The Romanian government should reconsider the scope and timetable of the country’s pension reform to reduce its fiscal deficit, according to the OECD.
Its OECD Economic Outlook Romania country notes that the fiscal deficit is set to widen further over the coming two years, putting public debt on a fast upward trajectory. This is due to a recent pension reform that will increase public spending by more than 2 percentage points of GDP by 2021.
“Expected improvements in tax collection and public efficiency are not likely to materialise soon enough to compensate for increases in public spending. As a result, the fiscal stance is expected to be broadly neutral in 2020 and strongly expansionary in 2021,” the report stated.
In addition, after a strong expansion of Romania’s economy in recent years, growth is projected to slow to 3.2 per cent in 2020 and then increase to 3.7 per cent in 2021.
However, while rages return to single-digit growth, private consumption is expected to remain robust, sustained by significant increases in public pensions, the OECD said.
“To reduce the fiscal deficit, the government should reconsider the scope and/or the timetable of the pension reform. Otherwise, the consolidation effort may have to rely on spending cuts in priority areas, including education, health and infrastructure. Increasing taxes that are the least distortive to growth, such as environmental and property taxes, could also be considered,” the report noted.
In July, Romania’s President Klaus Iohannis signed a decree promulgating the law on the country’s public pension system. The cost of the project will be around RON 8.4bn this year, rising to RON 24.8bn in 2020 and RON 58.1bn in 2021.
There will be a phased increase in the benchmark used for calculating individual pensions, starting 1 September 2019, until 1 September 2021. From 1 September the pension point will increase to RON 1,265, increasing to Ron 1,775 in September 2021, and RON 1,875 as of September 2021.
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