How do the Bolojan government’s measures against the budget deficit affect the economy, citizens, and the business environment?

Monica Varbanova

On 15 August 2025, the newspaper Capital published an article on the spending cuts and measures against the budget deficit taken by Ilie Bolojan’s cabinet in Romania. This article includes excerpts from the interview that journalist Monica Varbanova conducted with Vladimir Mitev, which The Bridge of Friendship is publishing below.

Vladimir Mitev explains that the most serious problem facing the Romanian economy is the large budget deficit, which reached 9.3% in 2024, threatening the country with insolvency. This imbalance, generated by the generosity of the previous government, including in the field of infrastructure, and not only in social spending, has led to higher interest rates on new public debt and the risk of the country’s credit rating being downgraded to “junk”. This requires Ilie Bolojan’s new government to urgently introduce anti-crisis measures, including spending cuts and revenue increases, to restore the confidence of international financial markets.

In addition, the economy is vulnerable due to its close links with economies in the center of the EU, particularly the German automotive industry, which is going through a difficult period. Domestic challenges include income inequality and regional disparities, with 80% of GDP generated by just 12 urban agglomerations. This leads to internal and external migration, as people in less developed areas have no prospects for development.

To manage the fiscal crisis, the government plans to raise taxes, including VAT, excise duties on fuel, tobacco, and alcohol, as well as electricity prices. These measures are expected to lead to inflation of around 9% over the year and a decline in citizens’ purchasing power. As the Romanian economy is also based on domestic consumption, this decline could slow economic growth.

The effects on the business environment are mixed. On the one hand, the government has a pro-business orientation, intending to list state-owned companies on the Bucharest Stock Exchange. It is experiencing an unprecedented boom. On the other hand, financial and speculative capital will be affected by the increase in dividend tax and the introduction of additional taxes on banks and gambling companies. The freezing of wages and pensions, which puts an end to the consumption-driven growth model (the so-called wage-led growth), will intensify the struggle for customers in sectors linked to domestic demand. These measures are expected to cause social unrest and protests, which are already reflected in public attitudes and the popularity of sovereignist parties such as the AUR.

What are the biggest problems and challenges facing the Romanian economy?

During President Iohannis’s term, there was often talk about the need for Romania to somehow increase the competitiveness of its economy, produce higher value-added products, and develop technologically. At that time, there was satisfaction in the automotive industry that the country was not only building car factories and auto parts for foreign investors, but also had research and development centers.

In the 2024 election year, when Romanians had all kinds of elections, Marcel Ciolacu’s government granted various supplements to some categories of employees. It was said at the time that Ciolacu was shying away from antisocial measures so as not to alienate voters of the Social Democratic Party and the National Liberal Party. However, the political crisis caused by the cancellation of the presidential elections created a sense of mistrust and uncertainty on the international debt markets, from which the Romanian state takes out new loans to repay old ones and to finance its large budget deficit. It was found that in 2024 the budget deficit was 9.3%. Interest rates on Romania’s new debt rose dangerously, while the country was threatened by credit rating agencies that they would downgrade its rating to “junk” and that it would default on its payments.

In this context, following the election of the new president, Nicușor Dan, and the formation of the government led by Ilie Bolojan, the priorities are maintaining a budget with lower imbalances, including reducing expenditure and increasing budget revenues, maintaining the confidence of international lending institutions, coordinating with the EC on the excessive deficit procedure, attracting new foreign investment to the country, etc., so that Romania can move away from the precipice of insolvency.

The challenges facing the Romanian economy are also linked to its close ties with the economies of the EU core, including the German automotive industry, at a difficult time for this industry. Romania will try to revive its military industry, which is also a challenge as it will need international partnerships.

Domestically, there is the issue of inequality – not only in terms of income between different social strata, but also between different regions. Former NATO Deputy Secretary General Mircea Geoană said last year that 12 urban agglomerations generate 80% of Romania’s GDP. People in regions that have not benefited sufficiently from foreign investment deserve prospects for development other than internal migration or emigration. And if Romania does not develop more evenly, versions of the Georgescu phenomenon may reappear.

The new government is striving to limit the budget deficit to 9% of GDP, which is more than three times the EU threshold. How do you expect the increase in taxes for businesses and citizens to be reflected?

According to forecasts, increases in VAT, excise duties on fuel, tobacco, and alcohol, and electricity prices will lead to inflation of around 9% this year. For citizens, this would mean a decline in purchasing power, and for the economy, a decline in consumption. The Romanian economy relies not only on exports but also on domestic consumption. A decline in consumption would reduce economic growth.

I believe that the effects on the business environment will be diverse. For example, the Bucharest Stock Exchange reached record levels on the BET index in July 2025. Prime Minister Ilie Bolojan has announced that he will list shares of state-owned companies on the stock exchange in order to raise funds and increase the liquidity of the stock exchange. According to many people in Romania, the government has a pro-business orientation. Thus, even if it takes measures to reduce the budget deficit, these tend to affect the interests of civil servants and employees rather than those of the business community.

On the other hand, from 1 January 2026, the dividend tax will be increased from 10% to 16%. An additional tax on banks and gambling companies will also be introduced. This means that certain types of capital—for example, financial and speculative capital—will also suffer economic blows.

Last but not least, Romanian wages and pensions will remain frozen in the foreseeable future, given that for years Romania has developed on the basis of the theory and practice of so-called wage-led economic growth, i.e. growth based on wage increases and, implicitly, consumption. Given that domestic consumption will decline, we can expect the struggle for declining demand to intensify in certain sectors more closely linked to domestic demand.

Which sectors will be most affected by the government’s new measures and what will be the effects?

Two more waves of measures are expected to reduce the fiscal imbalance by the end of the year. And, according to economic commentators, this difficult period for Romanian society will continue at least until the end of next year.

In previous years, the Romanian government tried to impose additional taxes on businesses, but at that time—for example, during Liviu Dragnea’s time – it distinguished between productive companies, such as the automotive industry and industry in general, towards which it maintained a positive attitude, and financial or speculative capital, which was clearly considered less useful for the country. We must monitor the extent to which this approach will now be applied.

All vested socio-economic interests must be affected by measures and accept or be forced to accept a reduction in the resources with which they operate. The Bolojan government is currently fighting to reduce special pensions in the judiciary and is facing resistance from its representatives. Similar resistance exists in the field of education, where measures affecting teachers’ interests have been introduced.

In addition to the economic effects I mentioned in my answer to the previous question, there is a sense—for example, on social media—that there is discontent, indignation, and a feeling of injustice in Romanian society toward the measures that have been implemented. Many believe that the business community is privileged and does not bear the burden of these measures to the extent necessary, while employees and civil servants are paying the price. This is a prerequisite for continued social discontent and protests. According to one of the latest public opinion polls this year, support for the sovereignist party AUR has reached 40%.

Photo: Downtown Bucharest (source: Pixabay, CC0)

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