Romania cuts seven-month budget deficit by 37% year-on-year, to 2.34% of GDP

Romania’s consolidated general budget recorded a deficit of RON 48.1 billion in the first seven months of 2026, down by RON 28.4 billion from RON 76.4 billion in the same period of 2025, according to data released on Monday by the Ministry of Finance. The deficit fell by 37% in nominal terms and narrowed to 2.34% of GDP from 3.99% a year earlier, an improvement of 1.65 percentage points, according to Business Review.

The adjustment was supported by an 11.2% increase in budget revenues, while total expenditure rose by just 2.9%. Investment spending also continued to increase.

“Data for the first seven months show that we are consistently maintaining the trend of reducing the budget deficit and stabilising public finances. The 1.65 percentage point reduction in the deficit is evidence of balanced management, combining fiscal responsibility with direct support for the economy. We continued VAT reimbursements without interruption, returning more than RON 20.4 billion to companies to provide the liquidity they need, and prioritised resources towards the main development pillars, where investment from European funds and the NRRP increased by more than 60%. As we consolidate this healthier foundation for public finances, the next step is to turn stabilisation into healthy and sustainable economic growth,” said Finance Minister Alexandru Nazare.

Total revenues reached RON 412.3 billion in January-July 2026, up 11.2% year-on-year. Tax revenues rose by 15.4% to RON 214.3 billion, while their share of GDP increased from 9.7% to 10.4%.

Net VAT revenues climbed 26.5% year-on-year to RON 88.6 billion. Gross VAT receipts were up 21.7%, partly reflecting the new VAT rates introduced under Law no. 141/2025, while VAT refunds to companies increased by 4.6% to RON 20.5 billion.

EU reimbursements and grants rose by 30.3% to RON 37.3 billion.

Revenue from personal income and salary taxes totalled RON 38.3 billion, up 8.6%, while social security contributions rose by 6.7% to RON 129.1 billion. Corporate income tax receipts increased by 8.3% to RON 28.4 billion.

Total expenditure amounted to RON 460.4 billion, up 2.9% in nominal terms. As a share of GDP, public expenditure declined from 23.3% in the first seven months of 2025 to 22.4% in the same period of 2026.

Personnel spending fell by 4.1% year-on-year to RON 95.7 billion, or 4.7% of GDP, following cuts to certain bonuses and wage restraint measures. Its share of total public expenditure declined from 22.3% to 20.8%.

Spending on goods and services rose by 11.2% to RON 59.6 billion, mainly due to healthcare payments.

Interest expenditure increased by 26.5% to RON 40.1 billion, equivalent to 2% of GDP, continuing to place significant pressure on the budget and the government’s financing needs.

Social assistance spending declined by 0.6% to RON 146.6 billion, while subsidies totalled RON 7.5 billion.

Investment expenditure reached RON 76.5 billion, up RON 14.8 billion, or around 24%, from the same period last year.

Projects financed through non-reimbursable external funds accounted for RON 45.9 billion. Payments for projects backed by external grants rose by 39.1%, while expenditure linked to the grant component of the PNRR more than doubled year-on-year.

Around 71% of total investment spending was linked to projects supported through EU funds and the PNRR, including grants and loans. Payments under these programmes increased by RON 20.4 billion, or 60.1%.

“The results after seven months send an important signal of stability and fiscal responsibility. Romania is strengthening its credibility both externally and domestically, and this is a very important signal for markets, investors, and confidence in the Romanian economy. A country that conveys confidence and fiscal consistency is a stronger country. However, we must also interpret the budget executions of the coming months correctly. From August, the annualised effects of the measures adopted in July 2025 will become visible, meaning that the comparison base will change and the differences versus last year will naturally narrow. What matters is maintaining budget execution within the planned profile and on the trajectory required to meet the full-year deficit target. The next stage is to ensure that the fiscal adjustment becomes structural and sustainable. Maintaining expenditure discipline, a predictable wage policy, accelerating the absorption of European funds, and prioritising investment are essential components for continuing this trajectory,” Alexandru Nazare added.

Alexandru Nazare also pointed to S&P’s upcoming assessment of Romania as the next major test for the country’s fiscal credibility. He said the seven-month budget execution would support the government’s discussions with rating agencies, but warned that markets and investors would continue to scrutinise Romania’s ability to maintain its current trajectory and present a credible 2027 budget.

He added that fiscal credibility can be lost quickly, particularly while financing costs remain high, making further credible deficit reduction important for companies and the wider economy.

Over the past twenty years, Romania’s budget deficit has served as a central barometer of its economic stability, highlighting the structural vulnerabilities of a dynamic, fast-growing Eastern European market. From the pre-accession euphoria of the mid-2000s and the devastating fallout of the 2008 global financial crisis to the pandemic-era spending shocks and subsequent European Union fiscal compliance pressures, Bucharest has consistently struggled to balance its public balance sheet.

Despite experiencing rapid GDP growth and significant infrastructure expansion over two decades, low revenue collection and rising rigid expenditures—principally public sector wages and pensions—have left the nation in a state of persistent fiscal overhang.

Key Epochs of Romania’s Fiscal Journey

Structural Drivers of the Deficit

The persistent gap between government revenues and expenditures over the last 20 years stems from several entrenched systemic issues:

1. Chronic Tax Collection Deficits: Romania has consistently registered one of the lowest revenue-to-GDP ratios in the European Union (hovering around 27%–30%), largely driven by persistent VAT compliance gaps and informal economic activity.

2. Rigid Budgetary Commitments: A substantial majority of tax revenues is automatically absorbed by statutory obligations—primarily public sector payrolls and social assistance/pensions—leaving limited fiscal space for public investments without borrowing.

3. Pro-Cyclical Fiscal Policies: During periods of strong economic expansion, successive governments frequently enacted pro-cyclical tax cuts and baseline spending increases rather than building fiscal buffers for downturns.

The EU Framework and Long-Term Outlook

Since entering the European Union’s Excessive Deficit Procedure (EDP) prior to the pandemic, Romania has faced growing urgency to realign its fiscal path. Anchored by commitments in its National Recovery and Resilience Plan (PNRR) and modern fiscal management frameworks, the government has been forced to pursue structural tax reforms, digitalization of tax administration (such as mandatory e-Factura systems), and expenditure rationalization.

While two decades of fiscal turbulence underscore the political difficulty of balancing budget priorities, long-term fiscal discipline remains the essential precondition for Romania’s sovereign credit ratings, macroeconomic stability, and sustained economic convergence with Western Europe.