A Blow to Investors: Romania’s Bold Tax Hike, Austerity Measures Spark Economic Turmoil

The Romanian government has introduced significant fiscal changes in an Emergency Ordinance published on Sunday, December 29, addressing budgetary constraints and enhancing fiscal stability. This ordinance outlines various measures that will take effect starting January 1, 2025, impacting both individual taxpayers and businesses.

The austerity measures in Romania are to be enforced on January 1, 2025, which makes it a blow to investors and key stakeholders.

Key Provisions of the Austerity Ordinance

Increase in Dividend Tax

One of the most notable changes is the increase in the dividend tax rate from 8% to 10%. This adjustment is expected to affect investors at the Bucharest Stock Exchange, potentially leading to reduced returns on dividend-paying stocks.

Public Sector Salary and Pension Freeze

The ordinance mandates that public sector employees’ salaries, bonuses, and pensions remain frozen at their November 2024 levels. This includes a halt on adjustments for special pensions and allowances, which will not be indexed to inflation.

State Employment Restrictions

The government has decided to freeze state employment, allowing hiring only for specific positions where recruitment processes have already begun. Additionally, public institutions can only fill 15% of vacant positions, adhering to a strict hiring policy.

Reduction in Political Party Subsidies

The subsidy allocated to political parties will be cut by 25%, a move designed to reduce government spending further.

Child Allowances and Social Benefits

Child allowances will remain current, with no increases planned for various social benefits tied to the reference social indicator.

Investment Prioritization

The ordinance prioritises public investments while limiting new project commitments to 50% of the previous year’s levels.

Digital Tax Reporting Enhancements

Starting January 1, 2025, the RO e-invoice system will be mandatory for B2B and B2C transactions. This includes simplified invoices that must now be transmitted electronically. The ordinance also clarifies that invoices for public procurement contracts must include corresponding CPV codes.

Implications for Investors and Citizens

The increase in dividend tax may deter some investors from engaging with Romanian equities, as higher taxation could diminish their net returns. Public sector employees may feel the impact of salary freezes amid rising living costs, while families relying on child allowances may find their financial support stagnant.

The government’s focus on reducing budget deficits—targeting a decrease below 3% of GDP by 2031—indicates a long-term strategy aimed at fiscal sustainability. However, these austerity measures could lead to public discontent as citizens face tightened budgets and limited social support.

Emergency Ordinance marks a pivotal moment in Romania’s fiscal policy landscape as it seeks to balance budgetary constraints with economic growth initiatives. While aimed at enhancing financial stability, the measures could have far-reaching effects on various societal and economic sectors.