Several recent analyses have stated that Romania’s level of economic development has reached or in some respects exceeded that of Hungary. While some statistical data indeed show an improvement in Romania’s relative position, the real situation reveals serious problems. Romania is facing unprecedented fiscal challenges: after the election year spending spree, the government was forced to make drastic cuts, while the public deficit and debt levels have risen to historic highs. While some economic indicators may suggest that Romania has caught up with or even overtaken Hungary, serious imbalances lie beneath the surface. The country is now having to face record levels of borrowing and painful adjustments, while investor confidence has been shaken and credit rating agencies are threatening downgrades.
The ostensible overtaking
There is no doubt that Romania has outperformed Hungary in some cherry-picked indicators in recent years. According to Eurostat data, in 2024, Romania’s GDP per capita at purchasing power parity reached 79% of the EU average, slightly above the 77% in Hungary. In terms of actual individual consumption (AIC) per capita, Romania overtook Hungary in 2022, as it was 86% of the EU average in the country, compared to 71% in Hungary.
However, these seemingly more positive figures came at a time of significant fiscal loosening and electoral spending in Romania, and it was obvious already then that these would undermine long-term economic stability.
The Oeco index, published annually by the Oeconomus Economic Research Foundation, provides an additional context for a comparative analysis of the economic and social situation in the countries of the region, including Romania and Hungary. The index comprises a total of 25 sub-indicators published by the World Bank that characterise the economic, social and political systems of the countries concerned. The World Bank’s latest data set, based on 2023 data, shows Romania still ranked 27th out of the 27 EU member states, with no improvement on its 2022 score, while Hungary is ranked a much better 18th. This difference indicates a stronger position for Hungary in the EU, based on the overall assessment of the Oeco index. But it is worth looking at what exactly happened in Romania.
A surge in spending
The “super-election year” of 2024 (European, municipal, presidential and parliamentary elections) put the Romanian budget under severe pressure. The governing coalition, the Social Democratic Party (PSD) and the National Liberal Party (PNL), took significant expenditure-increasing measures. In January, all pensions were increased by 13.8%, followed by a new pension law that raised average pensions by 40% overall from September 2024. These increases were implemented partly to offset the impact of inflation, but they were significantly higher than the 10.4% year-on-year increase in consumer prices in 2023.
Some elements of the “Sprijin pentru Romania” (Support for Romania) aid package, which was introduced in 2022 and which provides food vouchers every two months and food parcels every six months to around 2.5 million eligible people, were also maintained. In addition, the vast majority of public employees, one million civil servants, also received holiday vouchers worth RON 1,600 per year. However, these measures further exacerbated an already fragile fiscal situation, with the state spending a total of ~35 billion lei in 2024, an amount comparable to Romania’s defence spending in that year as a share of GDP.
Worrying fiscal trends
The consequences of election spending have also been reflected in public finance data. Romania has been under the European Union’s excessive deficit procedure (EDP) since 2020, and the European Commission concluded in July 2024 that Bucharest had not taken effective action to reduce the deficit. The size of the fiscal deficit has been worrying, as shown in the graph below, jumping from -4.3% in 2019 to -9.2% in 2020, and remaining high in the following years, reaching -9.3% in 2024, one of the highest in the EU. According to preliminary information, the general government deficit in the first quarter of 2025 was 22% higher than in the same period of the previous year. The high general government deficit has also been coupled with a large current account deficit in recent years, putting Romania into twin deficits.
The figure can be referenced here: https://public.flourish.studio/visualisation/23936461/
Romania has been forced to issue a record amount of foreign currency bonds in 2025 to cover its growing financing needs, while the three major credit rating agencies still rate the country at the lower end of the “investment grade” category (BBB-/Baa3). In their view, this position could deteriorate further, as S&P, Fitch and Moody’s all have a “negative outlook”. Bank of America analysts expect that by August 2025, Fitch may downgrade Romania to the ‘junk’ category, which is not recommended for investment.
Bucharest remains one of the largest issuers of foreign currency debt in the region, with around €13 billion of targeted sales in international markets planned for the current year, following a record €18 billion of borrowing last year.
Yield premiums on Romanian sovereign debt in international markets also reflect investor concerns and country-specific risks. The country’s 10-year bonds, with yields of around 7.5%, carry the highest risk premium among EU member states compared to comparable German government bonds. The yield of around 4.9% on Romanian euro-denominated bonds represents a premium of more than 280 basis points over the so-called mid-swap. This spread is one of the widest in the Central and Eastern European region and even exceeds the spreads of similar securities of some countries with lower credit ratings than Romania but outside the EU or NATO.
The country’s gross financing needs reach 231 billion lei, 12% of the projected GDP for 2025, more than half of which it plans to raise from the domestic market, including through the sale of retail government bonds. However, the market performance of bonds will depend to a large extent on the ability of economic policymakers to convince investors that their fiscal plans are sound, with a full recovery of market confidence likely to depend on the implementation of further tax reforms.
At the same time, public debt is also rising steeply, as illustrated in the graph below, although it remains at a more favourable level than the EU average. The debt-to-GDP ratio (calculated according to Eurostat methodology) increased from 35% in 2019 to 54.8% in 2024, and is forecast by Fitch to rise to over 65% by 2028. For historical reasons, Romania has had one of the lowest public debt levels in the EU in the recent period, but based on the current fiscal situation, it will soon exceed the 60% limit set by the European Union’s Stability and Growth Pact, which could lead to further sanctions.
The figure can be referenced here: https://public.flourish.studio/visualisation/23936245/
The 2025 fiscal adjustment
The unsustainable fiscal path and the very high deficit expected by the end of 2024 forced the government to announce and adopt comprehensive austerity measures for 2025, after the elections and despite earlier promises. The package of deficit cuts, estimated at around 1 percent of GDP and amounting to RON 19 billion, is very broad.
Revenue is to be raised, among other things, by raising excise duties on a number of products (energy, alcohol, tobacco), increasing the corporate dividend tax (from 8% to 10%), lowering the preferential tax threshold for micro-enterprises and abolishing tax breaks for several sectors (IT, construction, agriculture). In parallel, significant cuts have been made on the expenditure side too.
Pensions and public sector wages are frozen until the end of 2025, and the planned pension indexation has been cancelled. Public sector employees are also affected by further cuts, such as the abolition of overtime pay, the halving of holiday allowances and the slimming down of other benefits for teachers.
Alternative economic policy proposals
In the midst of economic difficulties and socially controversial austerity, new political alternatives have also emerged. George Simion, the leader of the AUR party, who won the first round of the presidential elections on 4 May 2025, has outlined a markedly different economic programme. This programme contrasts sharply with the austerity measures of the current government and promises, among other things, a reduction in the public charges on wages and salaries, tax exemptions for working pensioners and a reduction in the tax on profits of SMEs.
Its economic sovereignty measures include preventing the transfer of profits abroad, creating a Romanian sovereign wealth fund, developing domestic production capacities and acquiring a majority stake in OMV Petrom. As a social measure, it proposes preferential refinancing of mortgage loans. It is questionable to what extent these promises could be financed in the current budgetary situation.
Concluding thoughts
Although Romania appears to have achieved a better position than Hungary in some selected macroeconomic indicators, such as GDP per capita or real individual consumption, there are serious economic challenges under the surface. The Romanian budget was already in a fragile position before 2024, aggravated by the significant expenditure-increasing measures of the super-election year, drastically worsening the fiscal situation.
The consequent fiscal adjustment measures announced for 2025, which affect a broad section of society, clearly highlight the unsustainability of previous economic policies. It is in this context that George Simion and the AUR party have presented their alternative economic programme, which contains promises that run counter to the current austerity measures. However, there are serious questions about the extent to which these ideas could be financed within the current heavily indebted fiscal framework and whether they offer a realistic solution to Romania’s deep-rooted structural problems.
