Although the urgency of reducing the budget deficit is widely acknowledged, the political effort to achieve this objective appears increasingly paralysed by the difficulty of reaching consensus within a coalition composed of four parties with differing economic visions. After the presidential elections, policymakers chose to rapidly implement a package of tax increases and then wait, hoping that economic developments would help them avoid the necessary spending cuts -- the excessive rise in expenditures being the main cause of the deepening budget deficit. This fiscal policy approach has now brought us to yet another cul-de-sac.
At the beginning of June, we published an article outlining a potential set of measures, including detailed projections up to 2031 (https://cpag.ro/corectia-fiscala-trebuie-sa-fie-simpla-eficienta-si-sa-sprijine-cresterea-economica/). The principles were straightforward: increases in indirect taxes -- which would have generated immediate budget revenues -- necessarily combined with a cap on social contributions from other activities and a reduction of these contributions by 1 percentage point, while maintaining capital taxation (i.e., dividends). All these measures were aimed at protecting consumption and, crucially, at reducing budget expenditures. The package followed an economic rather than an accounting logic, with measures designed to support fiscal correction while partially sustaining consumption.
Data from the September budget execution reveal an unprecedented development: despite the summer increases in VAT and excise duties, revenues from these sources -- measured as a 12-month moving average -- declined in real terms. This contrasts with previous episodes, such as the VAT and excise increases in 2010 and 2014, when the effect on revenues was positive even in real terms, at least in the short term.
One positive aspect is that VAT and excise revenues were still increasing in September by 2.6% and 12.5% respectively in real terms, although the deceleration effect is far more visible than in previous months. In fact, what can be observed is that total tax revenues themselves show a downward trend, declining from an annual real growth rate of 11.2% in April to 6.9% in September. Even if it is premature to draw firm conclusions, the continued deceleration in revenue growth is a worrying signal. It is very likely that the marginal effect of the new taxes scheduled to enter into force at the beginning of 2026 on budget revenues will be smaller than currently anticipated.
If this reality continues to be reflected in the final months of the year, it should prompt a rapid rethinking of the fiscal adjustment plan, complemented by measures that support economic growth -- specifically those mentioned above. The increase in the dividend tax could still be avoided. Exempting second-pillar pension contributions and private pensions from social security contributions -- which lack economic justification -- and capping contributions for other income categories would support consumption. Eliminating the turnover tax would support investment. All these measures have a very favourable cost-benefit ratio and, in essence, would prevent future budget revenues from declining through a reduction in current economic activity. Given the current context, it may be difficult to implement them in 2026, but discussions could begin with a view to introducing them in 2027.
Signals from the market indicate that Romania's economy has been slowing, with a more pronounced effect since September. Recent growth projections for this year -- 1% from the IMF and 0.6% from the National Commission for Strategy and Forecast -- appear excessively optimistic in the current context. These projections also influence the deficit and growth forecasts for 2026, which would in any case have been very difficult to achieve. With inflation at around 10%, the policy of completely freezing certain budget expenditures in 2026 -- essential for achieving the assumed deficit target -- will be more difficult to implement amid rising social tensions. In addition, there is a significant risk of a potential negative shock from external markets, particularly capital markets. With both public debt and financing needs increasing, the indirect effects of such a shock could lead to a sharp rise in Romania's borrowing costs, further weakening the country's fiscal position.
In recent months, the authorities' efforts have rightly focused on avoiding the application of macroeconomic conditionality, which would have resulted in the suspension of European funds next year. However, budget correction cannot be achieved without a significant reduction in expenditures within a relatively short time horizon, however difficult this may appear. The fiscal space for additional tax increases has become significantly constrained, and early signals from the budget execution suggest that Romania's economy may be close to the peak of the Laffer curve, where further tax increases actually lead to a decline in total budget revenues.
The time remaining to correct the trajectory of the budget deficit, as currently designed, is becoming shorter by the day. The probability that Romania will correct its deficit through organic growth -- gradually reducing budget expenditures from the estimated 44% of GDP this year -- is increasingly limited. Romania needs economic growth, political stability, and economically coherent policy decisions; otherwise, the risk of a market-driven fiscal correction remains high, at least until the end of 2026.