Romania's parl votes to retroactively hike pensions by 40% as of Sept 1

In 2019 a law on a 40% increase of pensions as of September 1, 2020 was drafted by the previous PSD government and adopted by parliament, prompting warnings of ratings downgrades. Last month, in a bid to ease pressure on the budget, the liberal cabinet led by Ludovic Orban issued an emergency decree scaling back the hike to 14% as of September 1.

On Tuesday, however, 242 MPs voted in favour of a proposal by the opposition left-wing Social Democrat Party (PSD) to increase pensions by 40%, and not by 14%, data posted on the lower chamber of parliament website showed. A total of 147 MPs voted against and 18 abstained.

To enter into force, the pension revision must be promulgated by president Klaus Iohannis.

Reacting to the adoption of the new law, the floor leader of the ruling National Liberal Party, Florin Roman, said in a post on social media on Tuesday that his party will challenge it before the Constitutional Court.

Romania is scheduled to hold local elections on September 26 and general elections on December 6.

At the end of August, Fitch Ratings said that the amount by which Romania's government will hike pensions this autumn and the level of political volatility are key to its fiscal prospects.

Fitch estimated that a 14% pension hike would permanently increase expenditure by 1-1.2pp of GDP from 2021 onwards, whereas a 40% increase would increase annual spending by 4pp.

Romania's consolidated budget showed a deficit equivalent to 4.7% of the projected 2020 gross domestic product (GDP) in the first seven months of the year, compared to a gap of 1.76% of GDP in the like period of 2019, latest finance ministry data showed. Almost half of the deficit was generated by spending aimed at curbing the economic impact of the coronavirus pandemic.

(1 euro=4.8590 lei)