Fiscal Council: mild recession possible in 2026, recovery estimated for 2027

The Fiscal Council warns that Romania could enter a mild recession in 2026, amid deficit-reduction measures that are dampening economic activity and an unfavourable international climate. According to the institution's annual report for 2025, the main forecasts for this year range from a contraction of 0.2% to growth of 0.7%, with the economy expected to recover in 2027.

The European Commission forecasts growth of just 0.1% for Romania in 2026, below the IMF's projection of 0.7%. The National Commission for Strategy and Prognosis has also revised its estimate downward, from 1% to 0.1%, whilst the European Bank for Reconstruction and Development anticipates a contraction of 0.2%.

"A mild recession in 2026 cannot be ruled out, given the scale of the fiscal consolidation and the unfavourable international environment," the Fiscal Council's report states.

Data for the first quarter of 2026 show an annual contraction of 1.2% (gross series) and 1.1% (seasonally adjusted series). Compared with the previous quarter, the economy stagnated, following a 1.9% decline in the final three months of 2025.

By sector, construction and cultural and recreational activities performed positively, whilst trade, transport, HoReCa, industry, IT&C, real estate transactions, and public administration all weighed on the economy. Household consumption also made a negative contribution, partly offset by government consumption and investment.

Investment and European funds remain the principal factors capable of sustaining the economy, according to the Fiscal Council. Private consumption is not expected to become a growth driver again until 2027, as inflation eases and real household incomes recover. For 2027, the IMF forecasts growth of 2.5%, the European Commission 2.3%, and the EBRD 1.8%.

Deficit reduction is hampering the economy, but halting it would accelerate debt growth

The recession risk is emerging precisely at the time when Romania must continue reducing its budget deficit. The Fiscal Council describes a difficult situation: fiscal adjustment weighs on demand and short-term economic growth, but halting it would put public debt on an unsustainable trajectory.

The budget deficit, calculated under European methodology, fell from 9.3% of GDP in 2024 to 7.9% in 2025. For 2026, the scenario examined by the Fiscal Council factors in a target of 6.2% of GDP.

The institution analysed a "no-policy-change" scenario, in which measures already adopted would be applied in 2026, but consolidation would not continue from 2027 onwards. In this case, public debt would rise by an average of approximately 3.4 percentage points of GDP per year, would exceed 70% by 2030, reach approximately 80% by 2034, and surpass 100% of GDP by 2039.

"The measures adopted in 2025 have moderated the explosive trajectory of public debt, but are insufficient to stabilise it. Although the long-term debt projection is hypothetical — since financial markets and rating agencies would react well before those thresholds are reached — the projected trajectory underlines the need to press on with fiscal consolidation," the report states.

Public debt reached 59.6% of GDP at the end of 2025, five percentage points above the previous year's level, and climbed to 60.2% in April 2026.

If deficit reduction were to halt, the state's gross financing requirement — covering the refinancing of maturing debt plus the deficit — would rise from approximately 15% of GDP in 2026 to 20% by 2034. Interest expenditure would increase from around 3% of GDP to approximately 5% over the same period. The risks are compounded by the fact that approximately 53% of public debt is denominated in foreign currency, exposing it to leu depreciation.

This trajectory can be avoided by continuing the adjustment. If Romania were to achieve a structural primary surplus of approximately 2.1% of potential GDP by 2030, public debt would peak at 62–65% in 2027–2028 before beginning to decline, and the budget deficit would fall below 3% of GDP.

The Fiscal Council warns that maintaining consolidation through further freezes on social and personnel spending, or through additional tax increases, would be socially and politically difficult. The institution proposes a third option: raising revenues through more efficient collection. An analysis of VAT receipts suggests, however, that the expected progress has yet to materialise.

VAT revenues show no improvement in collection efficiency

In 2025, the state collected 133.9 billion RON in VAT, some 13 billion RON (10.7%) more than in the previous year. However, this fell 2.2 billion RON short of the amount projected in the original budget.

Revenues were supported by the increase in the standard VAT rate from 19% to 21%, effective 1 August 2025, and by the replacement of the reduced rates of 5% and 9% with a single rate of 11%. The Ministry of Finance had estimated that the rate changes would generate approximately six billion RON in additional revenue for the budget.

The Fiscal Council calculated the amount the budget should have collected, taking into account the 8.1% growth in private consumption and the new VAT rates, arriving at a projection of approximately 135.4 billion RON — above the 133.9 billion RON actually collected.

"Accordingly, the outturn of VAT revenues provides no evidence of improved collection efficiency, which should have generated additional revenues of 5.7 billion RON, according to the Ministry of Finance's initial projections," the report notes.

The Fiscal Council cautions that additional revenues estimated from combating tax evasion should not be incorporated into the budget in advance, but recognised only once they actually appear in the execution figures.

Romania continues to have the largest VAT gap in the European Union, estimated at approximately 30%, equivalent to 9.2 billion euros. In 2025, the state collected approximately 7.1% of GDP in VAT — the lowest level among the Central and Eastern European countries examined in the report. By comparison, Slovenia collected the equivalent of 8% of GDP, and Bulgaria 9.6%.

The Fiscal Council estimates that closing the VAT gap and the corporate income tax gap, together with recovering outstanding liabilities from companies in insolvency or bankruptcy, could generate additional revenues of over 1.5% of GDP. These amounts would support deficit reduction and ease the pressure for further tax increases, whilst also limiting the negative impact of consolidation on the economy.