In the course of a few days, the Prime-Minister and presidential candidate Victor Ponta has announced a wave of increases of indemnities, allowances and pensions. People from a large range of social categories will be the beneficiaries of tens to hundreds of lei.
From the government’s calculations and Capital’s estimations, the total extra sum needed for the budget would amount to approximately one billion Euros. Increasing pensions by 5%, above the legal cap, as the PM has promised, will mean that the pensions’ budget will have to be supplemented by 2 to 2.5 billion lei. This spring, the Labour Minister Rovana Plumb showed that the raise of pensions cannot exceed 4%-4.4% at best. Now, the argument sustaining this measure is economic growth, though the National Institute of Statistics has published data that show Romania is in economic recession. Furthermore, the international and national contexts indicate a new decrease in the third semester.
‘Fortunately, this year we have collected a bit more and that means the government can maintain two fundamental commitments that I have made as PM and which I am sure will be further observed. No pension will ever be cut again, it is very important because everyone in Romania knows what happened in 2010. Each year, at least the law of pension indexation on account of the inflation coefficient and of the raise of the average wage will be applied,’ Victor Ponta declared on TV.
The strain on the next year’s budget is increasing because of the generous promises of approximately one billion Euros, which add to the other at least 3 billion that Romania has to cover: the reduction of health insurance (over 1 billion), the reduction of deficit by 0.8% of the GDP, according to the Fiscal Compact (over 1 billion) and the increase in defense costs and in co-financing EU funds (more than 1 billion).
‘After the elections, the government will have to make difficult decisions, because the deficit for the 2015 budget must be no more than 1.4% of the GDP. That means it will either have to collect more, or cut the costs, or both. We expect either great increases in taxation, or major cuts of expenses. Either way, 2015 will be a year of great changes in the fiscal and budgetary policies,’ says Ionut Dumitru, the President of the Fiscal Council.
Almost all economical analysts predict major changes. As things stand now with the fiscal-budgetary situation, there is no possibility that all promises and commitments be kept.
Many economists even anticipate that the flat tax system will be discarded, especially since the Social-Democrat Party (PSD) endorses and the fiscal and budget strategies stipulate the introduction of the progressive tax system by 2016. However, they say that the 8, 12 and 16% brackets are not feasible. Most probably, the highest bracket will go beyond the present 16% and target those with medium and high incomes. But, for now, all this is speculation, because not even the government knows what action it will actually take. Though the budget plan should have been approved until the 15th October according to the law of public finance, then sent to the Parliament, there is no intention that the document is finalized before the elections.
The PM has said that the budget will be the next government’s duty, implying that it will only be ready and approved next year. This approach is not new. After 2008 and the economical crisis, the budget for the each year was not passed before January or February of the same year.
In this context, the insecurity of the business environment has reached critical levels, especially since the reduction of the health insurance tax – if good on its own – has been received with caution because of fear it creates the need to compensate losses through further taxation. One of the first facts to confirm the companies’ pessimist outlook is the increase of the minimum wage from 900 to 975 lei beginning with the 1st January. A minimum wage employee will actually cost his employer 91 lei more, which is double the sum he has saved with the health insurance cut of 45 lei, that became effective since the 1st October. This scenario is worryingly similar to that of 2008 – a year of unprecedented economical growth –, when the PM Calin Popescu Tariceanu, himself a presidential candidate now, augmented the expenses to an alarming level, with the deficit going over 5% of the GDP. In the first months of the next year, Romania had to do without an approved budget. The health insurance tax immediately went up by 3.3%, after it had been lowered in the previous autumn. Massive cuts of expenses followed, along with the rise of VAT to 24% and the financing agreement with the IMF imposed as ‘a safety belt’.
The present preventive agreement with IMF has become inconsequential, as Ionut Dumitru maintains, and the opening of new negotiations, in the case of a drastic deterioration of the budgetary situation, will be extremely difficult, especially with the international context deteriorating as well as of lately.
The next year’s negotiations, even inside the frame of the present agreement, will be very complicated, because Romania has strayed wide form the agreed upon principles with the international partners and has taken quite a few steps backwards.
The next government will be forced to find solutions. When asked of the next year’s budget, Victor Ponta said that it is only fair he does not make any commitment in the name of the next PM and his cabinet. However, the social expenses contracted in the last days prove the opposite: Victor Ponta is making the next year’s budget, but only in regard to expenses, while he leaves his successors to deal with finding sources for financing.