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Romania Implements Emergency Fiscal Reforms to Tackle Record Budget Deficit
Addressing the Budget Deficit
Romania’s coalition government is introducing emergency fiscal measures to reduce its budget deficit, the largest in the European Union as a percentage of GDP. The deficit, projected to reach 8.6% of GDP in 2024 due to pre-election spending, must be reduced to below the EU-mandated ceiling of 3% within seven years.
Key Fiscal Reforms
Tax Increases
- Dividend Tax: The tax on company dividends will increase from 8% to 10% starting January 2025.
- Small Business Thresholds: Tax thresholds for companies with no more than three employees and annual revenue under €500,000 will be gradually reduced in 2025 and 2026.
- Building Tax: A 1.5% tax on the value of all company-owned buildings will be reintroduced.
Removal of Tax Exemptions
Tax exemptions and fiscal incentives in sectors such as IT, construction, agriculture, and food industries will be eliminated.
Public Spending Cuts
- Wage and Pension Caps: Public sector wages and pensions will be capped, along with certain subsidies.
- Political Party Subsidies: These will be cut by 25% compared to 2024.
- Efficiency Measures: A new department will be tasked with reducing public-sector costs by 1% of GDP in 2025.
Long-Term Deficit Reduction Plan
The government has outlined a strategy to incrementally reduce the budget deficit from 7% in 2025 to 2.5% by 2031, ensuring compliance with EU fiscal rules.
Political Context and Challenges
Pre-Election Spending Surge
Upcoming presidential and parliamentary elections in November and December triggered a surge in public spending, exacerbating the deficit.
Election Turmoil
Three attempts to elect a president and parliament have faced complications. A far-right pro-Russian candidate’s victory in the first presidential round on November 24 led to allegations of Russian interference, prompting the top court to annul the election results.
Ratings Agency Concerns
In response to Romania’s financial and political instability, Fitch has downgraded its credit outlook to negative. Fitch, Moody’s, and S&P Global Ratings have all assigned Romania their lowest investment-grade ratings.
Implications
The emergency fiscal measures reflect the government’s commitment to addressing fiscal challenges and restoring economic stability. However, the interplay of economic reforms and political uncertainty will likely influence Romania’s trajectory in the coming years