Bulgaria’s public finances remain comparatively strong within the region, but fiscal pressures are set to persist over the forecast horizon. The general government deficit is expected to have held at around 3.0% of GDP in 2025, as automatic indexation and discretionary increases in social spending and public-sector wages—most notably in defence, internal security and education—continue to outpace revenue gains. This comes despite measures to broaden the tax base, including the reinstatement of standard VAT rates on bread and restaurant services and efforts to strengthen tax administration. Public investment is also projected to rise next year, driven by faster absorption of EU RRP funds and defence-related capital purchases.

Fiscal consolidation is expected to advance only gradually thereafter. With wage and pension dynamics moderating and defence equipment purchases easing, the deficit is projected to narrow modestly to around 2.8% of GDP in 2026, before declining further to around 2.5% in 2027, assuming no additional spending pressures and steady implementation of planned measures. Public debt, while still low compared to both CEE and Eurozone peers, is set to rise over the forecast period from 23.8% of GDP in 2024 to around 29.3% in 2025, largely reflecting refinancing operations and capital injections into state-controlled entities such as Bulgarian Energy Holding and the Bulgarian Development Bank. Debt is expected to continue drifting higher to around 31.6% in 2026 and 34.0% in 2027 as the government accommodates elevated investment needs and co-financing requirements for EU projects.

Bulgaria's business environment is adequate though spots of weaknesses remain. The World Bank Institute’s annual “Worldwide Governance Indicators” surveys suggest that the regulatory framework is generally business-friendly while weaknesses remain with regard to perceived corruption and the legal framework. The Heritage Foundation’s “Index of Economic Freedom” survey 2024 assigns Bulgaria rank 31 out of more than 180 economies, reflecting strong scores with regard to property rights, tax burden, business freedom and trade freedom. Weaknesses remain in the areas of judicial effectiveness and government integrity. On our proprietary “Environmental Sustainability Index”, Bulgaria is ranked 94th out of 210 economies, reflecting above-average scores for energy use and CO2 emissions per GDP and water stress, as well as its exposure to climate events and its readiness to protect itself against such events. However, there are still weaknesses regarding renewable electricity output and the recycling rate.

Political risks in Bulgaria have intensified at a sensitive moment, coinciding with the country’s formal adoption of the euro on 1 January 2026. The months leading up to euro entry were marked by large-scale public protests in late 2025 over the draft 2026 budget, broader anti-corruption grievances and frustration with governance standards. Sustained demonstrations ultimately forced the resignation of Prime Minister Rosen Zhelyazkov’s government after it withdrew the budget proposal and faced an imminent no-confidence vote, underscoring deep public dissatisfaction and institutional fragility.

In the aftermath, President Rumen Radev has launched consultations to form a new cabinet, beginning with the largest parliamentary group. However, coalition arithmetics remain challenging, and a caretaker government or snap elections remain plausible outcomes. The timing heightens policy risks: prolonged political uncertainty could delay EU-fund absorption, complicate fiscal execution and slow structural reforms at a moment when policy continuity would have been most valuable. Despite broad political consensus on Bulgaria’s pro-EU direction and euro adoption, persistent mistrust in institutions and recurrent government turnover remain a key medium-term political vulnerability.