An analysis by Miruna Enache, Partner, Transaction Tax Assistance Leader, EY Romania & Moldova, EY ESA Tax Markets Leader and Amelia Toader, Senior Manager, International Tax Department, EY Romania, shows that Government representatives have participated in a series of consultations with Romania's international financial partners to analyze Romania's latest financial and economic developments, most likely against the background of the downgrading of the country's rating from stable to negative.
During the consultations, the government delegation reconfirmed its commitment to remain within the deficit of 7% of GDP this year and to continue the corrective path in the coming years, in line with the Fiscal Plan agreed with the European Commission and the recommendations received under the Excessive Deficit Procedure.
Romania's medium-term budgetary-structural plan approved by ECOFIN
It should be recalled that Romania has been included in the Excessive Deficit Procedure (EDP) of the European Council for five years now, as a result of exceeding the EU's budget deficit reference value of 3% of GDP in 2019.
Starting this year, Member States are also required to prepare their national medium-term budgetary and structural medium-term budgetary plans setting out their reform path and investment strategy for the next 4-7 years, with the primary aim of bringing public debt to a prudent level and keeping the government deficit below the 3% of GDP reference value.
On January 21, 2025, the Council gave the green light to the budgetary-structural plans for 21 Member States, including Romania - which was also given the go-ahead to extend the budgetary adjustment period from 5 to 7 years. In the plan submitted to the Council, Romania commits to a set of reforms and investments aimed at improving growth and fiscal sustainability by 2031.
The surprise element is the very set of reforms on which the Plan is developed, composed of several commitments, some taken as such from the Recovery and Resilience Plan (NRRP), others - although existing in the NRRP - have been proposed with additional specifications, as well as some new reforms. Among the most interesting measures in the fiscal area are:
- - Minimum wage reform - aims to introduce from 2025 a new system for setting the gross minimum wage, based on the expected rates of inflation and productivity growth forecasted by an independent institution.
- - Reform of the tax regime for micro-enterprises - complements the actions in the PNRR and consists of measures to gradually reduce the scope of the micro-enterprise regime. It is expected that, compared to the current system, the reform could bring in significant budgetary revenues, if it were to be continued with an even more drastic reduction in the eligibility threshold (by aligning with the VAT threshold) and updating tax rates. Recall that the Ordinanza-Trenuleț has already brought substantial changes for SMEs, reducing the eligibility threshold from €500,000 to €250,000 in 2025 and to €100,000 from 2026 for the tax on micro-enterprises. Although it was noted in the NRRP that the gradual reduction in the scope for the micro-companies regime will be finalized by Q4 2024, it seems that the Government is preparing a new series of measures to increase tax rates and further tighten the conditions of application.
- - Reform on tax framework overhaul - an existing reform in the NRRP aimed at phasing out tax incentives, rethinking property tax or expanding green taxation, and which will be supplemented with new measures to be implemented as early as this year to extend across all tax areas. Two areas of action stand out for this reform, which may give us indications of the direction from which we can expect a new series of legislative changes, namely:
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- the revision of current tax incentives in all tax areas: corporate income tax, income tax and social contributions, property taxes, etc. Therefore, despite the important changes brought about by the Ordinance-Trail (elimination of tax facilities in the IT, construction, agriculture, food industry sectors, elimination or reduction of some tax benefits), it is not wrong to expect a new set of tax facilities to be deactivated in the coming period;
- operationalization of the property assessment computer system, in order to implement the automatic assessment model for real estate taxation from 2026.
In addition, the tax system administration reform - based on the PNRR actions on improving tax system administration processes and expanding digitalization, includes measures on the introduction of a VAT fraud early detection mechanism and tools to address VAT collection shortfall; better digital compliance monitoring (through e-Invoice, SAF-T, e-AMEF, e-TVA, DAC-7, CESOP, etc.) or the introduction of a tax planning control mechanism.
In spite of the Government's optimistic assurances, the state of increased volatility and insecurity is being felt in the business environment and by investors as early as the end of 2024. However, it seems that the legislature is preparing a new set of fiscal reforms, without which the assumed budget deficit could not be achieved.
The Romanian government needs to prioritize several key actions in 2025 to ensure sustainable economic growth and fiscal stability. These actions include:- Making full use of the new governance framework to boost reforms and investment.
- - Reducing the budget deficit to 7% of GDP by adopting prudent fiscal measures and ensuring that the budget reflects this objective.
- Improve the efficiency of revenue collection to achieve the proposed targets, addressing the current deficit of about RON 9.7 billion.
- - Allocate additional funds for essential services and carefully manage expenditure.
- - Maintain a sustainable debt level through better revenue collection and prioritization of projects.
By taking these actions, the Romanian government can work to achieve fiscal discipline and promote economic growth in the face of continuing challenges. This work can only produce the desired results through constant collaboration and consultation with the business community.
