Romania Post-Election Update: Political Stability and Fiscal Tightening
Market Recap: Recovery After November Sell-Off
Following the election driven 6.3% sell-off in November, Romanian equities recovered as the post-election uncertainty largely cleared. One of the potential scenarios that we presented in our November monthly has realized with Social Democratic Party (PSD), National Liberal Party and (PNL) and the Democratic Alliance of Hungarians in Romania (UDMR), supported by MPs representing Romania’s ethnic minorities, have formed a pro-European coalition government led by Prime Minister Marcel Ciolacu of PSD. Including minority representatives, the coalition controls about 54% of seats in the legislature.
A New Government Faces Fiscal Pressures
The new cabinet of Romania is facing the daunting task to reign in the EU’s largest budget deficit that is expected to reach 8.6% of GDP in 2024. Already during the first days in the office the government introduced fiscal measures to stabilize the economy and reduce the budget deficit to 7% in 2025.
Public Sector Reforms and Cost-Cutting
Key actions include new taxes, tax adjustments, and public spending cuts to save over RON 120bn (€24bn). SMEs and individuals will contribute RON 7bn, mainly through higher dividend taxes, reduced revenue caps for micro-enterprises, and the removal of tax exemptions for agriculture, IT, and construction sectors. Public sector reforms include merging institutions, reducing workforce size, freezing bonuses, and optimizing ministry expenses, all managed by a special team under the Prime Minister and Senate President.
Reintroduction of the Construction “Pole” Tax
The special construction tax was reintroduced starting from 2025 at 1% rate. Commonly referred to as the “pole tax” it was previously in force in 2014-16 and targets specific types of infrastructure and constructions that are not subject to property tax under Romanian law (e.g. electric power lines, oil and gas pipelines railways, storage facilities, power plants etc.). The tax is expected to last up to three years, similar to its initial run, which raised RON 3.5bn (€0.7bn) before being cancelled in 2017 due to economic concerns.
Additional Fiscal Adjustments
Other fiscal changes include raising the dividend tax from 8% to 10% in 2025 and gradually reducing the micro-enterprise revenue cap to €100,000 by 2026. Until now Romanian businesses with annual revenues below €500,000 have enjoyed simplified preferential tax treatment, being exempt from the standard corporate income tax of 16% and instead paying 1-3% tax on revenues.
Pensions will not be indexed in 2025, but targeted aid for low-income pensioners is planned. VAT and profit tax hikes are avoided, while digitalization efforts like e-invoicing aim to improve VAT collection, addressing a 30%-35% VAT gap caused partly by reduced rates on essential goods.
Presidential Election Crisis: Unprecedented Annulment
Although the government-related post-election uncertainties are now off the table, the presidential elections shall be re-run as the results of the first round were surprisingly annulled a mere 48 hours before the second round face-off between the ultranationalist independent candidate Călin Georgescu that won the 1st round with 22.94% and the runner-up reformist liberal Elena Lasconi from the Save Romania Union (USR) (19.18% of the vote). This decision is unprecedented in the Romanian history. It followed the declassification of documents by Romanian intelligence services that exposed evidence of voting manipulation through social media platforms, illegal campaign financing on TikTok, cyber-attacks orchestrated by external forces and suspected Russian interference. The government will now establish a timeline for the new presidential election, which is expected to take place in spring 2025. The process will restart, requiring candidates to gather endorsements to run. Incumbent Klaus Iohannis, whose term was set to end on December 21, will remain in office until the next president is sworn in.
