Romania’s new government is bracing for a baptism of fire as its drastic measures to slash the highest budget deficit in the EU are likely to provoke a severe backlash.
The potentially inflammatory ideas under consideration include slashing 20 percent of civil servant jobs — at least 167,000 people — ramping up value-added tax and creating a new tax on gambling.
The deficit stood at 9.3 percent of gross domestic product in 2024, and failure to haul it down could see the country’s sovereign rating downgraded. That would increase borrowing costs and potentially further widen the deficit. Romania also risks the suspension of EU regional development and post-pandemic funds.
A four-party coalition led by liberal Prime Minister Ilie Bolojan was just sworn in on June 23 — and the pushback has already begun.
Civil servants working in the building that houses the prime minister’s office on Friday protested against draft legislation that would cut bonuses and the number of extra days off for those working in dangerous conditions, Digi24 reported. The government postponed a discussion on the topic amid calls for union talks.
The European Commission asked Romania to reduce its deficit to 2.8 percent of GDP by 2030 in a draft recommendation to be discussed at a July 8 meeting of economy and finance ministers.
Getting there will be painful. In addition to slashing the civil service, new taxes on gambling and increases in excise duties are expected, according to a draft government plan.
The new government also plans to increase the tax on profits and dividends to 16 percent from 10 percent, and to raise the VAT rate on firewood and other energy products to 9 percent from 5 percent. Some other reduced VAT rates, excluding food and medicines, would increase to 19 percent.
“This correction is so extensive, so far-reaching, that pain cannot be avoided,” said Daniel Dăianu, a former finance minister who presides over the Romanian Fiscal Council, which advises the government on budget issues. He added that the balancing would be “a day of reckoning” for Romania.
The new government also plans to reevaluate investment projects, and to restrict government support programs to those that would increase exports, decrease imports and create added value.
“We have to convince Romanians, international financiers and the Commission to come together in this effort to avoid a [sovereign rating] downgrade that would trigger a more complicated and more painful situation for Romania,” Finance Minister Alexandru Nazare told reporters.
Painful reform
Ana Otilia Nuțu, a public policy analyst at the Bucharest-based Expert Forum think tank, said it was difficult for the government “to sell austerity when you see the same tired faces in government [that] people voted massively against.”
The new government comprises three of the four parties that have overseen a rise in the budget deficit over the past few years: the center-left Social Democrats, the center-right Liberals and the UDMR Hungarian minority party.
Siegfried Mureșan, a liberal member of the European Parliament, said Bolojan had demonstrated an ability to successfully manage budget cuts as mayor of the northwestern city of Oradea.
“Ilie Bolojan has a true reformist track record,” Mureșan said. “He made the institutions he led more efficient, he reduced the number of civil servants.”
Expert Forum’s Nuțu said austerity measures would be “terribly unpopular” if the government doesn’t reduce unnecessary public expenditures such as high pensions for former civil servants. “People will be very angry and we will continue to see, in the next elections, that they will blow everyone away,” she said, predicting a potential further rise in hard-right populism.
Nuțu and Dăianu pointed to efforts to collect more VAT as one area that could bring significant gains in reducing the deficit.
The gap between total potential VAT revenues and what the Romanian tax authorities collected in 2022 was €8.5 billion — or more than 30 percent of the total that could be collected, according to the latest Commission data.
“There will be a forceful intervention in this area,” said Victor Negrescu, a Social Democrat member of the European Parliament.
Romania’s tax authority needs to digitize to target evasion, he said, adding many people run unregistered economic activities and don’t pay the taxes due.
President Nicușor Dan plans to discuss tax evasion as a threat to national security with Romania’s top national security officials at a meeting on Monday.
The Fiscal Council’s Dăianu said the new government still had to produce an impact assessment of most of the measures it is considering. But in a positive scenario, these could pull Romania’s budget deficit under 8 percent of GDP by the year’s end, he predicted.
“The numbers are still approximate, but I believe Romania will avoid a downgrade,” Dăianu said.
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