A look at the decision to cut employers' contributions to the social security fund
Starting October 1st this year, the Romanian Government intends to reduce by 5% the employers’ social security contributions. The draft law regulating this decision, which had been passed by the two Parliament Chambers, was sent back by president Traian Basescu for re-examination. “I want to say again that a cut in the social security contributions is a good decision, which I fully support, as lowering taxation on labour is a useful measure. However, I have reservations when it comes to the sustainability of this measure” the President said on the occasion. Economic analyst Valentin Ionescu, former Privatization Minister, shares the president’s stand:
“ From my point of view, any increase in pensions and any drop in the social security contributions have the same effect, namely a bigger deficit in the public pension system, if the level of collection remains unchanged. Therefore, the measure was made against a background where fiscal administration has not improved, the level of collection has remained the same, so the deficit will grow, instead of becoming smaller. We cannot speculate and say that we have had economic growth and that will automatically entail a higher level of commitment within the national economy, meaning that there will more payers to the national pension fund. By no means can we do that. Things are not at all like that, at least for now. And we can also look at the figures and at the unemployment rate.”
However, the government says it has found the necessary budget resources. Economic analyst Valentin Ionescu:
“When the government says it has found the budget resources, it must also explain what they are. We know for sure that the budget deficit will grow, but we don’t know yet whether it will reach 12 or 19 billion lei, as the Tax Council says. I estimate a budget deficit of 17.8 billion lei based on the current deficit level and the level resulting from the reduction in the social security contribution, to which I added the annual indexation of pensions stipulated by Law 263 of 2010. The deficit may therefore grow by about 6 billion lei next year, which translates in a deficit of 4.2 billion Euros. The money has to come from somewhere, and I have always said that when the government takes a fiscal measure, it must also take into account the individual fiscal pressure, namely how much of their gross incomes individual citizens contribute to the state budget in terms of taxes and duties. If one tax is reduced at the expense of increasing or introducing other taxes, fiscal pressure will not decrease. I cannot therefore assess a fiscal measure taken as such, individually, but the sum of all taxes and duties we have to pay.”
In the opinion of Valentin Ionescu, business people will not have a lot of money left for investments:
“It all comes down to cutting expenses per employees by 20 – 30 euros. The fact is that money saved this way is not that big in order to allow you to make investment or something. That applies only to big enterprises with thousands of employees on the payroll and in Romania only 0.24% of the total number of big enterprises boast over 500 employees while those with 10 or 15 thousand employees could be counted on the fingers of one hand. And only with such big companies the effects of that measure could be felt.”
Economic analyst Valentin Ionescu has even made a forecast.
“I am concerned about the deficit in the public pension fund, which is to increase. And if we are not going to see any tax increase this election year, we’ll be facing the introduction of fresh taxes and duties in the years to come or the ones that we have at present will go up, because the budget simply cannot cope with such expenses. The degree of collecting money to the budget has remained the same all these ten years, a fact also reflected by the state’s fiscal incomes/GDP ratio, whose percentage is unchanged. Eliminate the EU funding and you’ll get the whole picture.”
However, Finance Minister Ioana Petrescu says that in order to apply the measure as of October 1st and not July 1st as initially scheduled, there is enough money to offset the phenomenon of losing budget incomes.
“I wasn’t convinced that we had enough budget resources if we were to implement the measure as of July 1st, but I am sure that we have enough resources to do it as of October 1st. There are resources for 2015 as well, and the medium and long-term effects of reducing social security contributions will have positive effects on the economy and that impact, as estimated by bookkeepers, will be very small indeed. But before seeing these effects we must make sure we have plenty of budget resources.”
As the Finance Minister explains, now there is the right time to introduce the 5% cut in the employers’ social security contributions. Ioana Petrescu:
“We need such a measure because we are excessively taxing the labour market at present. We are speaking about 20.8% for the employer and 10.5% for the employee so it’s obvious that we need a fiscal relaxation here. And I am not the only one saying that. Even the European Commission’s recommendations refer to the excessive taxation of labour all over the Union, where fiscal relaxation is needed. The measure comes at the right time because we have registered economic growth of late; the National Institute of Statistics has revised the GDP growth in the first quarter at 3.9%, inflation is at an all time low, the budget deficit target has been met and Standard and Poor’s has recently revised Romania’s rating up. So, all in all, the economic context is good and we can afford such a measure.”
According to Finance Minister Ioana Petrescu, employers will invest the money they save after the introduction of that measure into new jobs, in streamlining their businesses or in consumption, and beneficial effects for the economy will soon be seen.
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