Opinion on the Draft State Budget of the Republic of Bulgaria for 2025

TO MS. LYUDMILA PETKOVA MINISTER OF FINANCE OF THE REPUBLIC OF BULGARIA

POSITION

REGARDING: Published draft Law on the State Budget of the Republic of Bulgaria for 2025 and the updated medium-term budget forecast for the period 2025–2028.

DEAR MS. PETKOVA,

On behalf of the undersigned organisations, we present the following position on the draft Law on the State Budget of the Republic of Bulgaria for 2025 and the updated medium-term budget forecast for the period 2025–2028 submitted for discussion.

We express our support for some of the proposals set out in the draft budget:

• The discontinuation of the diversification of the VAT rate for different industries and the return to 20% VAT for restaurateurs and bread producers. We believe that Bulgaria should strive for low, uniform and clear taxes for all, and that tax exemptions would in the long term be destructive for our country.
• We welcome the efforts of the Ministry of Finance to apply measures related to the removal of our country from the list of high-risk countries pursuant to the AMLA (FATF).
• We consider the proposed measures related to increasing excise duties on tobacco products and alcohol to be reasonable.
• We regard as a positive development the dropping of the proposal to tax the "excess profits" of banks, which in our view would have sent a very bad signal to business and created a dangerous precedent.

We consider that the draft budget as proposed contains some very concerning proposals and call on the Ministry of Finance to reconsider some of them.

I. Increase in the maximum insurable income.

The proposed increase in the maximum insurable income is a blow against the companies that for years have served as examples by operating transparently and forming the backbone of the middle class. Numerous studies have been conducted showing that taxing the middle class more heavily is not the right policy.

In working on the 2025 budget, we must take into account the development of global markets. Many of the companies that will be affected operate on international markets that are currently in a deepening recession. It is important at this moment for more money to remain in businesses and to ensure that they have the resources to continue developing in this difficult international situation, rather than having the state take away part of the funds of people and companies at this critical moment.

In 2024 in Europe, 90% less funding was invested in technology companies by venture and private equity funds compared to 2023. Company valuations are currently very depressed and it is precisely the businesses with growth potential that are being forced to cut costs and postpone their next investment rounds. Raising the insurance threshold at the current moment would place them in an even worse position relative to their international competitors, which is contrary to Bulgaria's interests.

It should be borne in mind that among the middle class, which is insured above the insurance threshold and would be affected by the proposal as made, tension on this topic has been building for more than 3 years. The people themselves have the sense that the constant raising of the insurance threshold and the taking of part of their salaries is not fair, because they already pay the most in absolute terms. Against this backdrop, there is a growing understanding that the state does not provide the necessary quality of public services, and people are paying twice — once in the form of taxes and social security contributions, and a second time for:

• Private kindergartens — because state ones are most often unavailable.
• Private schools — because state education remains unreformed and delivers very poor results.
• Private doctors.
• Care for their elderly parents.

What we see happening in Poland and Romania is that, especially in the IT sector, more and more people are terminating their employment contracts and transitioning to contractor agreements, insuring themselves at the minimum wage — a decision prompted above all by a sense of fairness. This trend will develop in Bulgaria if the annual raising of the insurance threshold continues, and this in turn will lead to a reduction in the number of people insuring themselves at a higher rate.

The biggest problem with raising the maximum insurance threshold is that it affects the people who pay everything owed to the state correctly, while entire industries operate in the grey economy. The European Parliament published a study placing Bulgaria first as the country with the largest grey sector as a share of the economy. Construction, the restaurant industry, taxi services and many others are sectors in which it is well known that many people earn well above the insurance threshold, while at the same time insuring themselves at the minimum wage and working only with cash. We consider it unfair and improper for the state to "write off" one third of the economy, while continuing to demand more funds from the approximately 7% who pay the highest social contributions.

II. Cancellation of the raising of the VAT threshold from BGN 100,000 to BGN 166,000.

The raising of the VAT threshold affects approximately 700,000 small companies, which represent the majority of businesses in Bulgaria. This measure is unquestionably positive for the development of the business environment and must not be cancelled.

It is particularly negative that there are only 3 weeks remaining until the threshold is raised to BGN 166,000. Business has already drawn up its budgets and plans, and this measure will create enormous chaos among many companies. There is a real risk that the budget will not be voted on by the end of the year, which means that on 1 January the threshold will be raised, and could subsequently be lowered again to BGN 100,000 after the proposed budget is voted on. For quite a few businesses this will create even greater confusion, and we call on the Ministry of Finance to reconsider the proposal as made, in order to bring more stability to the business environment.

One of the biggest criticisms of our country is that we do not have a predictable business environment. The last-minute cancellation of the planned raising of the VAT threshold (or after the fact) will be yet another action on the part of the state that demonstrates unpredictability in our country's policy — something that deters both foreign and domestic entrepreneurs and investors.

III. The increased expenditure in the public sector.

The European Union regards it as the norm to provide funds in exchange for implemented reforms. We believe this is a good practice that we should follow in Bulgaria when drawing up the budget. Recommendations for structural reforms and stability-oriented economic policies also come from the European Central Bank in its convergence reports on Bulgaria's progress towards accession to the Eurozone.

Undoubtedly, teachers and employees in education must be progressively better paid, but the increased expenditure must be linked to reforms and higher quality education.

Our country's defence has the potential to be a driver of the economy, and in today's world it will be increasingly important to develop our own innovations in the defence industry and dual-use developments. Higher pay for people in this field must be linked to a clear vision for improvements and modernisation of the industry.

Similarly, the pay increase at the Ministry of Interior must be linked to optimisation of personnel and reform of processes.

IV. The minimum wage (MW) must not be linked to the average wage.

The formula currently in force triggers a spiral in which the MW and the average wage constantly push each other upwards and only in one direction. We believe this is destructive for our economy, and we are already witnessing cases in which major employers are leaving Bulgaria precisely because of the increase in the minimum wage. At the same time, our state has no policy for attracting employers from higher added value industries, which would also pay higher wages.

The increase in the MW must be frozen until a comprehensive reform is carried out that leads to the setting of a minimum wage only where it is needed. It is not appropriate to have the same minimum wage for the IT sector in Sofia and for a company producing cables in the town of Mezdra, for example.

We believe that the budget is a powerful instrument with which the state can implement policies related to the development of the economy and the business environment. The most important role of the state is precisely to create a framework within which businesses, entrepreneurs and working people can generate products, services and added value.

At present, all the ways in which our state can attract funds are not working well:

• Foreign investment is practically absent.
• NRRP funds have been suspended.
• Our export indicators are developing negatively.
• Industrial production is developing negatively.
• The absorption of funds under the operational programmes is extremely unsatisfactory.

Global processes are also placing companies in an increasingly difficult position, and it is important for the state to leave more funds in the hands of business, as well as to focus on initiating positive reforms, deregulation and the improvement of the environment.

We thank you for the time and attention given to familiarising yourself with our position and proposals.

Yours sincerely,

AIBEST

Bulgarian Association of Information Technologies (BAIT)

Bulgarian Association of Software Companies (BASKOM)

Bulgarian Entrepreneurial Association (BESCO)

Information and Communication Technologies Cluster (ICT Cluster)

Professional Association for Robotics and Automation (PARAi)