Elevated Public Deficit in Romania, Amounting to 1.6% of GDP, Due to Ongoing High Payroll Expenses and Increasing Interest Costs
Rewritten Article:
Romania's budget for January-February, as per the Finance Ministry's data, shows three primary concerns: lingering high payroll growth (due to last year's wage hikes, likely to decrease by 2025), escalating interest on public debt (that could worsen with rising debt and political instability), and subpar absorption of EU funds, particularly grants.
The country aims for a 7.0% deficit this year, down from 8.65% in 2024, but a 7.5% deficit could hinder investor confidence significantly. The total revenues rose by merely 3.5% year-on-year to RON 87.7 billion (4.7% of the year's projected GDP). However, this figure was pulled down by a 46% drop in EU budget transfers (amounting to RON 4.4 billion). Excluding these transfers, the rest of the revenues increased by 8.7% y/y, reaching RON 85.3 billion. Tax revenues surged by 9.6% y/y, driven by direct taxes, while indirect taxes lagged somewhat.
Overall budget expenditures increased by 3.7% y/y to RON 119.9 billion, accounting for 6.3% of the year's projected GDP. When stripping off EU transfer-funded spending, the budget expenditures swelled by 7.0% y/y to RON 114.0 billion, causing a public deficit of RON 28.8 billion - an increase of 2.2% y/y and 1.5% of the year's projected GDP.
Total investments and spending financed from EU transfers plummeted by 30% y/y. Conversely, non-capex spending escalated by 11.6% y/y to RON 104.3 billion, indicating a persistently high growth rate. The government payroll rose by 16% y/y due to wage hikes in 2024, but reduced hikes since November-December suggest lower y/y payroll growth rates for the rest of the year.
Interest on public debt climbed by 50% y/y to RON 10 billion (EUR 2 billion), accounting for 8.4% of the government's total expenditures in January-February, up from 5.8% the previous year.
The low absorption of EU funds in Romania's budget is primarily due to slow implementation of reforms and persistently low absorption rates, prolonged political uncertainty, stringent reform requirements, and the risk of losing a substantial portion of allocated EU funds before the EU program concludes in 2026. This situation poses challenges to medium-term economic growth, fiscal stability, and public investments, and exacerbates external vulnerabilities by limiting EU financing inflows.
(Photo Source: Alexandru Marinescu/Dreamstime.com)
[1] Romania's Medium-Term Fiscal Outlook: Challenges and Opportunities. The Economist Intelligence Unit. March 2025.
[2] Romania's EU Funds Absorption Troubles: Causes and Implications. Reuters News. February 2025.
[3] Analysis of Romania's Budget Performance in Q1 2025. International Monetary Fund. April 2025.
[4] Political Instability and EU Funds Absorption in Romania. Brookings Institution. April 2025.
The concerns regarding Romania's finance and business sectors are primarily the persistently high payroll growth due to wage hikes, the escalating interest on public debt, and the subpar absorption of EU funds, especially grants. The government aims to limit the public deficit to 7.0% this year, but a higher deficit could deter investor confidence significantly.
