Report: Romanian government has 3 choices this year: sharp rise in budget deficit, public spending cut or more ad-hoc tax increases

The Romanian government has three unenviable choices in 2019: a sharp rise in budget deficit, probably penalized by rating agencies and lenders, a cut in public spending or more ad-hoc tax increases, according to UniCredit’s 2Q CEE quarterly report.

The last two options would further affect economic growth in elections years 2019-20, the report says.

“Influential members of the Social Democrat Party (PSD) argued for replacing the flat personal income tax (PIT) with progressive tax rates. In a first step, the PIT was cut from 16 percent to 10 percent in 2018. However, the second step – a PIT of 20-25 percent for wages exceeding the economy’s average – is unlikely ahead of four rounds of elections,” UniCredit analysts indicate.

Absent such tax measures, fiscal unpredictability may lead to tighter financial conditions and could offset the boost from higher social security spending, according to the report.

UniCredit analysts downgraded Romania’s GDP growth forecast to 2.8 percent in 2019 and 1.8 percent in 2020, adding weaker expected foreign demand to potential reasons for slower growth.

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“With 2018’s budget deficit probably around 3.0% of GDP, Romania is facing an excessive deficit procedure in 2Q19. From here on, the government has three unenviable choices: a sharp rise in the deficit, probably penalized by rating agencies and lenders, a cut in public spending or more ad-hoc tax increases,” the report points out.

According to the experts, the uncertain tax environment adds to higher borrowing costs and may further reduce private investment.

“Two of the main sources of FDI – energy and telecom companies – are facing sectoral levies at a time when both should decide on large investment projects, namely the exploitation of gas from the Black Sea and the introduction of 5G technology. Meanwhile, infrastructure projects will continue to be crowded out by other types of public spending,” according to the report.