Fiscal Sustainability and Macroeconomic Resilience in an Emerging EU Economy: Growth, Debt, and the Twin Deficit Trap in Romania

This paper investigates the macroeconomic determinants of Romania’s budget deficit over the post-EU accession period, drawing on quarterly data from Q1 2007 to Q2 2025. Using an Autoregressive Distributed Lag (ARDL) model, we identify both short- and long-run relationships between the fiscal balance and a set of macroeconomic fundamentals. Real GDP growth proves to be the most robust positive determinant, with a short-run coefficient of 0.2718 and a long-run multiplier of 0.5152—a finding that firmly establishes sustained economic expansion as the primary structural force behind fiscal improvement. Inflation is positively associated with fiscal balance, consistent with nominal revenue buoyancy outpacing expenditure indexation in the short run. Public debt exerts a persistent negative effect, confirming that accumulated borrowing generates structural pressure on fiscal outcomes over time. A fiscal persistence parameter of 0.4724 reveals that nearly half of any quarter’s deficit is carried forward from the previous one—a feature that compounds temporary shocks into prolonged imbalances. Bounds testing confirms cointegration, validating the long-run interpretation of the estimated multipliers. The results contribute to the literature on fiscal reaction functions in emerging EU economies, particularly by documenting the interaction between cyclical conditions, external imbalances, and fiscal sustainability. The findings carry direct implications for the long-term sustainability of Romania’s public finances and welfare state. Persistent fiscal deficits and compounding debt dynamics constrain the government’s capacity to finance public investment, social transfers, and the green transition—highlighting the interdependence between fiscal consolidation and broader sustainability goals aligned with sustainable development goals: Decent Work and Economic Growth, Reduced Inequalities, and Partnerships for the Goals.