Reflective analysis of Budget for 2025 and Draft budget for 2026

The budgets of fiscal years 2025 – 2026 represent a transitional phase for the Albanian economy, moving from the post-fiscal consolidation period toward a sustainable development model oriented toward social goals and fiscal efficiency.

The Draft Budget for 2026 is presented as one of the most balanced on paper in the last decade, but beneath this apparent equilibrium lie several structural tensions directly linked to the way the Albanian economy is evolving, both in its fiscal and real dimensions.

At first glance, the indicators signal stability and discipline, but beneath the surface, new trends emerge that will shape the contours of public policy in the coming decade.

First, the trajectory of budget revenues and the fiscal base. Public revenues, as a share of GDP, are projected to rise from 28.2% in 2024 to 29.6% in 2026, reflecting improvements in administration and the expansion of economic formalization. However, in real terms, this growth is not a deep expansion of the tax base but rather the result of wage increases, price rises, and technical formalization rather than productivity growth.

In structure, VAT remains the main contributor at around 8.4% of GDP, while Personal Income Tax (PIT) accounts for about 3.6%. This is a dual signal: on one hand, it marks greater formalization and better administrative control; on the other, it highlights the lack of diversification in fiscal sources, making the budget more sensitive to fluctuations in private consumption. In other words, the Albanian fiscal system will continue to rely primarily on domestic consumption—a stable short-term source but uncertain if real production growth does not keep pace.

Social and health insurance contributions continue to grow faster than GDP, due to the minimum wage increase, public wage indexing, and formal employment growth, but this constitutes a cost increase for the private sector. The expected effect is a slowdown in employment in low-profit sectors, particularly services and trade.

Positive factors include improved tax digitization and fiscal data integration, progressive formalization in construction and retail, and the minimum wage hike that expands the contributory base for insurance.

A critical factor here is that revenues grow nominally also due to built-in price inflation, which boosts VAT but does not reflect real consumption growth. This makes the budget visibly more sensitive to price fluctuations and exchange rates if import pressures reemerge in 2026.

Second, the structure of public expenditures and the social-capital balance. From 28.9% of GDP in 2024, total expenditures are projected to reach 31.9% in 2026, with two main pillars: strengthening social protection and maintaining public investments at a stable level. This increase, while aligned with social expectations, indicates a structural shift that must be interpreted carefully.

The two main pillars are:

• The growth of social expenditures, reaching over 10.5% of GDP, linked to pension indexing, periodic increases, and economic aid policies. Essentially, the rise in social spending is a strategic shift from physical investment to human investment, aiming to bolster aggregate demand and social stability. Pensions, economic aid, and health support are taking on a developmental character, no longer just compensatory. This indicates an orientation toward protecting vulnerable layers but also an increase in the weight of non-productive consumption in the budget structure. If GDP growth slows in 2026, this component could become sustained pressure on the deficit.
• Capital expenditures remain stabilized at 6.6–6.7% of GDP, but in real terms, they are low, as construction cost inflation and the slowdown in new infrastructure projects have diminished the real impact of investments. Unless accompanied by greater public investment efficiency, this portion will not translate into sustainable productive growth.

The pension and social spending increases coincide with a period of real growth slowdown, so they are interpreted as protective measures to preserve purchasing power. However, economically, these policies also play a stimulating role in domestic demand.

In the short term, this brings a positive effect on economic circulation. But in the medium term, if pension growth is not supported by employment and contribution increases, it could create structural fiscal pressures on the social insurance system.

In essence, Albania is transitioning from a social compensation model to one of economic activation through social expenditures. This is positive for consumption but risky for long-term balances.

Thus, we emphasize that the 2026 draft budget indeed supports public consumption and social protection but does not support production and productivity to the same extent. This creates a latent imbalance between immediate expenditures and the future tax base.

Third, the deficit, public debt, and fiscal discipline. The deficit remains at 2.3% of GDP, staying within acceptable fiscal discipline limits, but its structure is less sustainable than the percentage suggests.

Deficit financing will come mainly from domestic sources, with interest rates in the local market beginning to rise gradually, reflecting new capital costs. If this trend continues, debt servicing costs could rise faster than the deficit itself, shifting fiscal space currently used for investments toward debt service.

On the other hand, net public debt is expected to remain around 59–60% of GDP, but with a structure increasingly dependent on short-term financing and domestic instruments. This makes the debt more sensitive to monetary policy fluctuations and the pace of market demand for government securities. This is a signal of fiscal discipline in line with EU criteria, but beneath this stability lies a delicate dynamic.

Positive factors include the gradual reduction in reliance on external borrowing and more efficient use of the domestic financial market, as well as using debt as a stabilizing rather than consumptive instrument.

However, risks seen as negative trends include interest rates in international markets and the need to refinance existing debt under more expensive conditions, as well as the risk of overestimating nominal GDP, which could mask lower real revenue growth.

Fourth, the macroeconomic and structural impact, or the real base of the budget. According to the data included in the analysis, GDP is expected to grow from 2,642,509 million ALL in 2025 to 2,781,433 million ALL in 2026, representing a nominal increase of 5.25%.

Subtracting projected inflation of around 2.5–3%, real economic growth is calculated at about 2.3–2.7%.

This growth is modest but sustainable, supported mainly by:

• the services sector, particularly tourism and transport,
• construction, which continues to generate economic activity albeit with low productivity, and
• domestic trade, linked to household consumption.

This growth structure directly affects the quality of budget revenues: consumption feeds VAT but not necessarily productive profits or exports. The contribution of the manufacturing and export sector remains limited. Consequently, the budget remains dependent on the consumption cycle rather than productivity. This means growth is not accompanied by deepening the productive base but by expanding domestic monetary circulation—a model fragile to any slowdown in consumption or lending.

In this context, wage and pension policies aimed at preserving purchasing power are necessary, but they do not replace the need for productivity growth and expansion of the domestic production base.

If these reforms do not increase productivity in the public and private sectors, real growth could stall at an average of 2.5%, making it difficult to maintain the deficit-debt ratio in long-term balance.

In this sense, the budget is more a reflection of the current economy than its driver. It reflects more than it orients developments, reacting to social needs but without creating new structural impulses.

Fifth, comparison with previous budgets and the region. The horizontal comparison of key indicators in the table below shows a gradual increase in revenues and expenditures over GDP during 2023–2026. Revenues rise from 27.2% to 29.6%, reflecting fiscal base expansion, while expenditures grow faster, from 28.5% to 31.9%, leading to a deficit increase from 0.7% to 2.3% of GDP. Capital expenditures remain relatively stable, rising slightly from 6.3% to 6.7%, while social expenditures show a clear upward trend, from 9.3% to 10.5%, indicating a greater social orientation in budget policies.

Compared to regional countries:

• Albania approaches North Macedonia in budget revenue levels (around 30% of GDP),
• surpasses Kosovo (26–27%),
• and remains slightly below Montenegro (31–32%).

Albania stands in the middle of the regional scale, with revenues approaching the Balkan average but with a more socialized expenditure structure. This orientation increases short-term social stability but requires caution to avoid medium-term fiscal pressure.

On the other hand, the weight of social expenditures is higher than the regional average, indicating a more social budget policy orientation but requiring high fiscal vigilance to maintain the debt-revenue balance.

Finally, the 2026 draft budget is more realistic than previous ones and marks a shift from crisis management to development management, but it remains exposed to three core tensions:

• Taxation dependent on consumption,
• Modest real growth,
• Lack of structural investment priority.

If these three issues are addressed through sustainable reforms in tax administration, public productivity, and the investment climate, the 2026 draft budget could be considered the start of a phase of Albanian fiscal maturity, where stability and development begin to coexist functionally.

In the fiscal plan, it offers nominal balance.

In the economic plan, it presents social support.

In the structural plan, it shows a lack of reforms that generate productive growth.

This is a budget realistic in figures but conservative in vision, more focused on maintaining equilibrium than creating a new development model.

This budget marks a paradigmatic turn from collection-oriented taxation to developmental taxation, but the balance is still fragile.

Hot spots to monitor:

1. Real formalization, if revenue growth comes mainly from control and administrative pressure rather than economic expansion, the effect is short-term.
2. Consumption structure supported by consumption taxes creates risk in case of domestic demand slowdown.
3. Capital investments and their maintenance at 6.7% of GDP are insufficient to drive long-term growth and project completion, so a revival of public-private partnerships and EU funds is needed.
4. Rising budget costs for personnel, where public wage growth indexing must be linked to productivity; otherwise, it could generate budget constraints in 2027–2028.

In clear terms revenue growth is administrative, not structural; expenditure growth is social, not investment-oriented, and stability is fragile because it relies on prices rather than productivity.

The 2026 Draft Budget is the budget of an economy seeking stability but that has not yet found the balance between growth and social justice. It is the budget of “fiscal calm” that could precede a deeper reform or a new cycle of difficulties if the real dynamics of the economy do not change.