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Investing.com -- Romania’s efforts to reduce the European Union’s largest budget deficit through tax increases and spending cuts face significant implementation challenges due to its fragile coalition government, Fitch Ratings said Tuesday.
The rating agency noted that the stability of the four-party coalition led by Liberal Prime Minister Ilie Bolojan will be crucial for implementing fiscal consolidation measures and will influence Romania’s credit ratings.
Romania experienced political instability following a presidential election that was cancelled in December and rescheduled for May. This extended election cycle contributed to market turmoil that increased borrowing costs and weakened the leu currency.
The political uncertainty pushed Romania’s budget deficit above 9% of economic output last year, raising concerns about a potential downgrade to below investment grade. Financial markets stabilized in late June when the new coalition government announced a series of tax increases.
However, the coalition parties have shown reluctance to implement these unpopular fiscal measures, which have drawn criticism from unions and employers while triggering protests from public sector workers.
Adding to the uncertainty, the coalition agreement includes a provision for Bolojan to be replaced by a prime minister from the center-left Social Democrats in 2027, before parliamentary elections in 2028. The two largest parties already disagree on income tax policy.
"Significant fiscal consolidation will weigh on economic growth, and implementation risks cannot be discounted," Fitch stated.
The government plans to increase value-added tax, excise duties, dividend levies, and taxes on bank turnover, with some measures taking effect in August and others in January. These changes are expected to have a budget impact of 1.1% of output this year and 3.5% in 2026.
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