Romania announces painful austerity plan to tackle historic budget deficit

Romania’s new government has announced a series of austerity measures aimed at reducing the country’s soaring budget deficit, which stands at 9.3% of GDP for 2024 – more than three times the EU’s permissible limit. The move comes amidst mounting pressure from Brussels and concerns over potential sanctions, including a freeze on European funds.

Prime Minister Ilie Bolojan, appointed earlier this year, outlined the government’s plan during a press conference on 3 July. The measures, set to take effect on 1 August, include increased taxes, expenditure cuts, and structural reforms – all designed to prevent a fiscal crisis reminiscent of Greece’s debt saga (Greece however, as a eurozone member, cound count on massive support. Romania is very far from meeting the eurozone accession criteria).

Bolojan emphasized the urgency: “Out of every 100 lei (19.76 euro) collected in taxes, Romania spends about 132 lei, [the difference being] borrowed money that we cannot sustain. Continuing this trajectory risks bankruptcy and a sharp downgrade of our credit rating.”

The Prime Minister added that the proposed measures include higher VAT rates and excise duties, an increase in the number of contributors to the public healthcare system, and higher taxes on banks’ profits and online gambling winnings.

He insisted that the imbalance in the public healthcare system with just over 6 million contributors and more than 16 million beneficiaries needs to be addressed. The government plans to raise the number of contributors to over 8 million by applying healthcare contributions to pensions above 3,000 lei ($697/592 euro) and removing certain exemptions.

Key measures proposed

The first package of measures will be approved next week, Bolojan said on Thursday.

Among the measures that will be part of this project are the re-establishment of VAT on two thresholds, the general rate at 21% and a reduced rate of 11% (medicines, food, HoReCa), the increase in taxes on dividends from 10% to 16%, the increase in excise duties on alcohol, tobacco, fuel by 10%, the freezing of the increase in pensions and salaries in the public system in 2026, pensioners who receive a pension over 3,000 lei will pay the health contribution, a tax on bank profits and surtaxation of gambling winnings.

All the announced measures will enter into force on 1 August, with the exception of the increase in taxes on dividends that will apply from 1 January 2026.

Addressing the imbalance in the public healthcare system, which currently has over 6 million contributors for more than 16 million beneficiaries, the government aims to increase contributors to over 8 million by applying contributions to pensions above 3,000 lei ($697/592 euros) and removing certain exemptions.

The government proposes a temporary cap on public sector wages and pensions in 2025, citing recent increases of over 20% for salaries and 30% for pensions as unsustainable.

Implications and risks

Failure to implement these measures could lead to Romania defaulting on debt payments, losing access to crucial EU funds, and facing a further downgrade of its sovereign credit rating – raising borrowing costs and exacerbating fiscal instability.

Romania’s European Commission forecast projects a modest reduction in the deficit to 8.6% of GDP in 2025 and 8.4% in 2026. However, recent criticisms from Brussels highlight that Romania has yet to take effective steps to curb its fiscal excesses, risking sanctions and the suspension of EU funds.

In the first five months of 2025, Romania’s budget deficit widened to 64.23 billion lei, up from 60.1 billion lei during the same period last year. The government faces tough choices, including potential layoffs of up to 20% of civil servants – at least 167,000 jobs – as it seeks to slash expenditures.

Political and social reactions

The Bolojan coalition government has faced immediate pushback. Civil servants protested against proposed cuts to bonuses and benefits, especially for those working in hazardous conditions. The government has postponed discussions amid trade union negotiations.

Siegfried Mureșan, a European Parliament member, praised Bolojan’s previous track record as mayor of Oradea for successfully managing budget cuts and increasing efficiency. However, analysts warn that implementing these reforms will be politically and socially challenging.

The European Commission has set a target for Romania to reduce its deficit to 2.8% of GDP by 2030—a goal that will require painful reforms. These include further civil service cuts, higher taxes on profits and energy, and reevaluation of investment projects to prioritize export growth and value creation.

Romania’s Finance Minister, Alexandru Nazare, highlighted the importance of uniting domestic and international efforts to avoid a sovereign rating downgrade and the accompanying economic fallout.

Romania’s path to fiscal stability remains fraught with difficulties. The government’s ability to implement these measures amid political resistance will be crucial in securing future funding and maintaining economic stability. As the country braces for a potentially turbulent transition, the stakes could not be higher.

Sources: SeeNews, Hotnews.ro, Politico

Caption: Romania’s Prime Minister-designate Ilie Bolojan (C) checks his watch during a confidence vote on his cabinet at a plenary session of the Parliament assembly in Bucharest, Romania, 23 June 2025. The government led by Bolojan passed the vote of confidence in the joint plenary session of the two Chambers of Parliament, with 301 votes in favor and 9 votes against. EPA/ROBERT GHEMENT