Romania's general government budget deficit narrowed by 44% y/y to RON 35.9 billion (EUR 6.9 billion) in January-May, as the country reduced payroll in the budgetary sector and current expenditures from EU grants (other than investments), according to data published by the Finance Ministry. The deficit-to-GDP ratio dropped to 1.75% from 3.35% in the same period last year, versus a 6.2% of GDP full-year target.

Notably, the deficit correction was operated on the expenditures side in January-May, as expenditures were hindered by the lack of a budget law during the entire Q1, while the main correction driver is expected to be on the revenues side, for the entire year.

"The figures are good, but they do not allow for relaxation at all. The priorities remain reducing the deficit, completing investments from the PNRR, and delivering the undertaken reforms," ​​Finance Minister Alexandru Nazare stated, cited by Profit.ro.

The deficit target for this year is still very high in absolute terms, but Romania managed last year and this year to bring the deficit back on track with the agreement concluded in 2024 with the European Commission to reduce the deficit below 3% in seven years. In 2024, the deficit was 9.3% (ESA terms), the highest in the EU and well above the 3% level allowed at the Union level. This year, Romania’s ESA deficit is planned to drop to 6.0% of GDP (6.2% of GDP under cash terms).

“The budget deficit in the first five months is small, if we look at the same period of the previous year, but there is still a long way to go until the end of the year and we must meet the target of 6 - 6.2%,” Raiffeisen Bank's chief economist and former Fiscal Council head, Ionuț Dumitru, commented, cited by Curs de Guvernare.

In his opinion, it is premature to say whether the deficit of 1.75% of GDP is good news.

Overall, total public expenditures decreased nominally by 1.5% y/y to RON 315.5 billion in January-May, and the expenditures-to-GDP ratio (calculated against the full-year projected GDP) for the period dropped to 15.3%, from 16.7% in the same period last year. At the same time, total budget revenues increased by 9.2% y/y to RON 279.5 billion in January-May and accounted for 13.6% of the full year’s projected GDP (13.4% in the same period last year). The correction was operated, therefore, predominantly on the expenditures side in the first five months of the year.

Over the full-year budget plan, the revenues are expected to rise more robustly than in the first five months, from 34.7% of GDP to 36.0% of GDP (+1.3 percentage points, compared to 0.2pp in January-May), while the expenditures expressed as a ratio to GDP are planned to decrease only marginally from 42.4% of GDP in 2025 to 42.3% of GDP this year. The correction over the full year is planned, therefore, on the revenues side.

On the revenues side, VAT collection improved by 23% y/y and the tax on property ownership by 30% y/y. The revenues from personal income tax also increased above average, by 13.4% y/y.

On the expenditures side, the public payroll decreased by 4.1% y/y, and the total payroll envelope decreased to 3.3% of the full-year GDP from 3.7% in the same period last year. The social security expenditures also decreased, by 0.7% y/y in nominal terms, while as a share of GDP they reached 5.1% compared to 5.5% in the same period last year. The capital expenditures contracted as well, by 32% y/y (from RON 22.6 billion in January-May last year to RON 15.4 billion in January-May this year). The Ministry reports, however, that the total investments (including those financed from EU funds) rose by 10% y/y from RON 40.5 billion to RON 44.7 billion. However, total expenditures from EU grants and loans increased by only RON 2 billion from RON 33 billion to RON 35 billion, meaning that non-investment expenditures from EU contracted sharply, so that the investment expenditures from EU funds increased by some RON 11 billion.

(Photo: Vlad Ispas/ Dreamstime)

iulian@romania-insider.com