 State Social Security Budget Act for 2025.

Strengths of the draft State Social Security Budget Act for 2025.

The amounts of insurance contributions for the "Pensions" fund and the fund "Pensions for persons under Art. 69" of the Social Security Act in 2025 are maintained at the level of 2024. The amounts of insurance contributions for the other Social Security Act funds are also maintained, as well as the ratios between insurers and insured persons;

Compared to the Social Security Act for 2024 It is planned to increase the transfer from the central budget to cover the shortfall of funds by 669.9 million BGN. As a percentage of the total expenses of the Social Insurance Institution, the transfer to cover the shortfall will decrease from 45.3% in 2024 to 42.7% in 2025. Transfers from the central budget - 12,751.5 million BGN (for pensions and supplements to them, and cash benefits and allowances at the expense of the state budget - 678 million BGN and to cover the shortfall of funds - 12,173.5 million BGN);

The required age and insurance period upon 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 CSR;

In 2025 the maximum amount of one or more pensions received is maintained at 3,400 BGN;

The minimum daily amount of unemployment benefit is maintained - 18.00 BGN, as well as the maximum daily amount - 107.14 BGN;

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 is maintained - 780 BGN;

The period of two months of payment of the cash benefit for raising a child up to the age of 8 by the father (adoptive parent) is maintained, as is the amount of the benefit - 780 BGN;

The period for which the income is taken into account when calculating the amounts of the cash benefits is maintained - 18 calendar months for cash benefits for temporary incapacity for work, and for pregnancy and childbirth and unemployment - 24 months;

The new procedure introduced in August 2024 for calculating cash benefits for unemployment 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 is maintained. When determining the amount of the benefit for the specified persons, 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, should be taken into account;

Weaknesses of the draft state social security budget for 2025.

The minimum wage for the country is increased from 933 BGN to 1,077 BGN. monthly, as of January 1, 2025;

The minimum social security income for self-insured persons increases from BGN 933 to BGN 1,077, as of April 1, 2025;

The maximum social security income for all insured persons increases from BGN 3,750 to BGN 4,130, as of April 1, 2025;

The minimum amount of the pension for insurance length of service and old age and the related minimum amounts of pensions for work activity increase, as of July 1, 2025, by 8.6%;

Increase in the number of newly granted disability pensions, as well as in the costs of state social security. With the 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;

The average pension 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 2024 Pension and Disability Insurance Act. A real growth of pensions of 7.8 percent is expected in 2025, with a projected average annual inflation rate according to the harmonized consumer price index of 2.4 percent 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;

Pension expenditure in 2025 is expected to be around 11.2% of the estimated GDP for the same year, which is a record level;

The regime of payment of cash benefits for temporary incapacity for work is maintained in accordance with Art. 40, para. 5 of the Social Insurance Code - 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 Social Insurance Institution.

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

• The minimum wage for the country is increased from BGN 933 to BGN 1,077 per month, effective January 1, 2025;
• The minimum social security income for self-insured persons is increased from BGN 933 to 1,077 BGN, effective from April 1, 2025;
• The maximum social security income for all insured persons increases from 3,750 BGN to 4,130 BGN, effective from April 1, 2025;
• The minimum amount of the pension for insurance length of service and old age and the related minimum amounts of pensions for work activity increase, effective from July 1, 2025 by 8.6%;
• Increase in the number of newly granted disability pensions, as well as in the costs of state social security. With PMS No. 13 on amendments and supplements to the Ordinance 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 the 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 were not 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;
• The average amount of the pension 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 2024 Pension and Disability Insurance Act. A real growth of pensions of 7.8 percent is expected in 2025, with a projected average annual inflation rate according to the harmonized index of consumer prices of 2.4 percent 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;
• The expenditure on pensions in 2025 is expected to be about 11.2% of the estimated GDP for the same year, which is a record level;
• The regime of payment of cash benefits for temporary incapacity for work is maintained in accordance with Art. 40, para. 5 of the Social Insurance Code - 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 Social Insurance Institution.

According to the draft Law on the Budget of the National Health Insurance Fund for 2025.

AIKB has repeatedly recommended increasing the share of expenses for prevention and prophylaxis at the expense of the share of expenses for hospital medical care and expenses for medications. 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 of spending in the healthcare system.

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

The health insurance system urgently needs a development plan that will 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 of the National Health Insurance Fund Budget Act for 2025, despite the growth of the budget, lacks a request for the long-awaited reform, which is sufficient reason for AIKB to refrain from supporting the draft of the National Health Insurance Fund Budget Act 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 Insurance Budget Act for 2025 and the Law on the Budget of the National Health Insurance Fund for 2025.

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

• "Freezing" of public sector salaries in 2025: In the last three years (2022-2024), the average salary in the public sector has increased by 32%, while inflation for the same period is 25.1%, which means that salaries are increasing in real terms. With an expected inflation of 2.4% for 2025, the real increase in salaries will be maintained. In addition, the average net salary in the public sector is 26% higher than that in the private sector, which generates revenue for the state budget.
• "Freezing" of pensions in 2025: In the period 2022-2024, the average pension increased by 70.6%, and the minimum pension by 57%, with inflation of 25.1%. This shows a real increase in pensions. With an expected inflation of 2.4% for 2025, the real increase in pensions will be maintained. At the moment, 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.
• Abolition of the automatic linking of wages to the average salary: The regulations that link wage increases in the sectors of "Defense and Security", "Justice" and "Higher Education" to the average salary do not take into account the real needs and the results achieved. The increase in wages leads to an increase in the average wage, creating self-serving growth. These sectors become the "spoiled children" of society.
• Correct calculation of wages: If the formulas for calculating wages in the public sector are based on the average wage, it is necessary to apply a correct relationship - calculating gross wage from gross or basic wage from basic, in order to avoid distortions and accumulations in the calculated new wage amounts.
• Administrative reform: Closing departments and services with no longer needed or duplicative 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 civil services should be preserved, with the savings made being directed entirely towards increasing staff salaries.
• Change in social security rules: Public sector employees, who are currently 100% insured at the expense of the state, should begin to pay social security contributions themselves in the same way and in the same proportion as private sector workers and employees. This would ensure a fairer distribution of the insurance burden and eliminate discriminatory treatment of different workers and employees.
• Removal of COVID supplements to pensions: 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, AIKB is ready to reconsider its position and support the drafts 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 people.