Snejana Ivanova, BNR, 4 August 2025
You have probably heard that, as of 1 August 2025, Romania has suddenly increased prices for a number of goods and services. The new government’s first budgetary and fiscal measures to tackle the huge budget deficit have come into force, introducing additional taxes and increasing VAT. I discuss the situation in our neighboring country with my colleague, Vladimir Mitev, founder of the Bulgarian-Romanian blog The Bridge of Friendship.
Hello!
Hello
What exactly is happening in Romania, what is the situation?
Life goes on in Romania, but it seems that we are entering a difficult period that will last for some time. Perhaps it will not be short. Some commentators believe that such measures will probably remain in place until the end of next year and that life will be harder from an economic point of view.
Inflation this year is expected to be around 9%, which is relatively high. The cause is not only the increase in VAT, but also higher excise taxes. Since 1 July 2025, the price of electricity, for which the government previously paid compensation to keep it lower, has been liberalized. In fact, various factors are coming together that are leading to price increases – not just by 2%, which is the VAT rate. Price increases are being reported from various quarters compared to previous levels.
In this situation, of course, tensions in society remain high. We remember the high tension during the presidential elections, when a president was elected who, for a period, resolved the political dilemma. But we see that the measures taken now are leading to a situation where the sovereignist AUR party has 40% public support, according to polls. And there is discontent in society, there are very frequent protests.
Give us an example of some products to give us an idea of how big this price shock is.
I can’t be precise about many products, but, for example, bread costs, in principle, 1 euro, from what I’ve seen the prices – the equivalent of 1 euro, actually 5 lei. For such products, which are relatively inexpensive, there is a price increase of probably a few Romanian lei or a few dozen Romanian lei. This is true for food products, as prices are generally low, so the price increase is relatively small in absolute terms.
However, there have been reports that, in some cases, retailers have increased prices much more than they should have following the VAT increase. There have also been reports that supermarket chains are introducing promotions as a way of keeping prices as low as possible. We have even seen some reports that in the first few days there may be a slight decrease in prices for some products. I cannot say exactly which ones, but in the case of some basic products, such as eggs or similar items, there are cases where, thanks to these promotions, the price increase is not felt so strongly.
I suppose this could become a public policy to some extent, because the Romanian economy has developed in recent years not only thanks to the predominant automotive industry, which exports cars and car parts, but also thanks to domestic consumption. This has been the case because wages have risen and there have been these special VAT rates, which are now also rising slightly. The Romanian economy is more consumption-driven than the Bulgarian economy, and this is certainly taken into account by the government and economic actors – that these price shocks need to be more gradual.
Who is responsible for this large budget deficit? When did Romanians realize that something difficult was coming? I ask because a deficit is also emerging in our country and there are occasional mentions that taxes may be changed. What are the reasons for this?
The Romanian economy has been importing more than it exports for a long time, and this is one of the important factors. Another factor is that there are deficits in various areas of public activity. For example, in terms of pensions, because in Romania there are special pensions that are very difficult to reduce or eliminate due to the influence of the people who receive them. These are the pensions of former police officers and judges.
There are various expenses that simply remain and are not small. That is why, over the years, as in our country, there have been budget transfers to cover the pension deficit. This is an example of the causes of the deficit.
For example, another expense was incurred during the coronavirus crisis, but also long after the war in Ukraine. The state had to liberalize electricity prices, and before that, for three years, €6 billion was spent to keep prices at a level acceptable to the population. In other words, there were various expenditures that, in calmer times, when there are more opportunities to accumulate debt and accept deficits and lower interest rates, might have made sense. This is how social policy is made, and the population feels better.
The peculiarity of the situation is that, with the cancellation of last year’s presidential elections, it became clear that the interest rates at which Romania borrows are rising sharply. Credit rating agencies believe that the Romanian state could become insolvent and, for this reason, when financing its debt through new loans, Romania is taking out loans with high interest rates. This creates an additional problem – a large part of the state’s funds are earmarked for servicing these debts and paying interest.
The situation is such that, after this crisis with the presidential elections, which we followed very closely in Bulgaria, the time has now come to reduce spending. This is also because the previous government, in 2024, allocated more funds to the population because it was an election year. At that time, Romanians had all the elections they could have wanted, and politicians did not have the courage to introduce unpopular measures, as this would probably have been reflected in their election results. And, in any case, it was reflected, because those politicians have disappeared from the political scene. In short, order must be brought to the finances. Romania is also in talks with both credit agencies and the European Commission to reduce this deficit and obtain a better credit rating so that it will be easier for it to pay off its debts.
Photo: Vladimir Mitev (source: YouTube)
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