JP Morgan concerned about PSD ruling’s impact on Romania’s fiscal consolidation

The European Commission and Romanian officials currently envisage a deficit of around 5.9% of GDP. JP Morgan had previously expected Romania to outperform its official deficit target this year.

The current trajectory points to a budget deficit of around 5.7% of GDP in cash terms, compared with the official target of 6.2%, JP Morgan estimated, as reported by Profit.ro. This would put the deficit close to the 2023 level, before the major fiscal slippage in 2024, when the deficit reached 8.65% of GDP in cash terms and 9.3% in ESA terms.

The more significant risk associated with a PSD-centred government, however, would materialise in 2027 if the new government pursued tax cuts.

"Tax cuts, especially a VAT reduction, if adopted, would be very damaging to the 2027 budget deficit," the JP Morgan report concluded.

The bank argued that, in the absence of tax increases, reducing the deficit in 2027 would require keeping the growth of government spending below nominal GDP growth.

VAT-driven consolidation is unlikely to last

"The VAT rate hike last year provided impetus to fiscal consolidation, but the momentum will not last forever," JP Morgan warned.

At the end of the first seven months of 2026, the budget deficit stood at 2.3% of GDP, broadly in line with JP Morgan's expectations. The deficit nevertheless widened during May-July, partly because of increased spending on projects financed from European funds. The bank expects spending related to European projects to remain high in August and September as well.

On the revenue side, budget revenues continued to increase in real terms in July, which Nicolaie Alexandru Chidesciuc, the author of the JP Morgan report, described as a "strong performance", attributing it largely to the VAT rate increase implemented last year.

"Basically, without last year's VAT increase, Romania would have been in a significantly worse position in terms of revenues and budget deficit," according to the report.

Despite the stronger revenue performance, however, "the budget deficit is deepening due to increased spending", Chidesciuc warned.

Rising interest costs will add further pressure as government debt continues to accumulate.

The JP Morgan assessment therefore points to a relatively manageable fiscal trajectory for 2026, but a much more significant policy challenge in 2027. The fiscal consolidation achieved so far has relied partly on the one-off boost to revenues from last year's VAT increase, while maintaining the consolidation momentum will increasingly depend on expenditure restraint and political commitment - particularly if a PSD-centred government seeks to reverse part of the tax increases.