Shrinking the social contribution by five percentage points since 1 October is good news for the companies. However, the precarious state of the pension system, which currently absorbs 38% of the government expenditure, is watched carefully by the business community. The entrepreneurs fear other taxes might be raised to counterbalance the decrease of the government revenues.
According to calculations, the already huge deficit of the pension budget will increase by five to seven billion RON per year starting with 2015. Obviously new revenues sources will be necessary. “We would like to see what a whole year with this tax decrease, such as 2015, looks like and more important we would like to see the tax cut is not accompanied, during the same year, by other fiscal decisions that will actually increase the fiscal pressure. We are afraid they will take back next year what they gave us this year”, said Foreign Investors Council President Mihai Bogza.
Unstable pension budget
The financial problems of the pension budget exploded six years ago. Between 2000 and 2007 the social security budget was relatively balanced or there was even a surplus. After 2008, its deficit (ranging between 68% and 155%) became an important component of the total budgetary deficit. “In 2013, there would have been a general budget surplus in case the social security budget was balanced”, pointed out the Fiscal Council members.
Last year, the pensions’ budget deficit was 11.7 billion RON. The social contributions’ decrease will stress it even more, especially as the number of taxpayers remained low in the past years. In 2013, 4.33 million employees supported the pensions of 5.24 million retired people. The measures taken through the Pensions Law have bettered the things in the recent years and the deficit was slightly declining. However, according to a Fiscal Council report, paying the pensions keeps on being “a relevant risk for the medium and long term fiscal policy’s sustainability.”
The fragility of the pensions system has several reasons, related to the demographic trend, but also to the way the system was administrated. The disastrous management is the main cause for the current chronic imbalances. And a huge burden is represented by arrears appeared as the social contributions haven’t been paid. It’s notable the biggest bad debtor is the government itself, through the companies that it fully or partially owns.
Not paying the social contributions had become a habit for the state-owned companies, which gathered over 6.1 billion RON in arrears last year, after they benefited from debt relief measures for years in a row. It’s even worse as the public companies’ arrears (payments delayed by more than 30 days) are significantly bigger than private companies’: the arrears of the 1,086 state-owned entities, representing 0.2% of all the companies in Romania, are almost double than the arrears of the 627,545 private enterprises.
“The biggest part of the state companies’ arrears is composed of amounts owed to the general government budget (50% of the total) and especially to the social security system, unlike the private companies’ arrears, which are mostly owed to their suppliers”, points out a Fiscal Council study.
The government pays slowly or at all
The total overdue debt the government owes to the public budget is 11.26 billion RON, namely the equivalent of the pension system’s deficit. “The state-owned companies don’t usually pay their taxes in time, especially when it comes to social contributions, but also don’t pay in time the money they owe to other state-owned companies”, said the above-quoted report. The public companies had in 2013 294,000 employees (7.7% of the total number of employees) and an aggregated turnover of 49.6 billion RON (4.4% of the Romanian companies’ total turnover).
Decreasing state companies’ arrears was a separate chapter, carefully negotiated, in each of the agreements Romania signed with IMF. Constantly, the agreed targets for dropping the arrears level were missed. For example, in 2013 the target was 5.6 billion RON and the final result was 7.2 billion RON.
The defective management of the state companies was one of the main problems in the past decades and the solutions that have been found didn’t improve, but often even worsened the situation. The debt relieves and the failed privatisations were extremely common. In 2014, these companies keep on being a millstone for the public finance, forcing them to cover the managerial deficiencies with taxpayers’ money.
“State companies operating in a low fiscal discipline environment harms the business environment, but also has a direct and indirect impact over the public finance. In case their activity doesn’t become efficient, the government will have to intervene for bailing them out”, said the Fiscal Council representatives.
The fiscal deficits are compensated through loans, which mean paying interests and returning the money at some point. As a result of this, instead of recovering debts, the government raises taxes in order to collect more from the serious and reliable taxpayers. That’s the reason why the social contribution cut is not really welcome by the business community. After a series of unexpected fiscal policy changes which led to apparently unjustified tax raises (as the government was euphorically claiming the economy was growing), the private companies felt suffocated by the amount of taxes they had to pay. And the Ministry of Finances’ estimates regarding a potential increase in government revenues as result of the new jobs created and of the new investments made because of the social contribution cut didn’t seem reliable.
The 2015 budget was postponed
To emphasise the incertitude, Prime Minister Victor Ponta said the next year’s budget, the Fiscal Code draft included, will be a task for the new government. Taking into account the presidential elections scheduled for November and the possibility they will lead to the appointment of a new cabinet, it’s most probable the 2015 budget will be drafted in January at the earliest. Consequently, there is no certitude the social contributions cut will last for a long term and the 2009 case, when the new cabinet increased them only three months after they had been shrank it’s still fresh in the local businessmen’s memory.