Social Democratic Party (PSD) leader and prime minister-designate Marcel Ciolacu announced a series of economic reforms for the next 16 months when he was nominated on June 13, setting out his party’s “economic patriotism” ideology. 

The plan announced by the PSD is simple but unrealistic, given the latest budget execution data and the executive’s proven weak administrative capacity, which hasn’t improved upon the “rotation” of the two parties.

Ciolacu’s aim is to move on from the stabilisation achieved under his predecessor Nicolae Ciuca to stimulating rapid economic growth. However, the details of how he plans to raise enough extra revenues to inject €110bn into the economy in 2023 and 2024 were rather scanty, and Ciuca’s government was already under pressure from teachers and other public sector workers to raise salaries to keep pace with inflation. 

Slightly later than planned because of the teachers’ strike, Ciolacu will take over the prime minister seat after National Liberal Party (PNL) leader Ciuca resigned to allow the rotation of the two parties to go ahead as agreed when they initially struck a coalition deal.

It is highly likely that the third ruling partner, the Democratic Alliance of Hungarians in Romania (UDMR), will pull out of the coalition as it failed to reach an agreement with the senior ruling partners over sharing out ministerial seats. This leaves the ruling coalition with a smaller, yet safe majority in each of the two chambers of the parliament. 

Out of the 19 ministers, including one deputy prime minister with no portfolio, nine were part of Ciuca’s former government.

Finance Minister Adrian Caciu (PSD) and European Funds Minister Marcel Bolos of the PNL will swap places. Minister of Transport Sorin Grindeanu, Family Minister Gabriela Firea, Defence Minister Angel Tilvar, Labour Minister Marius Budai and Health Minister Alexandru Rafila (all PSD) will keep their places. 

Deputy president of the PNL Alina Gorghiu will take over as the new minister of justice. Minister of Education Ligia Deca (PNL) will keep her place and Minister of Digitalisation Sebastian Burduja will be ‘rotated’ to the Ministry of Energy.

From stability to expansion

Both Ciolacu and President Klaus Iohannis praised the performance of outgoing PM Ciuca, who was faced with the energy crisis and rising inflation, and assured citizens that the government will keep functioning well under the control of the Social Democrats.

“The government of prime minister Ciuca brought stability to Romania. I want the next government that I will lead to be about economy and reforms,” Ciolacu stated. 

The Social Democrats plan to inject into the economy over €110bn over 2023-2024 – or around 17% of GDP this year and in 2024 – by public investments and stimuli for households and companies, with the aim of boosting local production and consumption. 

They aim to kill two birds with one stone: achieve robust economic growth — which is supposed to partly finance the plan and result in higher wages as well — and bring inflation down, since more goods will be produced locally, the PSD said.

Ciolacu said the strategy should allow Romania to achieve economic growth of 4.2% this year and 5.4% in 2024, as well as fiscal consolidation. 

The budget deficit is seen at 4.4% this year and just under 3% of GDP in 2024. Public indebtedness is forecast to fall to 46% of GDP at the end of 2024, from 47.2% at the end of 2022. The Social Democrats based the plan on financing needs of only 10% of GDP this year and 9.6% of GDP in 2024 – less than in 2022 or 2021. 

Finding €110bn

However, the €110bn financial injection somehow has to be financed and detail on this is insufficient. Besides the fiscal optimisation and better tax collection (every government’s promise over the past 30 years), the Social Democrats are expected to take tougher steps such as cutting loopholes in the taxation system and introducing new taxes. 

For now, the PSD has outlined options including strictly limiting deductibility of expenses to those related to income-generating economic activity, according to practices in developed European countries – which will increase the corporate taxation base. The new government also plans to prevent the erosion of the tax base through the transposition of the Base Erosion and Profit Shifting Project (BEPS Project). Another plan is to develop and consolidate the department that verifies transfer prices in order to substantially reduce tax evasion. 

Financing resources for the years 2023 and 2024 comprise the state budget, from which there will be public investments of RON239bn in 2023 and 2024, financed from national funds and from European funds and the National Recovery and Resilience Plan (PNRR), as well as European funds worth RON10bn from the amounts already allocated through the Modernisation Fund. 

The government plans to accelerate the collection of the RON11.5bn arrears recoverable, and reduce tax evasion by RON7bn. Public-private partnerships will be launched for a minimum of five major investment objectives; the government estimates that €3bn can be mobilised from the private pension funds in Romania for feasible public-private partnership (PPP) projects. The government also expects to receive financing from development banks, and FDI inflows of €24bn in 2023 and 2024.