Romania's Fiscal Council expresses confidence in the fiscal corrective plan's ability to prevent a sovereign rating downgrade.
Romania's Budgetary Corrective Package for 2025-2026 is a significant fiscal adjustment aimed at preventing a downgrade of Romania's sovereign risk and ensuring fiscal sustainability. The package projects a budgetary impact of 0.6% of GDP in 2025 and 3.35% of GDP in 2026, with substantial fiscal corrections both in terms of revenue increases and expenditure control.
The expected impact on the budget deficit is substantial. The package aims to reduce the budget deficit below 8% of GDP in 2025, with further improvement and respect of budget deficit targets in 2026. With prioritization and reduction of some public investment expenses in upcoming corrective measures, the deficit could be brought down to around 7.5% of GDP in 2025.
Additional anticipated measures for 2026 include the recalibration of the property tax calculation method and the introduction of an environmental tax on means of transport. These are expected to enhance budget revenues beyond the current package. Public expenditure adjustments are also planned, with an estimated impact of about 1.6% of GDP in 2026 through expenditure streamlining and prioritization of investment projects.
A key feature of the package is the reinstatement of a 2% increase in the standard VAT rate to 21% from August 2025. This measure is expected to raise around 6 billion RON (approximately €1.2 billion) annually and help meet EU deficit targets. Alongside, a new reduced VAT rate of 11% replaces the previous 5% and 9% rates, applying only to specific products and services such as medicines, basic foods, books, and cultural services.
The Fiscal Council anticipates that the government's announced additional packages of measures will include measures to streamline public sector spending and prioritize investment projects. The fiscal corrective package is projected to bring the deficit under 8% of GDP by itself. However, the Fiscal Council's expectations imply that additional measures beyond the first fiscal corrective package may be necessary to achieve the desired deficit reduction.
The renegotiation of the National Recovery and Resilience Plan (PNRR) may lead to the transfer of some projects from the loan component of the PNRR to the grant component or to multiannual European funds, thereby reducing budgetary spending. The government has announced two more packages of measures, which are expected to include measures to streamline public sector spending and prioritise investment projects.
The Romanian Fiscal Council concludes that the budgetary corrective package 2025-2026 could prevent a sovereign rating downgrade. However, the package's formal enactment by Parliament may be delayed or derailed by an opposition's no-confidence motion. The Fiscal Council has revised the forecast for Romania's budget deficit this year from 7.7% of GDP to 8.4% of GDP under the no-policy change scenario. The Social Democratic Party (PSD) may consider pulling out of the ruling coalition, but this is an extreme scenario with a very low likelihood.
The fiscal corrective package is expected to impact the business sector through increased VAT and the introduction of an environmental tax, while also aiming to reduce the general-news sector's deficit below 8% of GDP. The recalibration of the property tax calculation method and the announced additional packages of measures, focusing on streamlining public sector spending and prioritizing investment projects, may further influence finance and politics in Romania.
