Challenges for the New Romanian Government

In Bucharest, the disagreements between the Social Democrats and the Liberals, who won the 2012 elections together as part of the Social Liberal Union, have eventually led to a rift that prompted the National Liberal Party to leave the ruling coalition.

Corina Cristea, 14.03.2014, 12:02

The reshuffle of the cabinet, which is now made up of the Social Democratic Party, the National Union for the Progress of Romania, the Conservative Party and the Democratic Union of Ethnic Hungarians in Romania, has entailed new objectives included in a new governing platform that comprises many of the objectives of the previous government. Rather reluctant to making promises, the PM Victor Ponta pointed out that the program adopted by the government, for which they asked Parliament’s vote of confidence, observes the principles underlying the budget voted last year in Parliament. As compared to the governing program of the former Social Liberal Union, the new one provides for the return to a 19% VAT, a 5% reduction of the social security contribution owed by employers, the reduction of VAT for basic foodstuffs, to the extent to which that is allowed by the fiscal framework. The VAT and the social security contributions are the most important sources of income, accounting for 55% of the consolidated budget. This money is used for financing such domains as healthcare, education, army, state employees salaries, unemployment, social security and pensions. The reduction of the VAT and the social security contributions could have a positive impact on the business environment, analysts say, just like the measures on the progressive taxation of small incomes. However analysts warn that such measures could seriously affect budget revenues and will most likely be accompanied by an increase in other fees and taxes. Ionut Dumitru, the president of the Fiscal Council, says that the implementation of these measures is somehow conditional on the available fiscal framework:

Ionut Dumitru: “These measures are mere intentions, in the sense that they are not actually provided for in the budget law for the time being. They will be implemented when solutions are found to offset their consequences. If we want to cut a tax or fee, according to the fiscal responsibility law you need to find a solution to keep budget revenues constant”.

The 16% flat tax remains valid in the new government program, the priorities being the reduction of the social security contributions and tax exemption for re-invested profit. Ionut Dumitru believes the reduction of the social security contributions should be compensated by broadening the tax base through the elimination of current exceptions for certain types of incomes:

Ionut Dumitru : “From the point of view of the economic environment, this is undoubtedly the right measure. We should actually find solutions to compensate for the effects of this move, because a 5% cut has a more than significant impact on budget revenues. We are actually talking about an amount of 0.8 up to 1% of the GDP”.

Maintaining economic growth is one of the objectives of the new Romanian government. Romania’s real GDP rose by 3.5% in 2013 thanks to the high level of exports boosted by a sound industrial output and good crops. The economic growth is expected to be 2.3% in 2014 and 2.5% in 2015, according to the latest forecasts published by the European Commission, with growth engines shifting from exports to domestic demand. It was estimated that the budget deficit was reduced to 2.6% of the GDP in 2013, from 3% in 2012. It is bigger than initially estimated, namely 2.5%, because of the higher co-financing rate for EU-funded projects. For the same reason, this year the deficit is to reach 2.2% of the GDP as compared to 2% estimated last autumn, and in 2015 it is expected to drop to 1.8% against the backdrop of stability and accelerated economic activity. However, the National Institute of Statistics announced that the indicators of the industrial activity saw a drop in January 2014 too, as compared to the previous month, this being the 3rd consecutive decrease reported in terms of turnout and new orders. Economic analysts believe that the developments in the past 3 months should draw a warning signal even if figures are on the rise compared to the beginning of last year.

Economic analyst Aurelian Dochia has details: “The fact that these indicators have dropped for 3 consecutive months has a larger significance, meaning that the year 2014 did not start very well, but we should take into consideration the difficult weather conditions this winter, which could have an impact on economic activity. I am convinced that in 2014 industry will remain the most important contributor to the GDP alongside exports, obviously, which are themselves influenced by industry to a large extent.”

According to Aurelian Dochia, in a year when agriculture can at best equal the performance of 2013, Romania’s economic growth will continue to rely heavily on industry.