Budget deficit rises to 3.4% of GDP, Government increases spending, and NBR slows down monetary easing

The interim government of the last month of spring continued the previous policy of the Ciolacu Cabinet, and resorted to increasing budget spending, by allocating to local authorities, at their discretion, significant amounts from the Budgetary Reserve Fund, but also to supplementing amounts intended for strategic investments in infrastructure, education, energy and transport.

One of the most important allocations in May from the Government Reserve Fund is that of 484 million lei for the development of airport infrastructure. These are the following investment projects: expansion and modernization of Craiova International Airport - 250 million lei; modernization of the "Transilvania" Airport in Târgu Mureş - 108.3 million lei; expansion and modernization of the passenger terminal at the Maramureş International Airport - 65 million lei; development, rehabilitation and modernization of the airport infrastructure of Satu Mare Airport - over 60 million lei. The money was allocated from the state budget by the government to cover the expenses incurred on the respective projects after December 31, 2023, the deadline by which they should have been completed because they were financed from the European Multiannual Financial Framework 2014-2020 (+3).

The interim executive led by Cătălin Predoiu also allocated 3.5 million lei from the Reserve Fund last month, by supplementing the initial allocated budget, to support the National Agency for Policies and Coordination in the Field of Drugs and Addictions. At the same time, the Government increased by 7.5 million euros the funds allocated from the state budget for a project carried out in collaboration with the Council of Europe Development Bank, which provides for the construction of kindergartens.

In addition to these allocations from the Reserve Fund, various amounts were also allocated from the state budget for the expropriations necessary for the implementation of highway projects, as well as for the implementation of energy projects. At the same time, last month, the Executive approved the budget of the National Investment Company for 2025, which provides for financing sources totaling 6.6 billion lei, of which 2.7 billion lei are budget credits and 3.9 billion lei are commitment credits for the implementation of major public projects.

In order to support these investment efforts and increasing current expenses, the Ministry of Finance was forced to turn to the capital markets. According to data presented at the end of May 2025 by the Ministry of Finance, under the TEZAUR and FIDELIS programs, Romanians invested, in the first five months of the year, over 22 billion lei, of which over 13 billion through TEZAUR and about 9 billion lei through FIDELIS.

However, the revenue dynamics could not fully offset the increase in budget expenditures, which reached 320 billion lei in the first five months of the year, up 25% compared to the same period in 2024. At the same time, revenues increased by 14%, reaching 256 billion lei. In this context, according to preliminary data from the Ministry of Finance, the budget deficit remained at a high level, reaching 3.4% of GDP at the end of May, only marginally below the 3.41% recorded in the same period last year.

This budgetary pressure, associated with weak economic activity in the first quarter - when GDP grew by only 0.2% in annual terms -, placed an additional burden on monetary policy. In this context, the members of the Board of Directors of the National Bank of Romania decided, in its meeting of 16 May, to maintain the monetary policy interest rate at 6.50% per annum and to keep the lending and deposit facilities unchanged. This decision was taken in the context of inflation that slightly decreased to 4.85% in April, but which remains volatile and with a slow reduction horizon, influenced by factors such as rising food prices and uncertainties regarding energy prices. Moreover, the adjusted CORE2 inflation rate, an essential indicator for assessing fundamental trends, decreased at a slower pace than expected, maintaining pressure on monetary policy decisions.

In parallel, the external and domestic political context contributed to the tension in the financial market. The prolonged electoral period and political instability caused capital outflows, amplified exchange rate volatility and led to increases in government bond yields, especially for short maturities. These developments have further complicated the mission of the NBR, which must maintain the balance between price stability and the sustainability of state budget financing. Against the backdrop of these imbalances, Romania's total external debt continued to grow, reaching 205.4 billion euros at the end of March, according to the NBR, , while long-term debt increased by 1.2%. In parallel, the current account of the balance of payments recorded a deficit of 7.6 billion euros in the first quarter, compared to 4.2 billion in the same period of the previous year. Also, foreign direct investments decreased significantly in the first three months of 2025, to 1.67 billion euros, compared to 2.48 billion in the first quarter of last year, which represents a signal of cooling of investors' appetite for the Romanian market, according to the central bank.

Under these conditions, the NBR was forced to maintain a prudent monetary policy, signaling that maintaining macroeconomic balances will critically depend on a coherent budgetary consolidation, attracting European funds and a correct calibration of the mix of fiscal and monetary policies. In the absence of such an approach, inflationary pressures and tensions on financial markets risk becoming increasingly difficult to manage, ultimately affecting economic stability and the state's ability to finance reforms and investments undertaken.