THE EFFECTS OF VAT RATE INCREASES ON WELFARE IN ROMANIA: INSIGHTS FROM THE 2025 REFORM. AN EARLY EMPIRICAL ASSESSMENT
THE EFFECTS OF VAT RATE INCREASES ON WELFARE IN ROMANIA: INSIGHTS FROM THE 2025 REFORM. AN EARLY EMPIRICAL ASSESSMENT
Patricia-Georgia LELE
Doctoral School of Economic Sciences, University of Oradea, Oradea, Romania
georgialele@yahoo.com
Abstract: This paper provides an early empirical assessment of the welfare effects of Romania’s August 2025 VAT reform, implemented in the context of fiscal consolidation under the EU’s Excessive Deficit Procedure. The reform increased the standard VAT rate from 19% to 21% and replaced the reduced rates of 5% and 9% with a unified 11% rate. The analysis combines insights from the empirical literature on VAT incidence with early macroeconomic evidence, including inflation dynamics, retail trade indicators, and real wage developments. The findings suggest that the reform generated significant short-run welfare costs. The VAT increase contributed to a sharp rise in consumer prices, a contraction in retail consumption following a pre-reform demand surge, and a marked decline in real wages. Consistent with the literature, the effects appear to be regressive, disproportionately affecting lower-income households, particularly through higher prices for essential goods. At the macroeconomic level, the reform is associated with a suppression of aggregate demand and the onset of a technical recession in late 2025. The paper contributes to the literature by providing evidence from a high-inflation Central and Eastern European economy, a context largely underrepresented in existing studies. It also distinguishes between fiscal revenue improvements and household welfare outcomes and highlights the importance of accounting for preannouncement consumption effects in the evaluation of VAT reforms.
Keywords: VAT reform; welfare effects; Romania; consumer price passthrough; fiscal consolidation; regressivity; Central and Eastern Europe.
JEL Classification: H22; H23; D12; E21.
