Deloitte: Sudden brake on public spending – with what conditions does the “stepping stone” from the European Commission come?

Opinion by Dan Bădin, Tax Services Partner, Deloitte Romania

The Romanian authorities’ past unconvincing approach to reducing the budget deficit, which reached 9.3% of GDP in 2024 and continues to remain at a high level in 2025, has led European institutions to issue statements stating that our country has not implemented effective solutions to correct the deficit and to warn that this state of affairs “opens the way for possible additional measures if Romania does not act quickly to reduce its budgetary imbalances”.

And although in its most recent communication, dated June 23, the European Commission proposes October 15, 2025 as the date by which our country must take effective measures to correct the excessive deficit, policymakers must pay attention to the conditions that accompany this proposal, especially with regard to the restriction of public spending. Specifically, the commission recommends that the EU Council set a new deadline (October 15, 2025) by which the Romanian authorities must implement concrete measures to ensure the timely correction of the excessive deficit (by 2030), but tightens the maximum limits on the increase in public spending.

If at the beginning of the year the European institutions considered that Romania could afford to increase public spending by 5.1% in 2025 (compared to 2024) and by 4.9% in 2026, they now argue that these should be tempered to a maximum of 2.8% in 2025 and 2.6% in 2026. The next meeting of the ECOFIN Council is scheduled for July 8 and it remains to be seen whether the European Commission’s proposal will be approved and what further recommendations will be issued.

However, regardless of the Council’s decision, the corrective measures must be implemented as quickly as possible to keep spending within the limit mentioned by the EC, given that, in the first four months of this year, we already have an increase of 6.6% compared to the same period in 2024. On the other hand, the deficit reduction measures are also necessary in view of the expected assessments from the rating agencies in the coming months. Currently, Romania is placed by the three major financial rating agencies on the last step recommended to investors, with a negative outlook. In the event of a worsening of the rating, our country falls into the category of states not recommended for investment, with an immeasurable impact on the costs and availability of loans.

Total lack of reaction since the beginning of this year Our country has been in an excessive deficit procedure since 2019 (when it recorded a budget imbalance of 4.6% of GDP), was exempt from correction measures during the pandemic, when fiscal rules were suspended in the EU to allow member states to support their economies affected by the health crisis, but later re-entered the sights of European authorities and was subjected to pressure to consolidate its fiscal-budgetary position. However, because, this time, Romania was no longer the only country in an excessive deficit procedure, the EC relaxed the procedures and granted the respective states the opportunity to adjust their budget deficit over a period of four to seven years, provided that they carry out the structural reforms and investments necessary to increase the competitiveness of national economies.

Romania, already on an accelerated trend of deficit growth, submitted to the EC, in October 2024, a seven-year fiscal-structural plan (the maximum allowed term) through which it committed to reducing the budget deficit to 7.9% of GDP in 2024, to 7% of GDP in 2025 and to 2.5% of GDP in 2031. The EU Council approved Romania’s plan in January 2025 and issued a set of recommendations for our country which, in practice, represented the directions to be followed for the recovery of public finances – the limits within which public spending and the reforms necessary to stabilize the economy and increase state budget revenues should have been included (including tax reform, with an emphasis on modernizing the tax administration and, implicitly, on making tax collection more efficient).

The corrective measures should have been adopted by Romania by April 30, 2025 and presented to the European Commission in the annual report on progress made in the first half of the year, but this report has not yet been transmitted to the European institutions. Thus, at the beginning of June 2025, the European Commission found that Romania had not taken effective measures to correct the budget deficit and submitted a report to the ECOFIN Council in this regard. In the document sent to the Council, the EC identified the most pressing challenges facing our country, namely excessive macroeconomic imbalances, and again transmitted the set of recommendations to remedy the situation.

This was followed, on June 20, by the ECOFIN Council’s information on the fact that Romania not only failed to take the measures recommended at the beginning of this year (January 21, 2025), but, on the contrary, “budgetary spending increased much faster than recommended, which led to a persistently high public deficit and jeopardized the timely correction of Romania’s excessive deficit by 2030.

Recommendations of the European institutions, the way forward for budgetary recovery

This is the situation we are in now and it is very important that, once the electoral calendar of the last year is over, the representatives of the authorities follow the recommendations of the European institutions, which, in essence, aim to stabilize public finances and maximize the development potential of the Romanian economy. Specifically, this concerns maintaining public spending on the correction path and implementing the reforms and investment programs assumed through the medium-term structural fiscal plan.

At the same time, the EC recommends that Romania expedite the implementation of the Recovery and Resilience Plan (PNRR), including the REPowerEU chapter, accelerate the implementation of cohesion policy programs and make optimal use of EU instruments, including the opportunities offered by the InvestEU platform and the Strategic Technologies Platform for Europe, in order to improve the competitiveness of the Romanian economy. In this regard, the Romanian authorities are encouraged to better prepare and plan large infrastructure projects and accelerate their implementation, to ensure that mature public investment projects are completed in a timely manner and to promote private investment to stimulate sustainable economic development.

And, last but not least, the European institutions say that Romania should improve the efficiency of public administration and the predictability of the decision-making process, ensuring that legislative initiatives are based on relevant impact studies and are subject to adequate consultations with stakeholders. In conclusion, the documents of the European institutions provide a clear picture of the stage of the Romanian economy and of the areas where prompt intervention for corrections is necessary. It is only necessary for the Romanian authorities to demonstrate the necessary will in this regard, in order to avoid, on the one hand, the reduction of the country’s rating and, on the other hand, the disengagement of European funds and, implicitly, the blocking of numerous projects essential for the overall development of Romanian society.

The new government in Bucharest announced, through its government program, that it is treating as a priority the issues related to reducing the budget deficit, and not only the European Commission, but also the entire society expects concrete results in this regard, as soon as possible.