Romania’s coalition survives no-confidence vote, pushes painful tax hikes amid dire economic outlook

On 14 July Romanian Prime Minister Ilie Bolojan’s three-week-old coalition government narrowly survived a no-confidence vote, securing its ability to implement sweeping tax hikes and austerity measures aimed at curbing the European Union’s largest budget deficit.

The government fast-tracked legislation through parliament to raise value-added tax (VAT), excise duties, and other levies starting in August, driven by the urgent need to avoid a credit rating downgrade to below investment grade and to unlock billions in EU funds.

However, these radical measures, described as “unavoidable but painful” by fiscal experts, come against a backdrop of severe economic challenges that have fuelled public unrest and deepened political divisions, with the hard-right opposition vowing further challenges.

Romania’s economy is grappling with alarming indicators that underscore the necessity of these drastic reforms. In 2024, the country posted a budget deficit of 9.3% of GDP, the highest in the EU, far exceeding the bloc’s 3% ceiling and surpassing the government’s initial 7% target. This figure, up from 6.6% in 2023, reflects years of fiscal mismanagement, exacerbated by heavy spending during four election campaigns last year, including a contentious presidential ballot annulled in December and rerun in May.

Government expenditure soared to 43.5% of GDP in 2024, while revenues lagged at 34.1%, compared to the EU averages of 49.6% and 46.5%, respectively. The VAT revenue gap alone cost Romania €8.5 billion in 2022, over 30% of potential collections, due to widespread tax evasion.

Inflation, the EU’s second-highest at 6.9% in January 2025, has eroded purchasing power, with public sector wage and pension hikes driving price increases. The leu weakened past 5.10 per euro in May, a 3% drop, raising import costs and pushing 10-year bond yields to a two-year high of 8.1%. Romania’s debt-to-GDP ratio, while below the EU average at 52.3%, is rising rapidly, and the current account deficit, one of the highest in emerging markets, exposes the economy to investor confidence shocks. Economic growth slowed to 0.9% in 2024, with the European Commission forecasting 2.4% for 2025, hampered by a 10.1% drop in gross fixed capital formation in Q1 2025 due to reduced EU funding.

The coalition’s austerity package is a direct response to these challenges and EU pressure under the Excessive Deficit Procedure, which threatens to freeze over €70 billion in recovery and development funds by 2027 if Romania fails to comply. The measures include raising VAT on food from 9% to 19%, increasing excise duties on fuel, alcohol, and tobacco, taxing gambling winnings and bank profits, and capping public sector pensions and salaries.

A 20% cut in civil service jobs is also planned, alongside a 16% tax on profits and dividends (up from 10%) and a 9% VAT on energy products like firewood (up from 5%). These steps aim to reduce the deficit to 8% of GDP by year-end and 6% by 2026, with a long-term target of 2.8% by 2030. Daniel Dăianu, chair of the Romanian Fiscal Council, warned that these measures will dampen GDP growth but are essential to avoid a “junk” rating, which would make Romania “essentially uninvestable.”

Public backlash has been fierce, with thousands of public sector workers protesting and unions threatening strikes, such as power grid workers in March 2025. Employers and unionists have criticized the tax hikes, arguing they burden an already strained population, with Romanian wages among the EU’s lowest.

The hard-right Alliance for Uniting Romanians (AUR), the second-largest party, filed the no-confidence motion, decrying the measures as “recycled austerity” that fails to address corporate tax evasion or government waste. AUR leader George Simion called the coalition’s policies a betrayal, claiming they “impoverish people and bury the economy.”

The opposition plans to challenge the tax measures in the constitutional court, though the coalition’s parliamentary majority – comprising the Social Democrats, Liberals, USR, and UDMR – ensured the motion’s failure.

Within the coalition, tensions are evident. The Social Democrats, led by Sorin Grindeanu, reluctantly supported the tax hikes but pushed for progressive income taxation over VAT increases, a proposal rejected by other parties due to enforcement challenges. Grindeanu warned that “absurd” elements of the package must be corrected to maintain coalition unity, reflecting unease among the Social Democrats, without whom the government cannot function.

Prime Minister Bolojan defended the measures, stating, “We can’t ignore the serious economic problems and simultaneously reject solutions. We must act decisively.”

With Reuters, edited by g.g.

Caption: Romania’s new Prime Minister Ilie Bolojan delivers his speech after the swearing in ceremony held at the Presidential Palace in Bucharest, Romania, 23 June 2025. EPA/ROBERT GHEMENT