Romania’s budget for this year, recently adopted by the Romanian Parliament, has been structured to support the country’s repositioning towards restoring fiscal balance, following the major deficits recorded in recent years, according to analysts from the Romanian Economic Monitor (RoEM), a research project of the Faculty of Economics and Business Administration (FSEGA) at Babeș-Bolyai University (UBB) in Cluj-Napoca. However, this national objective can only be achieved through responsible economic governance that takes into account overcoming two significant obstacles: internal political instability and significant economic pressures from both Europe and the United States in the current global context.
“In the budget for this year, realistic reference figures have been taken into account, but these could be jeopardized by unforeseen events in the global and local economy. Specifically, the budget is based on an economic growth rate of 2.5%—higher than last year’s—and an annual inflation rate of 4.4%, which is more moderate than the previous year. Thus, the government has projected a 2.3% increase in revenues as a percentage of GDP, compared to a 0.7% increase in spending, resulting in a targeted budget deficit of 7% at the end of 2025. This target deficit would represent a significant reduction from the 8.6% deficit in 2024, signaling the government’s commitment to bringing the state budget onto a sustainable long-term trajectory,” explains Levente Szász, prorector of UBB Cluj-Napoca, coordinator of the RoEM team.
In 2023, as in previous years, both revenues and government expenditures in Romania (as a percentage of GDP) were far below the EU average, but the situation changed completely in 2024. While in 2023, Romania’s government expenditures were 8.7% below the EU average, and government revenues were 11.8% below the European average, this gap widened further in 2024 due to increased government spending in Romania, while revenues grew only marginally. As a result, Romania ended 2024 with a budget deficit of about 8.6% of GDP, significantly higher than the 6.6% deficit in the previous year. RoEM analysts note, however, that the data on revenues and expenditures considered for 2023 followed Eurostat methodology, while for the 2024 and 2025 data, the Ministry of Finance’s methodology was used, meaning there may be minor differences between the two.
To reduce the gap with EU member states and to begin the difficult path toward restoring fiscal balance by achieving a 7% deficit target by the end of 2025, the Romanian government forecasts a significant increase in revenues (from 32.6% to 34.9% of GDP) and only a marginal increase in state expenditures (from 41.2% to 41.9%).
“Government revenues are expected to rise mainly due to better absorption of EU funds through the National Recovery and Resilience Plan (PNRR) and an increase in fiscal revenues, primarily from taxes and duties, without raising rates abruptly. On the other hand, the main lever planned to keep government spending as a percentage of GDP under control is a reduction in state spending on goods and services, as well as investments from its own resources. Salaries and pensions are, however, promised to be maintained at the 2024 levels. Probably the most important change refers to investments made with the help of EU funds, which are expected to rise significantly. This increase could not only compensate for the reduction in investments made from the government’s own resources but overall could significantly stimulate investments, far surpassing last year’s level, thereby providing substantial support to the country’s economic growth,” explains Levente Szász.
RoEM analysts highlight that an important and perhaps less recognized aspect is that Romania’s state revenues, specifically the level of taxes and duties collected as a percentage of GDP, have been significantly below the EU average for the past two decades. Data analyzed by the RoEM team shows that implicit consumption taxes (the share of taxes and duties on consumption, including VAT, from total consumption of a national economy) have consistently been among the lowest in EU member states. Additionally, implicit payroll taxes (the share of payroll taxes deducted from total gross salaries at the national economy level) have been consistently about 5 percentage points below the EU average. However, this gap has been significantly reduced at the beginning of this year, following the elimination of tax benefits for employees in IT and other sectors included in the “train ordinance.” Taxes on companies with the highest revenues have also been more than 5 percentage points below the EU average over the past two decades.
All of these data indicate that there is ample room for improvement in increasing and optimizing budget revenue collection in Romania, say RoEM researchers. For comparison, average government revenues in EU countries have accounted for about 45% of GDP over the past 20 years, while the same indicator for Romania has fluctuated between 30-35%. Since 2016, only Ireland and Malta have had lower government revenues than Romania, but these are two particular economic contexts.
“The problem of low government revenues is not only caused by relatively lower taxes compared to EU countries but also by the low level of efficiency in collecting these taxes. Improving the collection rate could be an effective way to reduce the budget deficit, as we demonstrated in a 2023 study. However, to significantly reduce the budget imbalance and restore the country’s economic and financial equilibrium, additional corrective measures will need to be taken in the coming years, which will most likely target both increasing budget revenues and controlling expenditures. Moreover, providing quality public services in the long term (which would implicitly mean an increase in budget expenditures) is impossible without an increase in government revenues, meaning a reduction in the gap between budget revenues as a percentage of GDP and the EU average,” explains Béla-Gergely Rácz, deputy dean of UBB FSEGA, a member of the RoEM team.
RoEM analysts warn, however, that there are at least two major risks that could pose serious obstacles to this budgetary consolidation process. “The first risk, internal, arises if there is no stable government and no strong political will to reduce the deficit. In this case, there is a real danger that the budget deficit will significantly exceed the targeted 7% or even that of 2024, which could further undermine Romania’s credibility with investors and rating agencies, triggering a financial crisis that could even lead to a general economic crisis and recession. The second risk, external, persists even with effective governance, as the economy can be affected by significant external shocks. On the one hand, the weakness of the European economy poses a challenge—Germany, for example, reported negative industrial production data in December. On the other hand, the tariffs announced by President Trump, as well as those expected to be announced in the future, could particularly affect small and open economies like Romania’s,” says Béla-Gergely Rácz.
Thus, conclude the RoEM analysts, in a situation where the economy, which is trying to reduce the largest budget deficit in the EU, is facing not only internal political instability but also significant external economic pressures due to global economic and geopolitical risks, responsible economic governance is absolutely essential. It may be Romania’s last real chance to restore economic and financial balance.
About Romanian Economic Monitor:
Romanian Economic Monitor is a research project of the Faculty of Economics and Business Administration at Babeș-Bolyai University in Cluj-Napoca. The six researchers involved in this scientific endeavor publish a series of economic data in the form of interactive infographics designed to provide a comprehensive, real-time updated picture of Romania’s economic situation. The goal of the project is to clearly and accurately inform Romanians about the economy’s evolution, based on credible and verified data sources, as well as to offer real support to decision-makers in Romania’s politics and economy through frequent analysis updates and scenario predictions to improve the functioning of the economy.
About FSEGA:
The Faculty of Economics and Business Administration (FSEGA) at Babeș-Bolyai University (UBB) is the largest faculty in Romania and one of the strongest Romanian schools in the fields of economics and business. It provides scientific and educational services through undergraduate, master’s, doctoral, executive education programs, and advanced research, consultancy, and sustainable development programs. Nearly 9,000 students at the undergraduate, master’s, and doctoral levels benefit from the educational, didactic, and institutional offer of the 386 faculty members, both in Cluj-Napoca and in the university’s branches in Reșița, Sfântu Gheorghe, and Sighetul Marmației. Since June 30, 2021, UBB, through FSEGA, has become a full member of the European Foundation for Management Development (EFMD), being the only higher education institution in Romania with this status. EFMD administers the EFMD Quality Improvement System (EQUIS), one of the most important quality assurance and international accreditation mechanisms for business administration and management institutions.
