EU’s Fastest-Growing Economy Needs a Band-Aid

(Bloomberg) -- Shaken by anti-corruption protests, Romania's government is getting creative to keep its promises to voters.

Prime Minister Sorin Grindeanu dare not shy away from tax cuts his party pledged before winning December's election. But paying for them is proving tricky. The solution? State-owned firms must raise dividend payouts by a fifth to ease strain on the budget.

The move, aimed at addressing concern the deficit is ballooning beyond European Union limits, risks damage further down the road. While Romania's economy is tipped to outpace the bloc's other 27 members this year, critics of the government's strategy say investment is already being neglected and the latest budget band-aid will only make that trend worse.

“There are side effects to this policy because it diminishes companies' capacity to invest and grow,” said Ionut Dumitru, a Bucharest-based economist at Raiffeisen Bank International AG. “This has a long-term negative impact on the country's development.”

The budget outlook has worsened over reductions in the sales tax and pledges to boost state wages and pensions. This year's shortfall is set to reach 3.6 percent of gross domestic product, the European Commission predicts, violating the bloc's fiscal rules. Revenue has plunged to less than a third of GDP in 2016, the lowest in at least a decade.

Grindeanu's plan would make government-controlled companies including natural gas producer Romgaz SA pay 90 percent of profits in dividends. That could endanger Energy Ministry recommendations that the firms, mainly in the oil and gas sector, invest as much as 14 billion euros ($15 billion) by 2030 on production upgrades.

The government's approach is short-sighted, according to Dumitru.

“Sooner or later the government will have to address the structural issues in the budget, mainly poor revenue collection and tax fraud,” he said.

To contact the author of this story: Andra Timu in Bucharest at atimu@bloomberg.net.

To contact the editor responsible for this story: Andrew Langley at alangley1@bloomberg.net, Paul Abelsky