Romania will have to introduce a fiscal corrective package to address the increase in the structural public deficit generated by non-discretionary spending, such as pensions and public wages, a report by UniCredit bank shows. 

"Due to parliamentary elections being held very late in the year, we now see a risk that the budget deficit could exceed 7% of GDP in 2024," the bank warns, adding that the government could cut spending or decide to run in arrears to window dress the yearend figure.

The bank expects the economy to grow by 2.4% in 2024 and 1.3% in 2025 (as an effect of the fiscal corrective package), with the government tightening fiscal policy only after this year's elections.

It also expects a 2pp increase in the VAT rate (from 19% to 21%) and higher excise duties, property and commodities taxes.

Coupled with a much smaller increase in pensions next year, UniCredit analysts believe this could lower the budget deficit to close to 5% of GDP in 2025, provided arrears are not too big.

The tax authority ANAF will need another year to prepare its systems for a move to a progressive income tax (PIT) in 2026, which would help lower the budget deficit further towards 4% of GDP, according to the bank's report.

Along with Hungary and Slovakia, Romania is at risk of downgrading the rating if taxes do not increase next year.

iulian@romania-insider.com

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