Romania’s public deficit shrinks by 31% y/y to 2.9% of GDP in January-August

The government plans to end the year with a deficit of 6.2% of GDP, down from 7.6% of GDP in 2025 and nearly 8.7% of GDP in 2024. Analysts expect an even smaller deficit, below 6% of GDP, based on the current budget execution.

The prospects for robust fiscal consolidation in 2025-2026, following the record public deficit in 2024, appear strong. The fiscal consolidation over 2025-2026, amounting to 2.5 percentage points under the government’s estimates and potentially more according to analysts’ expectations, was achieved through a combination of budgetary measures – including a freeze on public wages and pensions, higher VAT rates since last August and higher property taxation since this year – and robust inflows of EU grants under the RRF/PNRR and 2021-2027 cohesion programmes. The latter substituted a significant part of investment financed from the domestic budget, while also supporting GDP growth.

Further fiscal consolidation is expected to decelerate but will require additional measures. Both drivers that supported the consolidation in 2025-2026 will weaken in 2027, while fiscal consolidation is expected to continue, albeit at a somewhat softer pace. The pressure to resume public wage and pension indexation is immense, while the base effects from higher tax rates will gradually fade, all amid an economic recovery that remains uncertain.

Under the medium-term plan outlined alongside the 2026 budget, the government set a deficit target of 5.1% of GDP for 2027, down from 6.2% in 2026, in cash terms. Under the ESA methodology, the deficit would reach 5.2% of GDP next year, down from 6.0% in 2026 – a target more ambitious than the 5.7% of GDP set under the fiscal consolidation trajectory pledged under the Excessive Deficit Procedure (EDP) in January 2025. The European Commission currently projected a 5.8% deficit for 2027.

Setting the final 2027 target, and particularly the package of measures needed to achieve it in a comparatively more difficult macroeconomic environment, will be the responsibility of the new government still to be formed following the collapse of the centrist ruling coalition in May. This makes the political turmoil a material macroeconomic factor. Although the Social Democrats (PSD), which were supposed to take over the prime ministership in April 2027 under the former coalition’s rotation agreement, may eventually hold a dominant position in the new government, this remains highly uncertain. PSD had already been perceived as a risk to fiscal consolidation, but any new government that gains full powers in the coming weeks would still be expected to frame its 2027 budget within the EDP trajectory. How credible the budget plan and the ruling majority will be remains to be seen.

Regarding the January-August budget execution, revenues increased by 11.4% y/y to RON 468.1 billion, equivalent to 22.8% of GDP projected for the full year, up from 21.9% in the same period of 2025. Expenditures rose by a comparatively slower 4.2% y/y to RON 527.5 billion, or 25.7% of projected GDP, down from 26.4%.

Transfers from the EU budget accounted for 9.3% of total budget revenues in January-August, up from 7.5% in the same period of 2025, as they surged by 38% y/y. Domestic revenues increased by 9.3% y/y, significantly helped by a 25% y/y rise in VAT collection. Tax revenues rose by 14.3% y/y, nearly twice as fast as expected nominal GDP growth for the full year.

Expenditures financed from domestic resources, as opposed to EU budget transfers, increased by a mere 1.2% y/y in January-August. Public payroll expenditure contracted by 3.8% y/y in nominal terms to an equivalent of 5.3% of projected full-year GDP, down from 5.9% in the same period of 2025. Social security expenditure, including pensions, also decreased nominally, by 0.3% y/y, and fell to 8.1% of GDP from 8.7%.

In contrast, interest payments on public debt rose by 27% y/y to RON 42 billion, or 2.0% of projected full-year GDP, up from 1.7% in the same period of 2025.

Spending financed through EU grants increased by 39% y/y and accounted for 10.3% of total expenditure, supporting investment while reducing pressure on domestic budget resources. Capital expenditure financed from the national budget decreased by 5.3% y/y to an equivalent of 1.7% of GDP, down from 1.9% in 2025.