BUCHAREST (Reuters) – Romania’s new coalition government will make a series of tax hikes and caps on public sector wages and pensions via emergency decree on Monday, in a move to lower the EU’s largest budget deficit as a percentage of gross domestic product.
The prospect of presidential and parliamentary elections in central Europe’s second-largest economy in November and December had triggered a spending surge that is expected to push Romania’s 2024 budget deficit to 8.6% of GDP.
Yet Romania is obliged to cut its deficit to below the EU’s ceiling of 3% of GDP within seven years and the government’s emergency decree reflects its need for fiscal measures to come into effect before January.
It had submitted a deficit-cutting strategy to Brussels in late October but had not specified what tax and spending measures it planned to take.
A draft emergency decree published by the finance ministry on Sunday showed the government will raise the tax on company dividends to 10% from 8% from January 2025. It will also lower a tax threshold for the smallest companies – those with no more than three staff and revenue of less than 500,000 euros ($521,350) per year – in stages in 2025 and 2026.
In addition it will eliminate tax exemptions and fiscal incentives for IT, construction, agriculture and the food industry. It will also reintroduce a tax of 1.5% on the value of all buildings owned by companies, from oil wells to warehouses to electricity poles.
The decree will also cap public sector wages and pensions as well as a series of subsidies. Political parties will have their state subsidy cut by a quarter compared with 2024.
The government will also set up an efficiency department tasked to cut public-sector costs by at least 1.0% of economic output in 2025.
Romania aims to lower its deficit in increments over seven years, from 7.0% in 2025 to 2.5% in 2031.
Three consecutive ballots to elect a new president and parliament in Romania, which shares the longest land border with Ukraine, descended into chaos when a little-known far-right pro-Russian politician won the first presidential round on Nov. 24. Amid suspicions of Russian interference, the top court annulled the election.
Ratings agencies have already been reacting to the country’s financial and political situation and Fitch for example changed Romania’s credit outlook to negative earlier this month. Fitch and its peers Moody’s and S&P Global Ratings all have Romania on their lowest investment-grade ratings.
($1 = 0.9590 euros)
(Reporting by Luiza Ilie; Editing by David Holmes)
