Fiscal consolidation marks a potential turning point, but the road to restoring credibility will take years, says Romania’s Fiscal Council in its analysis of the budget revision.
Romania stands at a crossroads. After years of fiscal imprudence that brought its sovereign rating to the brink of junk status, the new government has launched an unprecedented budget correction that could mark a turning point in rebuilding confidence in public finances, according to the Fiscal Council. The stakes could not be higher; without corrective measures this year, Romania’s budget deficit would have reached around 9% of GDP. The three major rating agencies have reconfirmed Romania’s sovereign risk just above junk level.
What makes Romania’s situation unique is that, unlike other EU countries facing fiscal crises, this one is entirely self-inflicted. There was no financial collapse, pandemic shock, or external catastrophe. Instead, the crisis stems from years of election-cycle spending and permanent expenditure increases, culminating in a 2024 deficit of 8.67% on a cash basis and 9.3% under ESA methodology.
“Election years cannot justify major fiscal imprudence,” the Fiscal Council states in its recent opinion on the budget revision. “The 2024 budget deficit was driven especially by permanent spending increases.”
The twin deficits trap
Romania’s fiscal dominance has created what economists call a “twin deficit syndrome,” setting the country apart in the EU. The budget deficit runs parallel with a current account deficit, which exceeded 8% of GDP in 2024, financed mainly through borrowing. This dual hemorrhage puts strong pressure on monetary policy, forcing the central bank to keep interest rates high to combat inflation.
Correction is essential to maintain confidence in the national currency, warns the Fiscal Council. However, claims that fiscal adjustment causes an economic crisis “ignore the fact that Romania cannot sustain deficits of 9% of GDP.”
Revenue challenges
Romania’s challenge lies in exceptionally low tax revenue collection. At 28.8% of GDP in 2024, it lags far behind regional peers: 35% in both the Czech Republic and Hungary, 37.5% in Poland, and a 40.1% EU average. The idea that rapid tax collection improvements could avoid fiscal regime changes is “illusory,” according to the Fiscal Council.
Even the freezing of public sector wages in December 2024 and the non-indexation of pensions failed to halt nominal growth in these categories during 2025. Pensions reflected annualized recalculations, while salaries reflected 2024 increases. Consequently, spending on wages and pensions continued to grow, though inflation eroded their GDP share.
External pressures
The international environment complicates Romania’s inevitable budget correction. Trade wars, slowing economic activity in Europe, economic fragmentation, rising defense spending, geopolitical tensions, and growing risk aversion all increase the challenges facing Bucharest.
Defense spending presents a particular burden. Reducing tax evasion could help, given Romania’s very low revenue collection levels.
A narrow path ahead
The fiscal package adopted in July has a limited positive impact on the 2025 deficit, affecting budget execution only from September onward. Its effect will be much greater in 2026, reducing the deficit to around 6.5% of GDP — a significant adjustment from the very high levels of previous years.
The recent budget revision projects a 2025 cash deficit of 8.4% of GDP, 1.36 percentage points above the initial budget target but well below the 9% that would have materialized without intervention.
Public debt ceilings have been raised to 59.6% of GDP under EU methodology. Without corrective measures, debt would follow an explosive trajectory, rising by over six percentage points per year on average, reaching 83% by 2029 and exceeding 100% by 2032. “This deeply unsustainable debt trajectory highlights the urgency of adopting fiscal correction measures, even if painful,” emphasizes the Fiscal Council.
EU funds absorption problem
Compounding Romania’s woes is its chronic inability to absorb EU funds. By the end of August 2025, the effective absorption rate for Structural and Cohesion Funds under the 2021-2027 multiannual framework was only 10.4%. For the Recovery and Resilience Facility, the rate was 30.7% — after a revision reducing Romania’s allocation to €21.6 billion.
Weak administrative capacity undermining EU fund absorption represents not only lost development opportunities but also a threat to fiscal, budgetary, and financial stability.
A call for national solidarity
“The correction is painful and requires social calm and solidarity, even if these ideals may sound naive,” concludes the Fiscal Council. With domestic and international environments full of uncertainties, Romanian authorities must act cautiously while remaining consistent. The scale of the necessary adjustment is unprecedented for an EU member state not facing a deep financial crisis or severe external shock.
After years of fiscal excess, Romania has begun the journey toward credibility. The question is whether political will can be sustained long enough to complete it.