UPDATE 1-Planned Romanian spending cuts unlikely to prevent tax hikes, potential premier says

Plans to cut state spending in Romania once a new government is appointed are unlikely to avert the need for tax hikes to rein in a hefty budget deficit and prevent a ratings downgrade, the leading candidate to become prime minister said on Monday.

Having gone through a divisive presidential vote last month that closed a long and turbulent election cycle, Romania must now tackle the widest budget deficit in the European Union. The new centrist president, Nicusor Dan, faces the daunting task of nominating a prime minister to put together a majority government from four pro-European parties in parliament - which will then need to enforce austerity measures.

The 2025 budget assumes economic growth of 2.5% in targeting a deficit of 7% of GDP - which analysts, ratings agencies and the European Commission say is virtually unattainable without tax hikes. The four parties are now discussing how to cut government spending before deciding on a package of tax hikes that is certain to be unpopular.

"This package (of cuts) is very unlikely to avert tax hikes," Liberal Party leader Ilie Bolojan, Dan's first choice for prime minister, told reporters. The parties have yet to agree on cabinet appointments but Dan said he expected a line-up to be ready within two weeks.

Romania's growth has steadily slowed since a post-pandemic bounce in 2021, and Brussels forecasts a budget deficit of 8.6% this year and 8.4% next, well above the 7% target for 2025 outlined in a seven-year plan approved by the Commission. A London source with knowledge of talks between Romania, the Commission and ratings agencies said Brussels wanted to see the yearly deficit-to-GDP ratio cut by three percentage points, with 2.5% coming from higher tax revenue and 0.5% from spending cuts.

Romania is currently clinging to the lowest investment-grade rating from S&P, Fitch and Moody's, with a "negative" outlook. Election-induced market turmoil may have likely exacerbated the measures required as large capital outflows and central bank intervention to stem a slide in the leu currency have driven a surge in borrowing costs.

Foreign currency reserves fell by 6.75 billion euros in May after what central bank governor Mugur Isarescu said were some of the largest capital outflows in Romania's history.

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