Romania's budget cuts spark backlash ahead of sensitive election

By Luiza Ilie, Gergely Szakacs and Libby George

BUCHAREST (Reuters) - Government cost cuts to curb Romania's chronic budget deficit and avert a ratings downgrade are causing a social backlash that risks boosting support for the far-right pro-Moscow candidate in May's presidential rerun.

Romania's pro-European ruling coalition is scaling back years of spending that has lifted debt by nearly one-fifth of output from pre-pandemic levels just as the new election nears.

Authorities are still assessing whether Calin Georgescu can run again in May, after his surprise victory in a December poll that was annulled over alleged Russian meddling.

Leading in opinion polls, he plans to end support for neighbouring Ukraine, questions the need for European Union funds underpinning the economy, calls U.S.-driven NATO spending pledges "ultra-secondary" and vows to put Romanians first.

Some of the workers affected by the government cuts, which include a freeze on public sector pay and pensions, say that is something the present government is not doing.

"All these measures are taken against us. They always are," said Maxim Liceanu, 49, a clerk at state rail company CFR Calatori, which suspended about 240 services in January, including many commuter lines to capital Bucharest.

Travel subsidies for students were also curbed, while cuts in higher-paid overtime work have slashed train mechanic Danut Stoica's monthly income by about one-fifth.

"We stay home instead of meeting our schedule," Stoica, 54, said at a rally in Bucharest.

Elsewhere in the economy, power grid workers have threatened a strike in March over pay curbs, part of a seven-year debt reduction plan agreed with the European Union.

In assessing the prospects for a downgrade, the Fitch ratings agency flagged weaker growth and 'domestic political shocks', while some investors say the new U.S. administration's criticism of Romania over the cancelled election is a further risk factor.

Consumer sentiment has dropped and inflation was running at the EU's second-highest level in January, signalling a cooling off of the consumer boom that has buoyed Romania's economy.

'WE ISSUE TOO MUCH'

The debt-fuelled largesse of the pro-European ruling coalition has opened up one of the highest current account deficits in emerging markets, S&P Global said, exposing it to possible shocks in investor confidence.

The government says it needed to support the economy and shield households and businesses during multiple crises, including war in Ukraine. This year it has stressed that it will lower the deficit via cuts rather than hiking major taxes.

While at 53% of output, Romania's debt is still below the EU average, foreign currencies make up more than half of borrowing, with 13 billion euros of issuance planned for 2025.

"The situation we are facing, and the reason why spreads are high, is that we issue too much," debt agency chief Stefan Nanu said. "Otherwise, we do see investor appetite. Romania is attractive for investors. The key is a lower budget deficit."

Romania's economy slowed sharply last year despite the surge in pre-election spending. U.S. tariffs on Europe could further crimp growth, challenging the government's 2.5% assumption that underpins its deficit reduction drive.

"A potential commercial war between the United States and the EU will create recession in Europe, and then things will get complicated," central bank Governor Mugur Isarescu said.

He said the bank would give the tightly-controlled leu "more flexibility" if political tensions eased later in the year after spending what JP Morgan estimates is over 10 billion euros on interventions in 2024. The bank does not comment on interventions.

A source briefed on an investor meeting said the government showed "a bit higher commitment than in the past" to deliver on the cuts, although investors remain cautious after Romania went from targeting a 5% deficit to a nearly 9% shortfall last year.

Given Romania's low tax revenue, there could be scope for tax hikes. But with state-owned companies paying hefty bonuses and some public sector retirees enjoying lavish pensions while Romanian wages languish among the lowest in the EU, tax hikes are a hard sell.

"Even if improvements are needed to achieve the 7% budget deficit target in 2025, we expect Romania's fiscal policy to be flexible and help it remain a member of the (investment grade) club," Raiffeisen economists said.

"However, the matter remains challenging, as Romania has never had to consolidate its finances to such an extent over a longer period in its recent history."

Fitch Ratings Director Greg Kiss said it was uncertain how long the coalition would last, making the seven-year debt reduction timeframe a concern.

(Additional reporting by Marc Jones in LONDON; Writing by Gergely Szakacs; Editing by Mark John and Philippa Fletcher)