Proposals to amend tax legislation are part of the budgetary process. Decisions in this area fall within the remit of the government and Parliament. The Bulgarian National Bank does not take sides in the political debate over budgetary priorities. Its role is to provide a professional assessment of the possible implications of a proposed measure for the financial system and the economy.
These implications concern financial conditions, lending, the resilience of the banking system, and the interaction between fiscal policy and economic growth. From this perspective, the proposal to introduce additional taxation of bank profits warrants a broader analysis.
In substance, the proposal amounts to an increase in the taxation of banking activity. Describing it as a tax on “excess profits” does not change this fact. The question is whether the expected fiscal effect compensates for the consequences for financial intermediation and the economy. Answering that question requires more than an accounting calculation.
The proposed mechanism has a clear budgetary logic: a historical profit base is established, a legislated threshold is added, and the excess is subject to additional taxation. The expected revenue is relatively straightforward to calculate.
The macroeconomic calculation is different.
A bank’s profit is a tax base, but it is also a key internal source of capital formation. Capital determines a bank’s capacity to take risk, extend credit and absorb losses when economic conditions deteriorate. This is precisely why the BNB requires banks to build capital buffers during the favourable phase of the economic cycle: those buffers need to be available during the bad times.
In 2020, this logic was tested in practice. The BNB took measures to strengthen capital and liquidity, while banks implemented a private moratorium on loan payments. By September, the deferrals covered more than BGN 9 billion in loans. The buffers enabled banks to absorb the temporary pressure, while businesses and households were given time to overcome the shock.
Current bank profits, therefore, are not simply income that can be distributed. Part of them supports the system’s capacity to maintain credit and remain resilient in the event of a future shock. This makes the definition of “excess profit” more complex than a simple comparison between two accounting figures might suggest.
The reference period of 2020 – 2025 includes the pandemic, exceptionally low interest rates, an inflationary and energy shock, and the subsequent sharp change in the interest-rate environment. The starting year, 2020, was a crisis year marked by a significant decline in bank profits. Including it in the historical average may cause part of the subsequent recovery to be classified as “excess profit”. Over the same period, bank balance sheets, loan portfolios and capital increased, while significant structural changes took place at some institutions.
Under these conditions, nominal profit in 2027 and average nominal profit over the preceding six years are not directly comparable. A higher absolute level of profit may contain an economic rent, but it may also reflect a normal return on a larger capital base, a larger balance sheet and additional risk taken. Distinguishing between the two requires economic analysis rather than a normative assumption.
The more important question is what happens after the tax is introduced. Formally, the tax is paid by banks, but its economic incidence does not necessarily remain with them. Banks may respond through lower dividends – which would represent the most limited macroeconomic effect. The response, however, may also come through the price of credit, lending standards, deposit conditions and the composition of assets. In that case, part of the burden is passed on to customers.
For a household, this may mean more expensive or less accessible credit; for a company, a higher cost of capital. That cost affects which investment projects are undertaken. Banks are the channel through which financial resources reach the economy. Additional taxation of financial intermediation can therefore, to some extent, increase the cost of using that channel. The extent of this effect depends on competition, the capital position of individual banks and the credit cycle. It should be measured rather than assumed.
International experience provides grounds for caution. In Hungary, the extraordinary tax on banks, introduced as a temporary measure, was extended and modified alongside other interventions in the credit market. It would not be correct to attribute the high cost of credit there to a single tax: interest rates primarily reflect monetary conditions, inflation and risk premia. But the combination of policies is instructive – market-based corporate financing remains expensive, while the state also offsets this through subsidised lending programmes.
Bulgaria has no reason to follow such a model: first increasing the cost of financial intermediation and then subsidising credit with public resources. Euro-area membership creates opportunities for a lower risk premium, deeper financial integration and better financing conditions for the private sector. Unpredictable tax changes create uncertainty for investors and, when they alter lending conditions, may also affect the transmission of the common monetary policy to the economy. Economic policy should make use of the advantages offered by euro-area membership.
There is a second channel. Bulgarian banks are among the main institutional investors in government securities. The same balance sheet that finances businesses and households also participates in financing the government. With a higher cost of capital and more constrained resources, banks may prefer low-risk government exposures over private-sector lending. In that case, higher budget revenue could be accompanied by weaker financing of the private economy. Alternatively, if banks limit the increase in their exposure to government debt, the effect may be reflected in the cost of government financing.
Both consequences matter, particularly when there is a substantial need for new debt financing. This highlights a timing mismatch: revenue from an extraordinary tax may be one-off, while a higher interest rate on long-term government debt is paid over the entire maturity of that debt. The assessment of the measure should therefore include both the revenue generated for the budget and the cost of financing it.
The same applies to growth. If higher taxation leads to more expensive or more selective credit, the effect will be felt through investment and consumption. Lower economic activity means a smaller base for VAT, corporate taxes, personal income taxes and social-security contributions. Gross tax revenue and the net fiscal outcome are two different things.
Following Bulgaria’s accession to the euro area, the country’s main economic question is no longer the exchange-rate regime. It is how to accelerate investment, productivity and real convergence. The private sector should be the main engine. This requires a predictable tax environment, disciplined fiscal policy and a financial sector capable of directing resources towards productive private investment. Any increase in the tax burden on this process therefore needs to be carefully justified.
There is also a question of policy consistency. Macroprudential policy requires banks to build capital buffers when credit activity is strong and profitability is high. Fiscal policy proposes to extract additional resources from the very pool from which these buffers are built. The two policies have different objectives, but their combined effect on capital needs to be assessed.
At the same time, the weakening of fiscal buffers limits the room for manoeuvre in responding to a future shock. This risk should not be amplified by reducing banking buffers. If both types of buffers decline simultaneously, the government will have fewer options to mitigate a crisis, while banks will have less capacity to sustain lending. This would leave the economy and the country more vulnerable to adverse developments.
The question is not whether the banking system can absorb the additional tax. It is well capitalised, liquid and profitable; there is no reason to frame the debate as an issue of immediate financial stability. The question is whether the measure improves the overall economic outcome. That is the higher standard that should be applied.
Before a final decision is taken, the immediate budgetary assessment should be complemented by an assessment of the impact on capital, credit, interest-rate conditions, investment, growth, other tax revenues and the cost of government financing. It should include a baseline and an adverse scenario and take into account the interaction with macroprudential and monetary policy. Only then can the actual net effect be assessed.
This is not an argument in defence of bank profits, nor against the government’s right to propose changes to tax policy. It is an argument about how such decisions should be made. Raising taxes has a cost. When the tax is imposed on financial intermediation, part of that cost may extend beyond the taxpayer.
The question, therefore, is not only how much can be collected from banks in 2027. The question is what the cost to credit, investment and growth will be – and what the net outcome for public finances will be once that cost is taken into account. This is the difference between an accounting calculation and macroeconomic policy.