Romania no longer has the luxury of postponing fiscal reform and budgetary consolidation, according to the Romanian Economic Monitor (RoEM) team at UBB FSEGA, which has identified five key fiscal measures with the potential to rebalance public finances: increasing budget revenues by raising average effective tax rates, improving tax collection through better compliance, continuing the digitalization of ANAF and increasing audit efficiency, making better use of EU funds, and reducing the size of the public administration.
How Romania Disrupted Its Macroeconomic Balance
Starting in 2015, Romania’s fiscal and budgetary policy underwent a major shift, with long-lasting implications for macroeconomic stability. While the period from 2009 to 2015 was marked by clear fiscal consolidation—bringing the budget and current account deficits below 1% by 2015—this became, in retrospect, a “reference moment” for Romania’s macroeconomic balance. At that point, the country was on a path that could have led to eurozone accession around 2019, had it stayed the course.
However, this stability led to a rapid relaxation of fiscal discipline. The political class interpreted the resulting fiscal space as an opportunity for expansionary policies, often without proper analysis of their sustainability. This ushered in a wave of tax cuts (notably in VAT), large public sector wage increases, and other pro-cyclical measures. While these initially boosted economic growth, they fostered the false impression that such policies were “working.” This created a vicious cycle of budgetary expansion driven by short-term optimism—a pattern well-documented in some Latin American emerging economies.
By 2019, the negative effects of these policies were already visible: the public budget became unbalanced, and the size of the public administration grew considerably. Subsequent crises, starting with the COVID-19 pandemic in 2020, only deepened the pre-existing vulnerabilities.
Romania: The EU State with the Largest Macroeconomic Imbalances
As a result, Romania currently faces the most significant internal and external macroeconomic imbalances in the EU. Both the budget deficit and the current account deficit are the highest as a percentage of GDP. These imbalances increase sovereign risk, which in turn translates into higher borrowing costs for the government—placing even more strain on an already fragile budget.
“In a global climate of economic uncertainty and rising domestic pressures, patchwork solutions are no longer sufficient. The European Commission, rating agencies, and financial markets are closely monitoring every fiscal decision, and the room for maneuver has shrunk drastically. The time for vague promises and delayed action is over—what’s needed now are clear, credible, and swiftly implemented measures that are systemic, coordinated, and transparent, with both political support and technocratic responsibility,” say the researchers of the RoEM team, a project of the Faculty of Economics and Business Administration (FSEGA) at Babeș-Bolyai University (UBB) in Cluj-Napoca.
“The European Commission’s tolerance stems from multiple reasons. On one hand, there’s a desire to avoid escalating tensions during a sensitive domestic electoral period. On the other, granting Romania a rare seven-year window to reduce its deficit below the 3% threshold reflects strategic considerations. Romania holds a key geopolitical position in today’s regional context, marked by Russian aggression in Ukraine, and its strong pro-European, pro-NATO stance is a major factor in political and institutional assessments by European partners. These commitments now require follow-through. Early 2025 figures show that strong intervention is needed to avoid repeating the same deficit trajectory as in previous years. Although the original 7% deficit target now seems increasingly unlikely, a notable reduction compared to last year would already signal Romania’s willingness to return to fiscal discipline,” RoEM analysts add.
Cutting Spending Alone Is Not Enough
Several recent analyses suggest that the budget could be balanced solely through spending cuts and improved tax collection. While both are clearly necessary, they are insufficient under current circumstances. These tools could reduce the deficit by around one percentage point in the short term—but more is needed to reassure the European Commission and financial markets.
This is why the RoEM team proposes a set of challenging but realistic measures to reduce the budget deficit:
Preliminary Measure: Rationalizing Public Sector Spending and Investments
The public sector must be technically downsized, even though there are limits to this. Personnel expenses should be rationalized by eliminating various bonuses. Investments in early phases—such as stadium construction or prestige projects with low financial returns—can be postponed. However, these steps alone will not make the budget sustainable. Immediate revenue-raising measures are also necessary.
Measure 1: Increasing Budget Revenues Through Tax Reform
Corporate Taxation
RoEM proposes increasing effective average tax rates across corporations, consumption, labor, and wealth through a balanced distribution of the tax burden. Romania’s corporate tax regime is currently unpredictable, with frequent short-notice changes that undermine business confidence. Patchwork tax changes have led to significant economic distortions.
An example: Romania currently uses three main corporate tax regimes (plus exceptions)—microenterprise tax based on turnover, standard corporate income tax, and a 1% minimum turnover tax for companies with revenues over €50 million. Frequent changes to eligibility criteria erode competitiveness.
Additionally, Romania has the lowest VAT collection rate in the EU, largely due to the slow digitalization of ANAF. A more unified corporate tax system is needed, focused not on rate increases, but on stricter rules for deductible expenses and a fair tax base. While some targeted exceptions (e.g., for startups or young entrepreneurs) may be justified, uniformity should be the guiding principle.
RoEM also calls for stricter rules around negative equity firms, especially regarding shareholder loans. International examples show that closing loopholes—not increasing rates—yields better fiscal results.
Consumption Taxation
RoEM recommends shifting the tax burden toward consumption, especially given Romania’s recent surge in imports. This has worsened the external balance, so higher consumption taxes could both raise revenues and reduce excessive imports.
To this end, RoEM proposes a flat VAT rate of at least 21%. Recognizing that this would disproportionately impact lower-income households, they also recommend introducing a progressive personal income tax to offset the burden.
Labor Taxation
RoEM supports moderate progressive taxation of personal income—including special pensions—paired with social contribution reform. Using a dual system like in Poland or Slovakia, lower-income brackets could see tax rates below 10%, while higher brackets could be taxed at 20–25%.
Progressivity should apply to total income, which ANAF currently does not aggregate. A unified income tax and social contributions system could improve efficiency and fairness.
Wealth Taxation
Romania’s property taxes are low and flat. RoEM suggests introducing moderate progressivity—higher rates for second homes or luxury vehicles. Since wealth taxes are local revenues, a redistribution mechanism is needed so part of the extra revenue supports the central budget.
Measure 2: Improving Tax Collection
Despite the progress brought by RO e-Factura and RO e-Transport, further steps are needed. These include strengthening VAT fraud control in intra-community transactions, active identification of tax evasion through risk analysis, and incentives for voluntary compliance.
Measure 3: Digitalizing ANAF and Boosting Audit Efficiency
Digitalization should prevent rather than merely penalize non-compliance. RoEM recommends a unified, user-friendly platform for taxpayers, integration of tax and social data (e.g., income and pensions), and automation of audit and refund processes.
Measure 4: Better Use of EU Funds
Romania currently underutilizes EU funds. RoEM calls for simplifying access procedures, reducing bureaucracy, professionalizing project staff, and aligning national investment strategies with EU funding.
Measure 5: Downsizing the Public Sector
Romania’s public administration is oversized and inefficient. Besides cutting headcount, RoEM proposes restructuring loss-making state-owned companies, administrative-territorial reform that respects minority and local democratic concerns, eliminating redundant roles, regularly evaluating institutional performance, and digitizing administrative processes to reduce staffing needs.
Final Considerations
Two points are critical in implementing these fiscal measures: First, urgent decisions must be taken and implemented swiftly to increase tax revenues. Second, careful attention must be paid to both the intensity and design of these measures—because in a fragile global context, poorly designed policies could easily push the economy into a negative spiral.