Fiscal corrective package unveiled by Romanian government disappoints investors

Fiscal corrective package unveiled by Romanian government disappoints investors
Romania has been under the EU's excessive deficit procedure since 2019.
By Iulian Ernst in Bucharest September 20, 2023

Romania’s government has published a package of fiscal measures aimed at bringing the fiscal deficit onto a downward trajectory and preventing the slippage expected if it fails to change policies.

Finance Minister Marcel Bolos promised when the fiscal corrective package was published for consultations that this year’s public deficit will not exceed 5.5% of GDP and, if necessary, the fiscal corrective package will be adjusted. However, bne IntelliNews expects the deficit to exceed even the 5.5%-of-GDP target unofficially negotiated with the European Commission.

The government plans to bring to the budget on average RON20bn (€4bn) per year over 2024-2027 by a combination of tighter taxation (minimum profit tax and tighter taxation of SMEs suspected of being used for tax optimisation) and the elimination of tax allowances, while cutting expenditures by RON3.3bn on average over the same period.

This year, expenditures are expected to be reduced by RON631mn, obviously insufficient to bring the deficit down to 4.4% of GDP from the 6.8% projected under the no-changes-in-policy scenario.

Romania has been under an excessive deficit procedure since 2019. According to Bolos, the precise trajectory of the desired fiscal consolidation has not been drawn up yet. Bolos said that simulations are being carried out by the Ministry of Finance and, depending on the scenarios, Romania will decide in collaboration with the European Commission on the target trajectory.

Investors complain

Investors’ associations have blamed the government for placing the largest part of the burden (85%) on their account while cutting the budget expenditures comparatively less (15% of the overall package), compared to the 50:50 burden sharing promised. The package is expected to dampen growth via reduced consumption and higher inflation while arguably reaching its target of reducing the structural deficit.

In terms of electoral effects, the package visibly impacts the voters of the National Liberal Party (PNL), one of Romania’s two main ruling parties. They are expected to express their disappointment by shifting to other political vehicles if such options prove reliable (which remains unclear at this moment). On the other hand, the Social Democratic Party (PSD) strengthened their position in the political alliance that is expected to survive the elections next year.

Reformist USR plans no-confidence vote

Romania’s reformist USR party will attempt to overthrow the government by a no-confidence vote on the fiscal corrective package, USR president Catalin Drula announced, adding that his party is backed on this by other opposition lawmakers.

Strictly based on the political structure of the parliament, the government is not at risk unless (rather unlikely) members of the junior ruling PNL feel either that PSD is gaining too much power in the ruling coalition or that their party would be better off in opposition.

The scenario of a minority PSD government next year, followed by re-unification of the current ruling coalition after elections, became less likely recently but is not totally excluded. The structure of the fiscal corrective measures, biased against the PNL electorate, would justify such a scenario. However, the economic costs of a political crisis towards the end of the year, even if quickly settled by President Klaus Iohannis, would be major in terms of public financing costs and investors’ confidence.