PREVIEW-Romania's pension increase to test EU budget deficit limits

by Reuters
Friday, 13 December 2019 05:00 GMT

(Repeats story first published on Dec. 12)

* New minority government to unveil 2020 budget plans

* Ratings agencies, EU worried about deficit levels

* 40% rise in pensions kicks in from September 2020

By Luiza Ilie

BUCHAREST, Dec 12 (Reuters) - Romania's new liberal government is pushing ahead with the biggest increase in pensions in three decades as part of its 2020 budget amid growing concerns the country will flout EU budget limits and risk credit rating downgrades.

Facing elections next year, the government that took office last month is sticking with a law brought in by its left-wing predecessor to raise pensions by 40% and says it will boost tax collection and pare state spending to stop deficits ballooning.

The government has pledged to reduce the budget deficit to 3.6% of gross domestic product (GDP) next year from 4.4% in 2019 and economists will be looking closely at the 2020 draft budget due as early as Friday to see if the numbers stack up.

"It is clear that a pension rise of such magnitude does not fit with the current economic data," said Ionut Dumitru, chief economist at Raiffeisen Bank Romania. "The pension bill is one of if not the most serious domestic problems facing the Romanian economy."

The pension increase that kicks in from September is also likely to leave the country vulnerable in the coming years as birth rates boomed after a communist-era abortion ban in 1966 - meaning the number of pensioners is set to rocket from 2030.

The European Commission has estimated Romania's deficit will hit 6.1% of GDP in 2021, if no additional measures are taken.

That's more than double the EU limit of 3% and risks triggering an excessive deficit procedure, which could push up Romania's borrowing costs and put pressure on its leu currency, which hit a record low against the euro last month.

Prime Minister Ludovic Orban reiterated on Thursday that his cabinet would enforce the pension law but urged lawmakers to refrain from approving further spending-friendly bills.

"We are in an extremely difficult situation," Orban said. "The 2020 budget cannot handle any new additional spending."


All three major ratings agencies have Romania on their lowest investment grades, meaning any downgrade would push the country's sovereign debt into so-called junk territory.

S&P Global Ratings changed its outlook for Romania this month to negative because of concerns about widening deficits - and the pension increase - and said it could cut its BBB- rating within two years if deficits are not reined in.

"While we assume significant fiscal consolidation commences next year, the rigid budget structure and volatile policy environment pose risks to that assumption," it said.

Raiffeisen Bank's Dumitru and other economists estimate the 40% pension increase will cost about 1% of GDP in the last quarter of next year, rising to 2.7% for 2021 as a whole.

The average pension for just under 5 million Romanians stands at $305 per month, data from the state pension agency shows, one of the lowest in the European Union.

The minimum is just $163, but thousands of people, including former members of the police, secret services, military and magistrates get special pensions which are not tied to contributions and are unpopular with other voters.

Romania's central bank has rejected the EU's 2021 deficit estimate, saying fiscal measures would prevent the deficit going so high and incurring the wrath of financial markets.

"I don't believe we can seriously talk about such a deficit," said Governor Mugur Isarescu. "Such a deficit cannot be taken into account. We know something must be done."

Romania collects revenue equivalent to some 30% of GDP, well below the EU average of 46%, and spends more than two-thirds of that on state wages, pensions and other social assistance.

While Romania won't be the only EU state to breach deficit limits this year, the Commission's autumn forecasts show it is the only one expected to stay above target in 2020 and 2021.

That means Brussels could launch its excessive deficit procedure next year, a drawn-out process that could limit Romania's access to EU structural funds in the long run.

And the worst is yet to come. In 1966, dictator Nicolae Ceausescu outlawed abortion via decree to boost Romania's labour force. Just under 2 million Romanians, or 10% of the population, known as "decretei" will reach retirement age after 2030. (Editing by David Clarke)

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