Expanded budget deficit recorded in Romania, reaching 3.39% within the first half of 2025
Romania has recently adopted a major fiscal corrective package to address its high public deficit and respond to the European Union’s Excessive Deficit Procedure (EDP). Here are the latest updates on the key measures and their potential impact on the country's economy.
## Key Measures in the 2025–2026 Fiscal Corrective Package
The package includes several tax increases and public spending reductions aimed at improving the government balance.
- **Tax Increases**: The dividend tax rate will rise from 10% to 16% starting January 2026. Interim dividend distributions in 2025 may still benefit from the current 10% rate. The standard VAT rate will increase from 19% to 21%. The reduced VAT rate (previously 5%) will be replaced by an 11% rate for certain goods and services, including publications and cultural access. The 9% VAT category will shift to 11% for most essentials, except new housing, which remains at 9% until August 2026. A special tax on bank revenues will rise from 2% to 4% as of July 2025. Excise duties will be increased from August 2025 on alcohol, tobacco, sugary drinks, diesel, and gasoline. New excises will be introduced for still wines and fermented drinks, with specific duties on cigarettes scheduled until March 2026.
- **Public Spending Reductions and Other Adjustments**: The government has introduced a freeze on public-sector wages to curb spending. The plan includes an end to energy price caps, further reducing state expenditure. The package also features changes to health insurance contributions, aimed at improving budget balance.
## Legislative Process and Political Context
The government adopted the RON 10.7 billion (EUR 2.1 billion) corrective package on July 4, 2025, and assumed responsibility for the bill without parliamentary vote, speeding up enactment. Lawmakers could submit amendments until July 7, and the opposition could file a no-confidence motion, though it is unlikely to succeed due to the ruling coalition’s strong parliamentary presence.
## European Union and Market Reactions
The European Commission has endorsed the measures as necessary to avoid sanctions and maintain EU funding. The Romanian Fiscal Council believes the package could avert a sovereign rating downgrade, despite the tough fiscal adjustments and lack of alternatives.
## Impact and Outlook
The corrective package aims to improve the government balance by reducing the deficit, which reached 9.3% of GDP in 2024—well above the initial 7.9% target. The Fiscal Council estimates the package will have an impact of 0.6% of GDP in 2025 and 3.35% of GDP in 2026, with both lower spending and increased revenues.
These measures reflect a concerted effort by the Romanian government to align with EU fiscal rules and stabilize public finances amid significant economic pressure.
In addition to the tax increases and public spending reductions, other key financial indicators for the first five months of 2025 have been reported. Total revenues amounted to RON 256 billion (EUR 51.45 billion), marking a 13.6% year-on-year increase. Non-tax revenues for the same period reached RON 21.01 billion (EUR 4.22 billion), up 19.3%. Corporate income tax receipts amounted to RON 10.50 billion (EUR 2.11 billion), up 4.1% year-on-year. However, interest payments amounted to RON 22.86 billion (EUR 4.59 billion), which is RON 6.86 billion (EUR 1.38 billion) more than the same period last year.
The consolidated general budget expenditures for the first five months of 2025 totaled RON 320.23 billion (EUR 64.37 billion), up 12.2% in nominal terms compared to the same period last year. Social assistance expenditures were RON 106.21 billion (EUR 21.34 billion), up 15.2% year-on-year, mainly due to pension recalculations under Law No. 360/2023, effective September 1, 2024, and RON 1.70 billion (EUR 0.34 billion) for compensating household electricity and gas bills.
The budget deficit in absolute terms for January-May 2025 is RON 64.23 billion (EUR 12.91 billion), with the deficit as a share of GDP rising by 0.7 percentage points, from 16.2% in 2024 to 16.9% of GDP in 2025. Personnel expenditures totaled RON 71.07 billion (EUR 14.29 billion), up 11.3% year-on-year, and represent 3.8% of GDP, 0.2% higher than last year.
Romania is expected to come up with an updated fiscal plan by the July 8 ECOFIN meeting in order to avoid sanctions under the Excessive Deficit Procedure. Last week, the Economic and Financial Affairs Council, or ECOFIN, adopted a new decision establishing that Romania has not taken effective action in response to Council recommendations in the context of the Excessive Deficit Procedure.
These financial updates highlight the challenges Romania faces in balancing its budget while complying with EU fiscal rules. The recently adopted fiscal corrective package represents a significant step towards addressing these issues and stabilizing the country's public finances.
The inclusion of a tax increase on dividends and the standard VAT rate in the fiscal corrective package indicates an attempt to boost government revenues within the Romania's business sector. The public spending reduction through a freeze on public-sector wages and an end to energy price caps further demonstrates the government's commitment to improve the fiscal balance, thereby impacting the country's finance sector.
