Romania’s new fiscal consolidation package is likely to reduce the country’s twin deficits over the next two years, but at the cost of significantly slower economic growth (chart), analysts at ING said in a research note published on July 16.

The financial group projects that Romania's budget deficit (chart), measured in cash terms, will fall from a record 8.7% of GDP in 2024 to 7.5% in 2025 and 6.4% in 2026, in line with government targets. The current account deficit is also expected to narrow from 8.3% of GDP in 2024 to between 7.5% and 8.0% in 2025 and 6.5-7.0% in 2026, mainly due to fiscal tightening curbing import demand.

However, the macroeconomic adjustment is expected to have a significant impact on growth. ING forecasts GDP growth of only 0.3% in 2025, down from 0.8% last year, with a modest rebound to 1.7% by 2026. The contraction in public investment and declining household consumption, due to higher VAT and cuts to public sector bonuses, are expected to dampen domestic demand.

"Private consumption looks set to sputter," ING analysts wrote, pointing to wage freezes and tax hikes that will erode disposable income. At the same time, national and local government-funded investments are likely to be scaled back under the consolidation drive.

ING warned that the fiscal plan's credibility depends on consistent implementation. “Execution will be key – any slippage could reignite downgrade fears,” the analysts said, while noting that the current measures may have bought Romania some goodwill with investors and rating agencies.

Maintaining investment-grade status remains essential for Romania’s access to affordable financing, especially given its high funding needs, the report noted. ING believes a revision of the sovereign rating outlook to stable is possible this year, but only under an optimistic scenario.

On inflation, ING expects a temporary spike following the VAT increase in August. However, price pressures are forecast to ease by late 2025 and into 2026. Annual inflation could fall close to 4.0% by end-2026, supported by base effects and subdued demand.

“The BNR’s inflation target remains far off,” ING said, warning that policymakers will need to keep expectations anchored throughout what it called a “volatile period.”