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Romania Politics December 2020

Romania: December parliamentary elections decisive for government’s fiscal stance amid pensions dispute

On 6 December, the country is scheduled to hold parliamentary elections. The ruling center-right National Liberty Party (PNL) is currently ahead in the polls, closely followed by the center-left Social Democratic Party (PSD)—which is the largest party in parliament—albeit both are far from achieving an outright majority. That said, a likely coalition between PNL and the Save Romania Union and Freedom, Unity and Solidarity parties (collectively known as Alliance 2020 USR-PLUS) could be a game changer as, according to polls, the alliance would secure enough votes for a majority. Although the outcome of the vote is unlikely to bring changes to many areas of economic policy, it is expected to shape the government’s fiscal stance, amid diverging views on public pension payments between PNL and PSD. That said, short-term priorities will likely be dictated by the course of the pandemic, regardless of the election result.

Both parties are broadly pursuing similar targets in their governing programs, putting strong emphasis on job creation and wage growth, and envisaging increased spending on healthcare, investment for infrastructure projects and education. However, the main difference between the two parties lies in their approach to public pension growth: On 22 September, the PSD-led parliament voted in favor of a 40% hike in public pensions, thereby nullifying the PNL government’s earlier proposal of a 14% raise. The decision, which sparked warnings from market analysts, could cause the country’s budget deficit to skyrocket and risks potential rating downgrades—Fitch Ratings, Moody’s and S&P Global Ratings already have Romania in their lowest investment grade with a negative outlook. On the contrary, if PNL manages to gain control of parliament, it is expected to reverse the pension hike and pursue more moderate increases over time. PNL’s approach falls in line with its commitment to address the country’s widening fiscal deficit by pursuing efficiency and targeted measures—mostly in the form of public spending cuts and reducing administrative burden surrounding tax collection—as opposed to tax increases—PSD’s preferred tool. This substantial difference highlights that a victory for PNL would likely signal a tighter fiscal stance.

Commenting on the upcoming elections, Kevin Daly, analyst at Goldman Sachs, said:

“If opinions polls are accurate and the PNL and USR-PLUS are in a position to form a relatively stable coalition, it is likely to reduce significantly perceptions of political risk and policy uncertainty. […] In contrast to the PSD, which supports the implementation of the 40% pension increase and further significant increases in public sector pay, PNL has been careful not to make large spending commitments, arguing that it will be up to the next government to decide on the details of its spending programme.”

In the short-term, however, the winning party will be occupied with addressing the impact of the pandemic and putting the economy back on track to growth. Another tightening of Covid-19 restrictions is possible amid surging new infections, which would further weigh on the recovery and put an additional burden on the country’s already strained public finances.

Elaborating on the potential impact of additional lockdown restrictions, Dan Bucsa, chief CEE economist at UniCredit, argued:

“The budget deficit is unlikely to correct quickly in 2021. […] A tight lockdown is likely after parliamentary elections, and restrictions may have to be kept in place throughout 1Q21 if the infection rate is very high. As a result, fiscal spending will have to increase again and tax collection is likely to suffer anew in the first half of next year, before an expected economic recovery in 2H21. This is why we expect the budget deficit to be between 6% and 8% of GDP in 2021, down from around 9.6% of GDP in 2020.”

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