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−7.8%
Budget Deficit 2025
ESA basis · proposed fiscal package
Realistic level under the proposed measures
Target 2025Back to publications
Macro PlanJune 4, 2025
Romania: Fiscal Adjustment Must Be Simple, Efficient, and to Support Economic Growth
A fiscal package that includes a temporary increase of at least 3 percentage points in the effective VAT rate, alongside a reduction in public spending, would be a viable solution — maintaining fragile growth prospects while bringing the budget deficit to -7.8% of GDP in 2025.
By Laurian Lungu · Ella Kállai · George Ștefan · Consilium Policy Advisors Group · office@cpag.ro · www.cpag.ro
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−2.9%
Budget Deficit 2031
Below 3% of GDP · as negotiated with EC
Without additional increases in labor or capital taxes
EC target🔄
−7.2%
Budget Deficit · 4-Year Avg
Record-high twin deficits · past four years
Current account deficit avg: −7.9% of GDP
Twin deficits🧾
+3pp
Proposed VAT Effective Rate Increase
Temporary · up to the lowest in the region
Parallel with measures to reduce the VAT gap
Core measure📊
256.8%
Social Assistance + Personnel
% of fiscal revenues in 2024 · vs 115.6% in 2017
Unsustainable expansion of rigid budgetary obligations
Fiscal riskReport Sections
Fiscal Adjustment · June 4, 2025 · Data: Ministry of Finance, Eurostat, European Commission
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Summary
Fiscal Package Proposal
Core recommendations
Temporary +3pp effective VAT increase + spending cuts = viable solution. Deficit to −7.8% of GDP in 2025. Any increase in taxes on capital or labor is suboptimal, with a high cost-benefit ratio. Simulations show deficit below 3% of GDP by end of 2031.
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Context
Twin Deficits and Economic Slowdown
Record-high imbalances since 2021
In 2024, the economy advanced only due to net taxes, while average value added across all sectors was virtually zero. Budget expenditures rose by 4.1pp of GDP vs the 2017–2024 average; revenues increased by only 1.2pp. Correction postponed primarily due to NRRP.
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Economic Rationale
Two Action Plans Required
Immediate and 12–18 month horizon
First: reduce budget expenditures by freezing and reducing investment-related spending. Increase indirect taxes (VAT — least negative impact on growth). Second: fiscal reform addressing structural changes in revenues and expenditures. Romania needs to remain fiscally competitive.
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Lesson from 2010
Fiscal Package Experience
VAT increased by 5pp in H2 2010
Budget deficit reduced by −2.2% of GDP by end of 2011 — with expenditure reduction generating −2.4% of GDP (final data). VAT increase has immediate short-term impact on revenues but the effect dissipates later, possibly due to increased tax evasion. Any VAT increase must be complemented simultaneously with measures to reduce the VAT gap.
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Optimal Strategies
VAT, Labor Tax and Competitiveness
Regional comparison and policy options
Romania's effective VAT rate is lowest in the region at 14.5% (weighted statutory). Tax wedge in 2024: RO 38.3%, above Poland (33%) and close to EU average (38.8%). To counterbalance VAT increase: simultaneous reduction of social contributions by 1pp and limiting payments on other incomes to 5 minimum wages.
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Projections 2025–2031
Revenues and Expenditures Path
Fiscal package applied from July 2025 or January 2026
Total revenues projected to rise from 32.7% of GDP (2024) to 34.2% (2025). Expenditures rise to 42.0% in 2025 then decline to 37.0% by 2031. Budget deficit path: −7.8% (2025) → −6.6% → −6.2% → −5.5% → −5.2% → −4.0% → −2.9% (2031).
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Appendix
General Remarks on Fiscal Measures
IMF (2012) analysis on tax distortions
Least distortive taxes: consumption (VAT, excises), property, environmental. Income, profit, and social contribution increases reduce work and investment incentives. Reducing capital taxation (eliminating turnover tax, special construction tax, energy tax) redistributes resources to private sector investments with higher multiplier than public investments.
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Fiscal Risks & Reform
Evaluation of Fiscal Risks 2017–2024
Public expenditure reform: efficiency and prioritization
Social assistance and personnel expenditures reached 256.8% of fiscal revenues in 2024 (vs 115.6% in 2017). Rationalization needed: review of public sector salaries, subsidies, transfers. Public investments should target infrastructure and multiplier-rich projects. Measures are required to prevent excessive debt accumulation and arrears.
Summary
Core arguments and policy recommendations from the report
1
VAT increase + spending cuts: the viable solution
A fiscal package that includes a temporary increase of at least 3 percentage points in the effective VAT rate, alongside a reduction in public spending — especially investment-related — would be a viable solution. These are simple measures with immediate impact. This option maintains the fragile growth prospects for this year, bringing the budget deficit to -7.8% of GDP in 2025 (ESA basis), a realistic level.
2
Taxes on capital or labor are suboptimal
Conceptually, any increase in taxes on capital or labor is suboptimal, with a high cost-benefit ratio for the economy at this time. A fiscal package that simultaneously increases taxes on consumption, capital, and labor lacks economic logic, deepening the economic downturn and unnecessarily jeopardizing the premises for recovery. Romania needs to remain fiscally competitive.
3
VAT gap reduction is mandatory
It is necessary for the VAT increase to be accompanied by efficient, immediate measures to reduce the VAT gap. These measures will marginally reduce consumption, positively impacting the current account deficit. The signal sent by lowering social contributions will encourage labor, increase competitiveness, and partially offset the loss in purchasing power caused by a higher VAT rate.
4
Room for social contribution reform in 2026
In 2026, there is room for a marginal reduction in social security contributions by one percentage point and for capping them at a reasonable number of average wages (e.g., five) for other types of income. There is also room to eliminate the turnover tax, the pole tax, and additional energy taxes. These measures would generate more budget revenue, driven by the economic growth they stimulate.
5
Budget deficit below 3% of GDP by 2031
Simulations for the 2025–2031 horizon show that the budget deficit can be brought below 3% of GDP by the end of the period in the proposed form. The budget deficit can reach -3% of GDP in 2031, as negotiated with the European Commission (EC), with an effort to control expenditures and without additional increases in labor or capital taxes.
6
Fiscal responsibility law must be addressed
The fundamental issue of non-compliance with the fiscal responsibility law adopted in 2010 must be addressed. The legislative framework needs to be quickly revised so that exceptions to this law are made only in exceptional cases and within a certain limit, to prevent such deviations in the future. Communication with the European Commission and financial institutions/rating agencies will be a central element in the successful implementation of this plan.
Budget Deficit Projections
% of GDP · 2025–2031 · Working hypothesis: fiscal package applied from July 2025 or from the beginning of 2026
2025
−7.8%
% of GDP
2026
−6.6%
% of GDP
2027
−6.2%
% of GDP
2028
−5.5%
% of GDP
2029
−5.2%
% of GDP
2030
−4.0%
% of GDP
2031
−2.9%
EC target reached
Revenues, % of GDP — Historical and Projections 2025–2031
Source: Authors' estimates · Ministry of Finance · Eurostat
| Revenue Item | 2024 | Avg 2017–24 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 |
|---|---|---|---|---|---|---|---|---|---|
| VAT gap, cumulative gains (A) | — | — | 0.15 | 0.4 | 0.5 | 0.6 | 0.9 | 1.1 | 1.5 |
| VAT increase 3pp on effective (B) | — | — | 0.56 | 1.12 | 1.12 | 0.56 | — | — | — |
| VAT standard, currently collected (C) | — | — | 6.8 | 6.8 | 6.8 | 6.8 | 6.8 | 6.8 | 6.8 |
| VAT, (A)+(B)+(C) | 6.9 | 6.4 | 7.5 | 8.3 | 8.4 | 8.0 | 7.7 | 7.9 | 8.3 |
| Profit tax | 2 | 1.7 | 2 | 2 | 2 | 2 | 2 | 2 | 2 |
| Income tax | 2.8 | 2.6 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8 |
| Minus turnover tax | — | — | — | −0.37 | −0.37 | −0.37 | −0.37 | −0.37 | −0.37 |
| Property taxes | — | — | — | 0.2 | 0.2 | 0.3 | 0.3 | 0.5 | 0.5 |
| Excise duties | 2.6 | 2.8 | 2.6 | 2.6 | 2.6 | 2.7 | 2.8 | 2.8 | 3 |
| Others | 7.6 | 7.8 | 8.6 | 8.6 | 7.6 | 7.6 | 7.6 | 7.6 | 7.6 |
| Insurance contributions (D)+(E) | — | — | 10.7 | 10.1 | 10.1 | 10.1 | 10.2 | 10.2 | 10.3 |
| Revenues (total) | 32.7 | 31.4 | 34.2 | 34.3 | 33.4 | 33.1 | 33.0 | 33.4 | 34.1 |
Expenditures, % of GDP — Historical and Projections 2025–2031
Source: Ministry of Finance
| Expenditure Item | 2024 | Avg 2017–24 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 |
|---|---|---|---|---|---|---|---|---|---|
| Salaries | 9.4 | 9.1 | 9.3 | 8.7 | 8.6 | 8.4 | 8.3 | 8.2 | 8.1 |
| Goods and services | 5.3 | 5.1 | 5.1 | 5 | 5 | 5 | 5 | 5 | 5 |
| Interests | 2.1 | 1.6 | 2.8 | 3 | 3.2 | 3.3 | 3.2 | 2.7 | 2.3 |
| Social assistance | 12.7 | 11.9 | 13.5 | 13.1 | 12.6 | 11.8 | 11.7 | 11.7 | 11.6 |
| Capital | 3.7 | 2.8 | 3.2 | 3 | 2.8 | 2.8 | 2.8 | 2.9 | 3 |
| Others | 8.2 | 6.8 | 8.1 | 8 | 7.4 | 7.3 | 7.2 | 7.1 | 7.1 |
| Expenditures (total) | 41.3 | 37.2 | 42.0 | 40.8 | 39.6 | 38.6 | 38.2 | 37.4 | 37 |
Regional Comparison
Effective VAT rates, VAT gap and tax wedge · RO, HU, PL, CZ · Source: Authors' estimates, European Commission, Eurostat
Effective VAT Rates and VAT Gap in the Region, % (2023)
RO
Weighted statutory VAT: 14.5%
VAT Gap: 35%
HU
Weighted statutory VAT: 21.8%
VAT Gap: 13.5%
PL
Weighted statutory VAT: 17.6%
VAT Gap: 9%
CZ
Weighted statutory VAT: 18.2%
VAT Gap: 11.2%
Source: Authors' estimates and the European Commission (RO - Romania, HU – Hungary, PL - Poland, CZ - Czech Republic)
Tax Wedge in 2024, % (for a single person, without children)
Romania (RO)
38.3%
Czech Republic (CZ)
38.9%
Hungary (HU)
41.2%
EU average
38.8%
Poland (PL)
33%
Source: Eurostat. For a single person, without children.
Lesson from the 2010 Fiscal Package
Comparative differences expressed as % of GDP · 6 months and 1 year after implementation of fiscal adjustment measures
| 6 months | 1 year, GDP estimated value at that date | 1 year, GDP definitive value | |||||||
|---|---|---|---|---|---|---|---|---|---|
| 2011 | 2010 | differences | 2011 | 2010 | differences | 2011 | 2010 | differences | |
| (a) | (b) | (a)-(b) | (c) | (d) | (c)-(d) | (e) | (f) | (e)-(f) | |
| Revenues | 15.6 | 15.1 | 0.5 | 33.1 | 32.8 | 0.3 | 31 | 31.2 | −0.2 |
| Expenditures | 17.7 | 18.6 | −0.9 | 37.5 | 39.4 | −1.9 | 35 | 37.4 | −2.4 |
| Budget deficit | −2.1 | −3.5 | 1.4 | −4.4 | −6.6 | 2.2 | −4 | −6.2 | 2.2 |
The lesson from the 2010 VAT increase is that it has an immediate, short-term impact on budget revenues. However, this effect dissipates later, possibly due to increased tax evasion. Therefore, to be effective, any VAT increase must be complemented simultaneously with measures to reduce the VAT gap. The significant structural adjustment of the budget was achieved mainly through the reduction of budgetary expenditures and less through the increase of revenues, although VAT was increased by 5 percentage points. Paradoxically, calculations made with the final GDP data show that budget revenues as a percentage of GDP actually decreased in 2011 compared to 2010.