Romania's fiscal adjustment has been complicated, only partly efficient, with no support to economic growth. Fiscal adjustment needs a reset to jumpstart the economy.

In our paper “Fiscal Adjustment Must Be Simple, Efficient, and to Support Economic Growth” (with Ella Kállai and George Ștefan, 4 June 2025), we proposed what the title suggested: a simple fiscal reform based on economic logic, namely increasing the tax on consumption but balancing this with a small cut in labour costs and no increase in capital taxes.

One year on, the effects of fiscal policies implemented by the authorities show that essentially one instrument, out of roughly a dozen, did all of the work, namely the VAT increase. Budgetary results for the first seven months of 2026 show that we were right. VAT gains accounted for 0.7% of GDP while current revenues rose by only 0.4% of GDP. Compared to the same period a year ago, profit tax and social contributions are virtually flat as a share of estimated GDP; the dividend tax's apparent 2025 gain is very likely a one-off pulled forward ahead of the 16% rate; the turnover taxes and the construction tax raise revenue but not enough, relative to their size and the number of times they were touched, to show up as anything more than rounding in the execution totals.

Taking a rolling-12-month view (i.e. comparing revenue data for the period Aug 25–Jul 26 against the Aug 24–Jul 25 period) actually sharpens the results. Although these are only partial results, based on the 2026 Q2 GDP estimate, they actually outline a trend.

The most striking thing is that VAT alone (+0.8pp of GDP) accounts for slightly more than the entire net increase in fiscal revenue (+0.7pp). That is only possible because something else fell: in our preliminary estimates SSC actually declined as a share of GDP, from 11.1% to 10.9% (−0.2pp). This is notable given how much of the 2025 measure list was aimed at broadening the CASS base. None of that shows up as a net revenue gain here — if anything, the ratio moved the wrong way. Profit tax (2.1%→2.2%) and property (0.5%→0.6%) are both essentially flat, each contributing a rounding error's worth of GDP. So on a full rolling year, VAT is not just the biggest riser — it is doing more than 100% of the work, with everything else roughly cancelling out.

The economy is on a decelerating path, averaging −0.5% growth over the last three quarters. This is to be expected given a fiscal consolidation of this scale. But the real worry is that the fall in trend economic growth has been consistent over the last decade. And in a period in which Romania benefited from one of the largest inflows of free capital, via its National Recovery and Resilience Plan (PNRR), average growth was at its lowest, at only 1%.

The economy also lost almost 65,000 jobs over the last year (1.3% of total employment), pushing up the number of unemployed by 10%. Those job losses were largely occurring in the private sector. This explains why the broadening of the SSC base did not yield the results the authorities anticipated. The economy seems to have now reached a point where any increase in taxes threatens to bring in less revenue and slow economic growth further.

The real progress has been achieved by reducing the government's budget deficit to −2.3% of estimated 2026 GDP during the first seven months of the year. This was indeed the main purpose of the reform. But there are different paths to achieve the same outcome, some entailing lower costs than others. The risk now is that the effects of government measures will create a permanent supply destruction, pushing future GDP growth potential even lower while reducing Romania's competitiveness. Coupled with the potential negative shocks coming from abroad in the near future, the situation could become even bleaker.

That should have been the starting point for the initial policy design. What actually happened across four legislative vehicles in three years was the opposite of a philosophy: taxes on labour, capital and consumption were all raised, more or less simultaneously, with no attempt to sequence them, to protect the bases with the better growth trade-off, or to give the economy any respite. Each package reads as a response to that year's budget gap rather than as part of a considered view of which taxes Romania could raise without damaging the recovery it needed. That was purely an accounting exercise. It was not economics, which would have asked what each instrument's behavioral response and growth cost actually were before choosing between them.

The VAT gap is the clearest evidence that this was not about matching the instrument to the objective. The enforcement push we advocated has not yielded any tangible results so far. The government rightly chose to increase the effective VAT rate, but the slower structural work of actually collecting VAT is largely not visible. Given that VAT is the one instrument that is actually working, a stalled VAT gap is not a side issue — it is the single largest remaining source of revenue, one that would not require another tax increase on labour or capital at all.

Tighter labour demand is itself costing the budget. The simultaneous increase in labour costs and consumption taxes was likely the main factor behind the loss of 65,000 jobs over the last year alone. At the same time, the unemployed count rose by 10%, or 51,000 — implying that the roughly 14,000 gap between the two figures reflects people leaving the labour market altogether, rather than being counted as unemployed, and raising the risk of structural unemployment. This comes at a time when youth unemployment is itself on the rise, with almost one young person in three out of work.

The true figure would likely sit in the lower half of the range, closer to the minimum-wage bound than the average-wage one, probably around RON 2.5 bn or even more. For policy, the implication is that the hidden fiscal offset from labour-market deterioration is quite large. The calculation excludes further second-round effects (weaker household spending feeding through to profit tax and to other households' incomes), which would push the true cost higher. Moreover, the trend is likely to continue in the coming months if specific policy actions to reverse it are not taken. This should strengthen the case for SSC relief and a lower non-wage cost of labour.