The budgetary measures taken so far by the government of Romania are insufficient for stabilising the public debt to GDP ratio, and taking further steps will be complicated by recession – a “very likely scenario” for H2 this year – and the lack of coherence among the members of the ruling coalition, according to Nichollas Farr, analyst for global macroeconomic firm Capital Economics.
Thus, Romania’s cost of borrowing (10-year, local currency) is likely to end the year around the current level of 7%, but it will come under pressure once the effects of past budgetary measures are absorbed and further actions are needed, according to Capital Economics, as quoted by Cursdeguvernare.ro.
The barriers to a further sustained decline in Romania’s borrowing costs are high, Farr concluded.
In a recent presentation at a conference, Fiscal Council’s head Daniel Daianu argued that the public deficit could reach 6%-6.5% of GDP next year as a result of the measures already taken (which tends to be the consensus) and could drop below 5% of GDP after 2026 following a significant decline in the tax evasion and tax avoidance pursued by the tax collection agency ANAF.
The scenario sketched by Daianu (but not necessarily indicated by the Fiscal Council head as expected scenario) looks highly optimistic in the light of the past performance of ANAF and the lack of political will for reforming the agency demonstrated by the incumbent government – but it seems at the same time the sole alternative to another VAT rate hike (a short-term fix used by the governments in Romania as a substitute for deeper reforms). Daianu named ANAF a “captured institution” under the control of groups of interests.
However, ANAF head Adrian Nica and finance minister Alexandru Nazare promised to digitalise the agency by the end of 2026, implying that this would significantly improve the collection rate. Such promises, sometimes backed by loans and consultancy provided by IFIs, have failed in the past. Capital Economics’ scepticism looks, therefore, legitimate.
Other than ANAF digitalisation, the Romanian Government’s reform timeline remains unclear.
Turning to Capital Economics’ analysis for more technical details, Nicholas Farr expects the adopted fiscal consolidation measures to reduce the primary deficit by 1.2% of GDP in 2025 and 2.0% in 2026, “less than the 6.0-7.0% of GDP consolidation that we consider necessary to stabilise the public debt-to-GDP ratio.”
This is broadly in line with the consensus reached between analysts, the government, and the European Commission (from what is publicly known). He concludes that further austerity measures will be needed in the coming years to keep public debt under control, which is again not something unexpected.
Where Capital Economics may diverge from the consensus is the gloomy outlook envisaging recession in H2 (indeed very likely, but possibly obscured by the ambiguous communication from the statistics office when it comes to quarterly GDP data), putting pressure on the government to relax the fiscal consolidation.
In fact, with or without a recession, keeping the pensions and wages in the public sector flat for two consecutive years – like the government has decided – under the circumstances of high inflation, will create significant social pressures.
While Romania does not have a tradition of rallies prompted by austerity measures, this does not mean that the less visible channels can not result in a prevalence of anti-reformist factions of the ruling coalition. This is expected to prevent the consolidation of further fiscal measures after 2026 (which need to be designed and legislated during 2026).
iulian@romania-insider.com
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