Economic Tsunami Hits Romania: Brutal Austerity Package Revealed by New Government

Romania’s government, led by Prime Minister Ilie Bolojan, has announced a comprehensive and brutal austerity package aimed at addressing the country’s record-high budget deficit. The measures, among the most drastic in recent years, are set to impact a broad spectrum of the population and the public sector.

Key Measures in the Austerity Package

• VAT Increases and Restructuring: The value-added tax system will be simplified from three thresholds to two, resulting in a general increase in the VAT rate. Most reduced rates, except for food and medicine, will be raised to 19%. The VAT on firewood and other energy products will rise from 5% to 9%.
• Higher Excise Duties and New Taxes: Excise duties on fuel and alcohol will increase. New taxes will be introduced on gambling and certain financial activities, including a tax on gambling winnings and potentially on bank capital.
• Public Sector Cuts: The government plans to reduce public sector employment by 20%, resulting in the loss of at least 167,000 jobs. Bonuses and allowances for public employees will be limited, with performance-based criteria for any remaining bonuses. The boards of state-owned companies will see both their numbers and allowances reduced.
• Wage and Pension Freeze: Public sector wages and pensions will be frozen until the end of 2026. The scholarship system for students will be revised, with many scholarships set to be cut or restructured.
• Elimination of Tax Exemptions: Tax exemptions and incentives for the IT, construction, agriculture, and food industries will be eliminated. A new 1% tax on the value of all buildings owned by companies will be introduced, impacting a wide range of businesses.
• Enhanced Revenue Collection: The government will intensify efforts to improve tax collection and combat tax evasion, to eliminate exceptions in the tax system. There is also consideration for raising the corporate and dividend tax rates from 10% to 16%.
• Targeted Social Support: While general pension indexation is postponed, those with the lowest pensions may receive one-off aid, depending on budget constraints in 2025.
• Investment Prioritisation: Public investment projects will be re-evaluated, prioritising those that increase exports, reduce imports, and generate added value. The government aims to maximise access to European funds, especially from the National Recovery and Resilience Plan.

Romania’s budget deficit has reached unprecedented levels, significantly exceeding the European Union’s recommendations. The government views these austerity measures as essential to prevent an economic crisis, restore investor confidence, and secure continued access to EU development funds. The package is designed to balance the budget through a combination of spending cuts and increased revenue, while also improving the country’s ability to absorb European funds.

Public and Political Reaction

The austerity measures have already sparked protests among public sector employees and drawn criticism from opposition parties. Many argue that the burden is being placed on ordinary citizens rather than on political elites or privileged groups. Critics claim the new taxes and spending cuts will disproportionately affect those already struggling with rising costs and economic uncertainty.

Romania’s austerity drive is poised to significantly impact the country’s political and economic landscape in the years to come. With primary elections on the horizon, the success or failure of these measures will have significant consequences for Romania’s future stability and growth. The coming months will test both the resilience of the Romanian public and the government’s ability to implement reforms in the face of mounting social discontent.