Fitch Warns Romania’s Austerity Risks Growth, Inflation

Fiscal Consolidation Plan Faces Scrutiny

Romania’s newly announced government consolidation plan, spearheaded by the Bolojan administration, could significantly impact the nation’s fiscal health and economic expansion, according to Fitch Ratings. The agency cautioned that proposed austerity measures might lead to a tangible reduction in real incomes and potentially fuel inflation.

VAT Hikes Fuel Inflation Fears

Fitch highlighted that a substantial portion of the anticipated revenue increase relies on hiking the standard Value Added Tax (VAT) by two percentage points to 21%, alongside consolidating lower VAT rates into an 11% quota. This move is expected to exacerbate inflationary pressures, further diminishing purchasing power for citizens.

“A significant fiscal consolidation will put pressure on the economic growth, and the risks of implementation cannot be excluded. More than half of the additional revenues provided for this year come from the increase of two percentage points of the standard VAT rate, to 21% and from the unification of 5% and 9% in a single quota of 11%. This will generate a greater inflation, which will further erode real income.”

—Fitch Ratings

Revised Forecasts Due Mid-August

The international rating agency confirmed that its upcoming revised fiscal forecasts, slated for release on August 15, will incorporate the effects of Bucharest’s latest consolidation package. This signals a close watch on the practical outcomes of the government’s fiscal strategy.

Political Stability Improves, But Risks Remain

Fitch also acknowledged an improvement in political risk since late 2024, noting that the previous government had also introduced a consolidation plan amidst heightened tensions following the annulment of presidential elections. This suggests a more stable political landscape for implementing fiscal reforms.

Despite this, all three major credit rating agencies—S&P Global Ratings, Moody’s, and Fitch—have maintained a “negative” outlook on Romania’s sovereign rating. This precarious positioning places the country on the verge of a “junk” investment rating, a status generally considered unfavorable for global investors.

In comparison, Portugal’s VAT rate on food, excluding restaurant services, remains at a reduced 6%, demonstrating varied approaches to fiscal policy and consumer impact across European nations (European Commission, 2024).