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Bulgaria is facing a new fiscal warning from Brussels shortly after adopting the euro, as the European Commission says the country risks breaching European Union budget rules and its 10% flat income tax has become part of a wider debate over fairness, revenue and investment appeal.
Bulgaria’s budget comes under EU scrutiny
The European Commission has recommended opening an excessive deficit procedure against Bulgaria, the EU’s corrective mechanism for member states that breach fiscal limits. Under EU rules, the general government deficit should not remain above 3% of gross domestic product, while public debt should stay below 60% of GDP or decline at a sufficient pace.
For Sofia, the timing is politically sensitive. Bulgaria joined the euro area in 2026, and within the first months of adopting the single currency it has come under closer budgetary supervision. According to the Commission, Bulgaria’s deficit rose from 3% of GDP in 2024 to 3.5% in 2025. The 2026 forecast points to a further widening to 4.1% of GDP, followed by 4.3% in 2027.
That trajectory suggests the problem is not a one-off deviation. Brussels links the deterioration to public-sector wage increases, higher social spending, automatic pension indexation and support for specific state entities, including in the energy sector.
The flat tax moves into the budget debate
Novinite reported that the EU warning is accompanied by pressure to reconsider Bulgaria’s flat-tax system. Bulgaria applies a 10% personal income tax rate with no tax-free allowance, a model long seen as one of the country’s competitive advantages within the European Union.
Brussels’ position is more cautious than the political headline suggests. The Commission does not order Bulgaria to immediately replace the flat rate with a progressive tax scale. It does, however, state that the current design creates a regressive distribution of the tax burden. In practical terms, lower-paid workers may face a heavier burden relative to income than higher earners.
In the EU’s fiscal logic, the issue is not only social fairness. A low flat rate limits the budget’s revenue base at a time when spending pressures are becoming structural. According to Brussels, Bulgaria’s tax revenue as a share of GDP remains well below the EU average, while tax arrears, compliance and the shadow economy continue to weaken revenue capacity.
Brussels wants spending discipline as well as revenue
The main recommendation for Bulgaria in 2026 and 2027 is to respect the maximum growth rates of net expenditure. In the EU fiscal framework, net expenditure refers to government spending adjusted for certain items that may distort the underlying fiscal position, including some temporary measures and parts of interest expenditure.
The Commission estimates that Bulgaria’s net expenditure grew by 12.3% in 2025, above the recommended ceiling. It is projected to grow by 5.5% in 2026, with the cumulative deviation for 2025 and 2026 also exceeding the approved path. Even after accounting for flexibility linked to higher defence spending, Brussels says the country’s fiscal course requires correction.
That leaves Sofia balancing several difficult objectives: maintaining higher defence expenditure, protecting vulnerable households, containing wage and pension pressures, improving tax collection and preserving its reputation as a low-tax investment destination.
The deficit complicates Bulgaria’s first euro year
Adopting the euro was expected to deepen Bulgaria’s financial integration with the EU core and reduce currency risk for businesses. The budget dispute makes the first euro year more turbulent than euro supporters expected.
An excessive deficit procedure does not mean immediate fines. It usually begins with a Commission assessment, a Council decision and recommendations for correcting the fiscal path. But for a euro-area member, failure to comply can lead to closer monitoring and, in extreme cases, financial sanctions.
For investors, the legal procedure matters less than the signal it sends about future fiscal policy. If the government is forced to cut spending sharply or raise taxes, business expectations may change. If adjustment is delayed, borrowing costs and doubts about budget planning could rise.
Sofia disputes parts of Brussels’ assessment
The Bulgarian side does not fully accept the Commission’s numbers. BTA reported that the government considers its own calculations more realistic and has pointed to the possibility of a deficit even higher than Brussels projects. That increases uncertainty: if domestic estimates are worse than the EU forecast, fiscal consolidation may need to be tougher.
Bulgarian officials also argue that simply raising taxes is not enough to solve spending-efficiency problems. The domestic debate is now centered on what should carry the main burden of adjustment: tax reform, spending restraint, action against the shadow economy, reform of state-owned enterprises or a combination of all these measures.
For businesses, the main risk is sudden policymaking. Bulgaria’s low-tax model has attracted companies because it is simple and predictable. If tax reform is implemented without a transition period, it could affect small businesses, self-employed professionals, foreign investors and high earners using Bulgaria as a base inside the EU.
The shadow economy weakens the low-tax argument
A separate part of the EU recommendations focuses on the shadow economy. Brussels says Bulgaria needs to reduce incentives for underreporting income, improve tax compliance, strengthen recovery of arrears and broaden the revenue base.
This changes the flat-tax debate. Supporters of low rates usually argue that a simple system reduces the incentive to evade taxes. Critics reply that in Bulgaria this has not delivered enough results: the informal economy remains large, and the state lacks resources for healthcare, education, infrastructure and social support.
For the EU, tax fairness in Bulgaria is now linked not only to distribution between rich and poor. It is also tied to institutional quality, digital tax administration, enforcement capacity and the state’s ability to finance long-term obligations.
Social spending is rising faster than revenue
Demographics are increasing the pressure on Bulgaria’s budget. Population ageing raises pension and healthcare costs, while the labour market faces persistent shortages. In 2025, the employment rate reached 77%, slightly above the EU average, but total employment declined for a fourth consecutive year.
European documents say employers still need more than 230,000 additional workers. That limits productivity growth, pushes wages higher and adds pressure to the social insurance system.
Against this backdrop, the flat tax is no longer only an ideological issue. If the revenue base remains weak while age-related spending rises, the state will have to change the tax architecture, cut services or increase debt. Each option carries political costs.
Education and healthcare add to the fiscal risk
The Commission also points to weak basic skills among Bulgarian students. Around half of 15-year-olds do not reach minimum proficiency in key competences, roughly twice the EU average. For the economy, that limits future productivity and innovation potential.
Healthcare is another source of structural strain. The system remains heavily hospital-centered, while out-of-pocket payments by households are among the highest in the European Union. That reduces access to care and reinforces inequality.
In that context, the tax debate goes beyond the 10% rate. It is about whether Bulgaria’s model can simultaneously provide low taxes, investment appeal, acceptable public services and sustainable finances inside the euro area.
Anti-corruption remains an economic issue
Brussels links Bulgaria’s fiscal and investment outlook to governance quality. Its recommendations include stronger prosecution of corruption, especially high-level cases, more effective public procurement and greater independence of regulators.
For investors, this is not secondary. Low taxes can offset some costs, but they cannot replace predictable courts, transparent tenders, independent regulators and stable rules. If Bulgaria wants to remain an attractive business platform in the EU, it will have to show that its tax advantage is not accompanied by institutional risk.
Public procurement weaknesses also have a direct fiscal effect. A high share of single-bidder procedures, direct awards and cancelled contracts can reduce competition and increase project costs. For a country receiving EU funds and needing faster investment in infrastructure, energy transition and digitalisation, this is becoming critical.
Energy and defence narrow the room for manoeuvre
Bulgaria, like other EU members, has been allowed to use some fiscal flexibility for higher defence spending. But that flexibility does not remove the requirement to preserve medium-term fiscal sustainability.
Energy remains another major risk. Bulgaria’s electricity system still relies on coal generation, and the state energy holding needs more transparency. High wholesale power prices, grid modernisation, battery deployment and the gradual phase-out of inefficient subsidies require investment that is hard to reconcile with a widening deficit.
In practice, fiscal adjustment cannot rest on one measure. Abolishing or softening the flat tax would raise additional revenue only if well designed and properly enforced. Spending cuts without reform could damage public services. More debt after euro adoption could become more expensive if markets begin to see Bulgaria as a country with weakening fiscal discipline.
What may happen to the flat tax
Politically, a rapid dismantling of the entire system is less likely than gradual pressure on specific elements. Possible options include introducing a tax-free allowance, raising the effective burden on higher incomes, reviewing tax exemptions, tightening oversight of self-employment and strengthening action against income underreporting.
The International Monetary Fund had earlier recommended that Bulgaria consider moving toward a more progressive system, but Bulgarian authorities said they did not plan to change the tax model. After the EU warning and the risk of an excessive deficit procedure, the room for political manoeuvre has narrowed.
For investors and relocation-driven taxpayers, the core takeaway is that Bulgaria still has low tax rates, but their long-term stability is no longer guaranteed. The country remains one of the EU’s most competitive tax jurisdictions, yet euro-area fiscal constraints make its policy less autonomous than before euro adoption.
As experts at International Investment report, Bulgaria’s model is entering a stress test. The flat tax helped the country compete for capital, talent and companies, but it is now colliding with rising social spending, demographic pressure and euro-area rules. The critical risk is not a tax increase itself, but unpredictability: if Sofia changes its fiscal system under deficit pressure and without a clear transition period, investors will start pricing not only the tax rate but also political risk into their projects.