Cutting the public deficit to 7% of GDP this year is out of question, there is no way to achieve this – Romania’s prime minister Ilie Bolojan said in a press conference on July 11, adding that his government is striving to keep the budget gap “around 8% of GDP.”
The statement may disappoint those expecting Romania to bring its public deficit down to 7.5% of GDP this year (the rating agencies mentioned such a benchmark). But this may not be the case since PM Bolojan probably speaks in cash (versus ESA) terms.
Ilie Bolojan also said that Romania must move next year “closer to the target assumed in previous years,” Profit.ro reported.
Under the initial 7-year fiscal consolidation plan, Romania envisaged a 6.4%-of-GDP gap in 2026 (ESA definition), down from 7.0% of GDP in 2025 and 7.9% of GDP in 2024. Last year’s 9.3% of GDP gap, 1.4% of GDP above target, needs to be corrected, and the European Commission apparently believes this can be done within two years (2025-2026).
In principle, Romania may end this year with a cash deficit wider than the ESA gap – reversing the situation seen last year.
In 2024, Romania reported a cash deficit of 8.65%-of-GDP while Eurostat calculated the ESA gap at 9.3% of GDP. Part of the 0.65%-of-GDP discrepancy reflects expenses (accumulation of payables) incurred in 2025 – matched by related payments in the following years. Over a longer period of time, the two definitions of the fiscal balance (ESA and cash) are equal.
The 8%-of-GDP [cash] deficit mentioned by PM Bolojan would thus be consistent with a smaller ESA gap this year – with the differential equal to the expenses incurred in 2024 but paid for in 2025. This effect magnifies the fiscal consolidation in 2024-2025 when expressed in ESA terms – from 9.3% of GDP to under 8% (7.5% being still possible).
In cash terms, the consolidation from 8.65% last year to 8% this year does not look impressive – but would be consistent with a 0.5% decrease in the structural deficit (a requirement under the Excessive Deficit Procedure).
This scenario is consistent with the European Commission’s estimates. The EC’s Spring Forecast and the expected impact of the first fiscal package indicate Romania’s ESA deficit would drop close to 8.0% of GDP with no further measures this year (other than the first fiscal package) consistent with a significantly lower cash deficit. The forecast for 2026 still needs broader revision – but, in principle, the 6.4% ESA (and cash) target could be achieved with limited additional measures on top of the first fiscal package.
The second package (and possibly a third) is needed to free resources that the government could use to ease the social cost of the first fiscal package – which will turn particularly tough in 2026. Furthermore, the structural reforms in the second and third packages are aimed at preparing the ground for further fiscal consolidation until 2030.
The European Commission defined in June-July the revised trajectory for Romania’s fiscal consolidation in terms of the annual increase of the net expenditure. No hint was explicitly provided as regards the expected public deficit (cash or ESA). But the revised trajectory implies expectations for the gap to return to the original trajectory as soon as 2026 (6.4% of GDP).
The EC revised the annual increase rates for the net expenditure for only 2025 and 2026. Consequently, it means that no revision is needed in 2027 because the convergence to the initial trajectory would be reached in 2026.
As a technical note, the EC uses the “[annual increase of] net expenditures” as a benchmark to track the progress along fiscal consolidation – a benchmark that is relevant because it is under the control of the government’s policies. Exogenous factors such as borrowing costs or unemployment are filtered out. However, the correlation between the net expenditures (primary deficit corrected for factors such as unemployment expenditures) and the budget balance is rather complex.
By not indicating a specific deficit ESA (or cash) target for 2025, the European Commission and Ecofin avoided setting explicit targets, which could have interfered with further evaluation of the government’s efforts. This allows the Commission certain flexibility in evaluating the progress of the government’s performance this year with no pre-defined explicit targets.
iulian@romania-insider.com
(Photo source: Gov.ro)
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