Anticipated Excess of Romania's Public Deficit to Exceed 8% of the Nation's GDP According to UniCredit Romania
Romania is grappling with significant challenges in meeting its 2026 public deficit target of 6.4% of GDP, as social, economic, and structural constraints threaten to derail the government's efforts.
High current deficits are expected to remain above 8% of GDP in 2025, exceeding the 7% target for that year, according to UniCredit Romania's research report. Reducing this deficit to 6.4% in 2026 requires substantial fiscal consolidation.
One of the most pressing issues is the potential for severe social unrest due to freezes on public wages and pensions. Maintaining unchanged public wages and pensions through 2026, as fiscal consolidation demands, risks social tensions amid rising inflation and prices.
The success of reforms in state-owned enterprises, local administrations, and the complex issue of special pensions is essential for the Romanian government to meet its fiscal targets and address public frustrations. Delays or failure to reform these sectors could reduce fiscal space and worsen public dissatisfaction.
Economic slowdown and inflation pressures further complicate the situation. Fiscal tightening via tax increases and spending cuts is set against a backdrop of weak economic growth and rising inflation, which could further dampen domestic demand and complicate fiscal targets.
Monetary policy constraints also limit room for monetary support of economic growth. Persistence of inflation and expectations of sustained high interest rates could exacerbate the challenges.
To address these challenges, Romania's fiscal policy is likely to involve spending cuts, especially in public investments to keep the deficit in check. Tax hikes and structural fiscal measures, including higher VAT, dividend taxes, and property taxes, are also expected. Wage and pension freezes, restricting automatic indexation despite inflationary pressures, are another possibility.
The necessity to accelerate EU funds absorption is also crucial to support investment and growth without fueling inflation or deficits.
Failure to reconcile these competing pressures may slow growth, increase social discontent, and risk non-compliance with EU fiscal rules, potentially triggering sanctions. However, successful implementation could stabilize public finances, improve investor confidence, and reduce twin deficits (budget and current account).
The Romanian government is preparing two additional reform packages, focusing on spending cuts and improving public administration efficiency. The feasibility of the 8% GDP target may come at the expense of public investments, but the report does not expect the higher target to trigger rating actions.
In summary, Romania’s 2026 deficit target is challenging due to the need for deep fiscal adjustment amid inflation, social tensions, and structural reform hurdles. This necessitates a cautious fiscal policy stance prioritizing consolidation, reform, and EU fund utilization while balancing socio-economic stability.
In the context of Romania's 2026 deficit target, the government is expected to implement spending cuts, particularly in public investments, as a means to keep the deficit in check. This fiscal consolidation may also involve tax hikes, structural fiscal measures, and wage and pension freezes.
The success of reforms in state-owned enterprises, local administrations, and the management of special pensions is crucial for the Romanian government to effectively address its fiscal targets and alleviate public frustrations. Delays or failure to enact these reforms could further reduce fiscal space and exacerbate public dissatisfaction.
