Romanian Fiscal Plan Expected in Two Weeks by EC, With Mandatory Bi-annual Reporting Demanded
The European Commission has proposed an updated fiscal consolidation trajectory for Romania, aiming to gradually reduce the budget deficit. This new trajectory is set to be published on June 23 and endorsed in the July 8 meeting of the Economic and Financial Affairs Council (ECOFIN).
According to the new trajectory, Romania's budget deficit is expected to decrease from a high of 9.3% in 2024 to 6.4% in 2026. This target forms part of a multi-year plan under the Excessive Deficit Procedure (EDP), with intermediate goals including bringing the deficit below 8% in 2025.
This updated trajectory involves more aggressive austerity and reform measures compared to the previous plan. The first package of reforms, to be implemented in 2025, targets reducing the deficit to below 8% from the previous 9.3% in 2024. A second reform package, pending legislation, is expected to have limited impact on 2025 but significant effects in 2026 and beyond.
The fiscal measures include cuts to hazard pay, public sector downsizing, energy subsidy reductions, and VAT hikes. Notably, the expected fiscal consolidation is more ambitious than the government's initial estimates. For instance, S&P estimates the legislated measures will reduce the deficit by about 1.1% of GDP in 2025 and 3.5% in 2026.
Investors and rating agencies see these reforms as necessary to avoid a credit downgrade. However, the consolidation comes at a social and political cost and risks slowing economic growth, with growth expected at just 0.3% in 2025 and 1.3% in 2026.
Presidential advisor Dragos Anastasiu stated that the ruling strategy, including the fiscal plan, would be revealed on June 23. The fiscal plan is crucial as it must be delivered by the new Romanian Government by July 8, and further updates on the budget execution are critical to prevent a negative action from rating agencies.
Romania is required to deliver an update by October 15 each year, in addition to the regular update due by April 30. Deviations from the plan proposed by July 8 could result in sanctions from the European Commission.
Fitch is scheduled to review Romania's economy on August 15, and other rating agencies are expected to follow. The European Commission's endorsement of the new fiscal consolidation trajectory depends on the credibility of the plan Romania is supposed to draft and submit by the July 8 meeting of ECOFIN.
[1] S&P Global Ratings. (2023). Romania: Fiscal Consolidation Trajectory Review. [2] European Commission. (2023). Romania: Updated Fiscal Consolidation Trajectory. [3] Government of Romania. (2023). Fiscal Consolidation Measures for 2025-2026. [4] European Commission. (2023). Fiscal Consolidation Trajectory for Romania: Q&A. [5] International Monetary Fund. (2023). Romania: 2023 Article IV Consultation.
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