Indirect Taxation and Budget Deficit in Romania with Implications for Fiscal Sustainability

Abstract

Fiscal sustainability has become a major policy priority in the European Union, increasing the importance of stable revenue mobilisation and credible fiscal governance. This study examines the dynamic relationship between revenues from taxes on goods and services and Romania’s general government budget balance during 2010–2025. The empirical analysis employs dynamic Ordinary Least Squares models estimated with HC3 robust standard errors. The preferred specification includes the lagged budget balance, aggregate taxes on goods and services, and inflation, while alternative models control for real GDP and the 2020–2023 crisis period. The preferred model is jointly significant and explains 76.0% of the variation in the budget balance. The results indicate significant fiscal persistence and a positive association between taxes on goods and services and the fiscal balance. Inflation is not individually significant, while the RGDP and CRISIS coefficients are also insignificant in the augmented specifications. The positive TAXGS coefficient remains directionally stable, although its statistical significance is sensitive to additional controls. The findings should therefore be interpreted as conditional dynamic associations rather than causal effects. The study contributes updated evidence on Romania’s fiscal performance during a period marked by the COVID-19 pandemic, energy-market disruption, and inflationary pressures. The policy implications emphasise effective tax administration, broader compliance, expenditure discipline, carefully implemented VAT digitalisation, and predictable excise-duty reforms rather than reliance on statutory tax-rate increases alone.