Romania Supercharges Pensions as Government Seeks Escape Route

Romania’s government, facing elections this year and the threat of being ousted by parliament as soon as this month, is pushing ahead with the largest nominal increase in retirement benefits in at least 19 years.

Prime Minister Ludovic Orban’s cabinet, which is backed by a minority of lawmakers, will approve a 14% increase in pensions as of Sept. 1. The government is proceeding with the extra expenditure even after years of lavish spending and the effects of the coronavirus pandemic bloated the budget deficit to one of the European Union’s widest. The burgeoning shortfall has pushed the country’s credit rating to the brink of junk status.

Orban trimmed a pre-pandemic proposal for an even bigger pension boost, of 40%, to a level that he says the budget can sustain with a deficit the government estimates will reach 8.6% of economic output by the end of the year. Still, the opposition Social Democrats plan to file a no-confidence motion against his administration on Monday for not sticking to the plan for the larger increase.

“You can hurt your country even when you claim you want to do good things,” Orban said Friday. “I ask people to understand that this is the best we could do. The decision to increase by 14% was a hard one. This is all we can do. Whoever promises more is lying.”

The risk of a government collapse is an unwanted distraction in one of Europe’s most politically volatile countries. Romania is recording more than 1,000 new cases of Covid-19 every day and the economy recorded the biggest slump on record in the second quarter, with gross domestic product plunging 10.5% from a year earlier. The government predicts a second-half rebound supported by record public investment and estimates a full-year contraction of 3.8%.

Romania Supercharges Pensions as Government Seeks Escape Route

After years of fiscal largess, mostly on salaries and pensions, the new increase in permanent spending threatens the long-term health of the budget, which had the EU’s widest deficit even before the coronavirus arrived on the continent.

Finance Minister Florin Citu estimated the impact of the pandemic on the budget at about 5% of GDP. Still, he pledges to return to fiscal discipline once the health crisis eases. But before then, his government would have to survive the no-confidence motion and win elections.

“No other EU country has made a decision to increase pensions during this crisis,” Orban said. “It’s a very big increase that we pledge to fund this year and in the coming ones as well. But any other increase in the future will be done based on very serious economic assessment.”

©2020 Bloomberg L.P.

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