Following more than six months during which the Republic of Bulgaria operated under the so-called extension budget law, the Draft State Budget Act of the Republic of Bulgaria for 2026 (the “Draft Budget Act”), together with the Updated Medium-Term Budget Forecast for the period 2026 - 2028 (the “Medium-Term Forecast”), which serves as the explanatory memorandum to the Draft Budget Act, was published on the website of the Ministry of Finance. The delay in the adoption of the budget was due to the prolonged political instability throughout 2025, which resulted in snap parliamentary elections held in April 2026 and the formation of a new government.

In connection with the introduction of the euro as the official currency of the Republic of Bulgaria as of 1 January 2026, all parameters set out in the Draft Budget Act and the Medium-Term Forecast are, naturally, presented in euro.

The principal objectives of the fiscal and tax policy for the period 2026 - 2028 are aimed at restoring the sustainability of the public finances, reducing the budget deficit, improving revenue collection and reducing the size of the shadow economy. At the same time, the government places particular emphasis on maintaining a competitive tax environment, improving the investment climate and further digitalising the tax administration.

From a macroeconomic perspective, real economic growth is projected at 2.6% in 2026, while growth is expected to stabilise at around 2.5% annually in both 2027 and 2028. At the same time, the forecast anticipates an acceleration in inflation as a result of the unfavourable international economic environment and the sharp increase in energy commodity prices during the first half of 2026. Average annual inflation is expected to reach 4.3% in 2026, before gradually declining to 3.8% in 2027 and 2.5% in 2028.

The Draft Budget Act provides for a budget deficit of 5.7% of GDP in 2026, which is expected to be gradually reduced to 3.8% in 2027 and 3.0% of GDP in 2028. This approach is intended to ensure a gradual return to fiscal discipline.

With regard to government debt, the Draft Budget Act envisages a continuation of the upward trend in public indebtedness throughout the forecast period. According to the projections, government debt is expected to reach approximately EUR 37.7 billion (30.1% of GDP) in 2026, EUR 44.7 billion (33.2% of GDP) in 2027 and EUR 50.5 billion (35.2% of GDP) in 2028. The increase is driven both by the need to finance the budget deficits and by the refinancing of existing debt and the provision of liquidity necessary for the implementation of government policies.

In this regard, the maximum amount of government debt that may be incurred during 2026 is proposed to be set at EUR 10.1 billion.

The minimum amount of the fiscal reserve as at the end of 2026 is set at EUR 2.6 billion and is intended to safeguard the country's financial stability and ensure the timely servicing of public liabilities.

In practical terms, the Draft Budget Act does not provide for any substantial changes to the principal direct taxes, thereby creating a relatively predictable environment for businesses. At the same time, greater emphasis is placed on improving revenue collection, further digitalising tax control and reducing tax evasion. In parallel, the policy of gradually increasing public investment, including in the defence, infrastructure and digitalisation sectors, is maintained, which suggests significant investment activity over the coming years.

With regard to social security and health insurance, the Draft Budget Act does not provide for an increase in the social security contribution rates payable to the State Social Security funds. The existing allocation of the contribution burden between employers and insured persons is maintained, while it is envisaged that civil servants will gradually begin to bear part of their own social security contributions, with the employer-to-employee contribution ratio changing to 80:20 by the end of 2026 and subsequently to 60:40.

The maximum monthly insurable income will increase to EUR 2,300 as of 1 August 2026. At the same time, the minimum insurable income thresholds for certain economic sectors and professions will also be increased above the statutory minimum wage. The minimum monthly insurable income for self-employed persons is likewise expected to increase to EUR 620.20 as of 1 August 2026.

The Draft Budget Act is yet to be considered and adopted by the National Assembly, and it remains possible that certain budgetary parameters and proposed measures may be amended during the parliamentary legislative process. Nevertheless, the Draft Budget Act clearly outlines the main direction of Bulgaria’s fiscal policy for the period 2026 - 2028, namely the gradual reduction of the budget deficit, the restoration of the sustainability of the public finances and the fulfilment of Bulgaria's commitments under the European economic governance framework, while at the same time preserving the competitiveness of the tax system and promoting greater efficiency in the collection of public revenues.

This article has been prepared for and is part of the Legal Digest issued by Penkov, Markov & Partners. The publications therein do not constitute legal advice and are not binding. Penkov, Markov & Partners reserves all rights to this material, and any distribution thereof is subject to the prior written consent of the law firm.