Romania: PSD returns to power, welfare spending could push fiscal deficit past EU limit
January 9, 2017
The Social Democratic Party (PSD) retook the reins of Romania’s economy in January, assuming the lead role in a new coalition government to replace the year-long technocratic government. The top priority for the new government will be to keep Romania’s hot growth momentum going and fulfill fiscal stimulus pledges, while at the same time preventing the economy from overheating and avoiding placing too much strain on public finances. The PSD campaigned on a platform of welfare spending, including a rise in the minimum wage and increased funds for health care and pensioners, and while they have stated their intention to keep the budget deficit below the EU’s 3% of GDP ceiling, the analysts participating in our panel are skeptical as to whether this will be achieved. The FocusEconomics panel sees the fiscal deficit widening from 2.6% of GDP in 2016 to 3.2% in 2017.
Sorin Grindeanu will lead the country as Prime Minister, after the PSD’s first choice candidate was blocked by President Klaus Iohannis in a controversial move. Party leader Liviu Dragnea was unable to assume the position due to a conviction for electoral fraud, however, he is widely expected to rule behind the scenes. The key finance ministry will be headed by Viorel Stefan and experienced diplomat Teodor Melescanu will act as foreign minister during the country’s EU presidency. At this time, political risks appear minimal as the PSD won the largest majority seen in recent years in the December elections and should have the necessary political capital to pass legislation smoothly.
One of the first tasks for the new government will be to prepare a new budget for 2017. The budget is expected in the coming weeks and the PSD will have to walk a tightrope between fulfilling spending promises and keeping the deficit within EU limits. While the FocusEconomics panel projects the government to breech the EU’s deficit ceiling, fiscal stimulus measures should continue to support a consumption boom and the growth outlook for Romania this year is bright. Our panel sees the economy growing 3.7% in 2017, which is up 0.1 percentage points from last month’s estimate. In 2018, GDP growth is expected to decelerate to 3.3%.