The Romanian government is pursuing a package of tough austerity measures to contain a record fiscal deficit of 9.3% of GDP in 2024, the highest in the European Union, despite widespread public protests sparked by the measures.
A first package of tax hikes and spending freezes went into effect on August 1, with plans to roll out two more sets this year, Finance Minister Alexandru Nazari said in an interview with the Financial Times. Nazari emphasized that the government is committed to passing all necessary measures to correct public finances, despite the difficulties and unpopularity it faces.
The measures come against the backdrop of a fiscal deficit well above the 3% limit allowed under EU rules, after the previous government hesitated to implement austerity ahead of elections in 2024. Austerity measures led to the fall of governments in Romania and other European countries during the sovereign debt crisis more than a decade ago, specifically widespread protests in 2012 that led to the collapse of the then government.
However, Romanian government officials plan to implement these measures gradually to minimize their socio-economic impact. The current package includes raising the top VAT rate from 19% to 21% and increasing duties on excise taxes, as well as freezing public sector salary hikes and pensions until 2026.
However, more difficult measures are still under discussion, such as reforming the private pension system and eliminating special retirement privileges that allow some groups such as the judiciary to retire early at ages under 50, as well as reforming the structure of state companies that are plagued by corruption and nepotism.
At the same time, the government is facing opposition movements and popular protests, led by Georges Simeon's far-right AUR party, which is demanding early elections and calling for a tax boycott, describing the government as "illegitimate." The party is capitalizing on growing public discontent over the high cost of living and rampant corruption. The party is capitalizing on growing public discontent over the high cost of living and rampant corruption.
On the economic front, Romania is suffering from sluggish growth of just 0.3% in the second quarter, amid high inflation that is forcing the central bank to keep interest rates at 6.5%. The country is also suffering from an ongoing political crisis, after the Constitutional Court canceled the presidential election in December due to allegations of Russian interference, which affected the stability of the government.
In addition, Romania risks losing about a quarter of the financial aid allocated to it from the European Recovery Fund, due to delays in implementing the required reforms, especially those related to reforms in the pension sector and the governance of state-owned companies. Romania has so far benefited from less than 10 billion euros out of the 28.5 billion euros allocated to it.
Despite the fragility of the four-party ruling coalition, the finance minister remains optimistic about the government's ability to survive and accomplish the necessary reforms during its three-year term.
But some experts believe that strong opposition from the AUR party and the declining popularity of the ruling coalition could lead to its disintegration before the completion of the term, with early elections likely to be organized next year.
On the street, citizens show understanding of the need for fiscal reforms, but express resentment that they are bearing the burden of the state's deficit while suspecting corruption by high-ranking officials.
Christina, a 49-year-old engineer, said: "Money is needed, but everything has become more expensive because of the VAT increase. I hope the issue of private pensions that seem too high and unjustified will be addressed."
Mihai, a 53-year-old laborer, wondered: "If I and others are paying taxes, where did the deficit go? Someone must have made a mistake, let them take responsibility."
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