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In a bold bid to rein in its surging budget deficit, Romania’s new centre‐right government has unveiled a sweeping fiscal reform package—marked by a significant rise in the value-added tax (VAT) and a freeze on public-sector wages and pensions. The measures come amid warnings from Prime Minister Ilie Bolojan that failure to act could lead to a default, jeopardizing the country’s ability to fund essential expenses.
Key Components of the Fiscal Package
VAT Increase
Effective immediately, Romania’s standard VAT rate for most goods and services has been raised by 2 percentage points, from 19% to 21%. While the majority of products will face this higher rate, a reduced VAT rate of 11% will continue to apply to essential items—including food, medicines, books, public utilities, water and sewage services, and district heating—to alleviate the burden on lower-income households.
Excise Duty Hikes
In addition to the VAT adjustment, Prime Minister Bolojan announced a 10% increase in excise duties on fuel and alcoholic beverages. He also indicated that excise duties on cigarettes would be raised, though detailed parameters for the tobacco levy remain pending. These increases are designed not only to boost government revenues but also to discourage the consumption of goods that contribute to public health and environmental costs.
Wage and Pension Freeze
A further cornerstone of the reform package is the decision to freeze public-sector wages and pensions throughout 2025 and 2026. According to government officials, this measure is critical to curbing expenditures at a time when Romania’s budget deficit has ballooned to 7.5 billion euros—an equivalent of 9.3% of GDP, far exceeding the European Union’s recommended limit of 3%.
The Fiscal Context and Political Stakes
Since assuming office on June 23, Prime Minister Bolojan has been under intense pressure to deliver fiscal discipline amid rising debt concerns. Last month, Romania failed to submit a credible fiscal package to the European Commission—a setback that has raised the specter of a credit rating downgrade and increased scrutiny from Brussels.
At an Economic and Financial Affairs Council (EcoFin) meeting, Bucharest was expected to outline concrete plans to reduce the deficit to around 7% of GDP by the end of the current year. While the revised VAT and excise measures are seen as immediate revenue-boosting steps, the broader challenge remains: restoring investor confidence and meeting EU fiscal commitments without stifling economic growth.
“If we did nothing or continued to delay reforms, we’d risk defaulting,” warned Bolojan. “That would mean our creditors would stop lending to us, and we wouldn’t be able to cover the state’s expenses, including salaries and pensions.”
Economic and Social Implications
The new fiscal measures are a double-edged sword. On one side, higher VAT and excise duties are expected to generate additional revenue and help narrow Romania’s fiscal gap. On the other, these increases may exert downward pressure on consumer spending, potentially slowing economic activity in the short term. Moreover, a wage and pension freeze could fuel public discontent, particularly among vulnerable sectors that rely heavily on public sector incomes.
Analysts suggest that while the reforms are necessary from a fiscal sustainability perspective, their success will hinge on complementary structural measures—such as boosting productivity, reforming tax collection, and curbing corruption—to achieve long-term debt stabilization without derailing economic growth.
Looking Forward
The government is expected to release further details on additional fiscal adjustments in the coming days as it continues its efforts to realign Romania’s public finances. While immediate revenue gains from tax hikes may provide temporary relief, Romania faces a challenging road ahead to secure sustainable fiscal health and meet stringent EU recommendations.
For policymakers, investors, and international observers, Romania’s latest move serves as a critical case study in the trade-offs between fiscal consolidation and socio-economic stability during periods of financial distress.
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