Government pushes on with tax and budget measures

The Cabinet assumes responsibility for a bill aimed at re-balancing the state budget

Ştefan Stoica, 26.09.2023, 14:00

The
bill that the Government of Romania is seeking to push through Parliament is
intended to increase the effectiveness of the fight against tax evasion, to
curb the squandering of public funds and to ensure tax equity by scrapping
exemptions and privileges.

Under
the new legislation, all employees will pay public healthcare contributions,
including the staff in constructions and agriculture, who benefited from
exemptions so far, while IT personnel with salaries above EUR 2,000 a month
will now have to pay income taxes as well.

On
the other hand, public sector staff with salaries above EUR 1,600 will no
longer receive holiday vouchers and meal allowances. A special tax is
introduced for owners of houses worth over EUR 500,000, unless they have taken
out bank loans to pay for them. Large companies and banks will pay a 1% tax on
turnover.

As
for the VAT, there are no substantial changes. According to PM Marcel Ciolacu, the
9% rate for foodstuffs and medicines and the 5% rate for power, firewood,
natural gas and books will stay in place.

The
PM dismisses claims that these are austerity measures. But, he says, Romania
can no longer afford to grant privileges and facilities amounting to EUR 15
bln, nor can it allow tax evasion to account for 15% of its GDP (i.e. EUR 30 bln
a year). Marcel Ciolacu mentioned that minimum wages will be raised by 10%,
while in the constructions sector the raise will reach 12.5%.

The
PM argues that this set of measures will implement the most ambitious reform of
the public sector in post-communist Romania. The Opposition, however,
criticises the draft law and says it must be stopped by all constitutional
means available.

According
to procedure, one such option is a no-confidence vote, which would lead to
dismissing the Cabinet if the Opposition wins. But this is only possible in
theory, given that the actual parliamentary make-up favours the Social
Democratic Party and the National Liberal Party, the current ruling coalition. Another
option is to challenge the bill before the Constitutional Court.

But
the most dangerous scenario would be for the new measures to be invalidated by
economic reality. The Economic and Social Council, an independent body, has
already passed a negative opinion on the legislation, stating that the measures
to cut public expenditure are unconvincing and will have a negative impact on
the economy. In the past, covering the budget deficit by increasing the tax
burden on the business sector ended up having the opposite effect, and very
likely revenues to the state budget would decrease instead of going up, the
Council warns. (AMP)