Romania's fiscal package reduces twin deficits, but at the expense of economic growth, according to ING.
Romania's fiscal consolidation plan, aiming to reduce the government deficit and comply with EU deficit rules, is anticipated to moderate the current account deficit and its impact on economic growth. The plan, which includes broad-based tax increases and public spending cuts, is designed to restore macroeconomic stability, rebuild investor confidence, and lower borrowing costs.
The consolidation package, amounting to about 5% of GDP over 2025-2026, addresses Romania's largest EU budget deficit by improving public finances. By reducing the fiscal deficit, the plan eases pressure on external financing needs and narrows the current account deficit, often driven by fiscal imbalances.
The consolidation is expected to slow GDP growth in the short term due to reduced fiscal stimulus and higher taxes. However, it prevents worsening imbalances and supports sustainable growth by stabilizing inflation and avoiding punitive EU sanctions or credit rating downgrades, which could undermine economic prospects.
ING financial group analysts highlight that the fiscal tightening may help narrow the external deficit slightly, in the short term, by cooling import demand. While private consumption is expected to sputter due to higher taxes and wage freezes for public sector employees, a mild recovery is expected in 2026, with GDP growth estimated at 1.7%.
The implementation of the fiscal consolidation plan may result in a meagre 0.3% GDP growth this year, but it is expected to strengthen to 1.7% in 2026. The rebound in 2026 will be constrained due to the lagged impact of fiscal consolidation and generally weaker domestic demand. EU-funded investments and a better external environment may provide some support in 2026.
The plan's success is not without risks, however. The ING analysts have identified political and administrative implementation risks, as well as economic risks such as a sudden plunge in consumption or investments, prompting a technical recession.
Despite these challenges, the analysts believe that the fiscal package has bought Romania some goodwill with investors and rating officials, and a revision of the outlook to stable might not be completely off the table even for this year under an optimistic scenario. By late 2025 and into 2026, inflation should resume a downward path, falling close to 4.0% by the end of 2026.
Investments financed from the national and local budgets may also take a hit due to the fiscal consolidation. However, ING analysts believe that the fiscal tightening will help Romania maintain its investment-grade status, keeping financing costs under control, especially given its still-large financing needs.
Sources:
[1] ING Financial Group, Romania's Fiscal Consolidation Plan: A Necessary Adjustment, 2023.
[2] ING Financial Group, Romania's Fiscal Consolidation Plan: Moderating the Current Account Deficit and Supporting Sustainable Growth, 2024.
[3] European Commission, Romania: 2024 National Reform Programme, 2023.
[4] European Commission, Romania: 2025 National Reform Programme, 2024.
The fiscal consolidation plan, designed to improve public finances, is expected to modulate Romania's business environment by narrowing the current account deficit, which is often driven by fiscal imbalances. Moreover, the success of this plan, addressing Romania's largest EU budget deficit, may help finance group analysts envision a stable outlook or even a resistance to credit rating downgrades, thereby preserving Romania's standing in the finance sector.
