The Fiscal Code and the political parties

The parliamentary parties in Romania announce they have reached an agreement on amending the recently adopted Fiscal Code, which had been described by president Klaus Iohannis as unsustainable. Economic experts however remain sceptical.

Bogdan Matei, 21.08.2015, 13:00

On Thursday, the political class in Bucharest agreed to have a moment of respite. In a rather tense atmosphere, specific to a pre-electoral year, ahead of the local and legislative elections of 2016, representatives of the parliamentary parties agreed that the new Fiscal Code should be amended by political consensus.

The document has a short but troubled history, with tragicomic nuances. Drafted, for the most part, by the former finance minister Darius Valcov, who later on stepped down and was arrested on corruption charges, and energetically supported by the Social Democrat Prime Minister Victor Ponta, himself facing corruption charges, the Code had been unanimously voted by the Romanian MPs.

The Prime Minister gave assurances repeatedly that the provisions of the code are sustainable and that the budget impact produced by the reduction of the VAT can be covered by a better collection of taxes, alone. However, on July 17th, president Klaus Iohannis sent the Code back to Parliament, claiming that its implementation is not sustainable.

After technical talks between the parties’ economic experts, the sides agreed the best solution would be to operate a gradual cut in the VAT, down to 20% as of January 2016, and to 19% as of early 2017, respectively. The political parties also agreed to postponing the elimination of the 7 Eurocent supplementary excise duty on fuels until January 1st 2017, as the initial elimination date should have been 2016.

Following the application of the new provisions, Romania will have a budget deficit of only 2%, says finance minister Eugen Teodorovici. The junior partners in the ruling coalition have slightly different opinions. The National Union for the Progress of Romania says it agrees with the proposals made on Thursday, whereas ALDE further supports the version that has already been adopted by Parliament.

A political decision is to be made on Monday, during the meeting of the ruling coalition, which is held ahead of the Senate’s special session on the same day, and devoted to the amendments to the Fiscal Code, too. In turn, MP Eugen Nicolaescu voices the idea of the Liberals, in the opposition, that Romania would be more competitive as compared to other EU member states thanks to the amended Fiscal Code. Also in the opposition, the Democratic Union of Ethnic Hungarians in Romania has announced it agrees with the amendments, even if it would have liked the VAT to be reduced to 19% as early as next year.

Outside the political scene, the experts’ voices sound rather cautious. The President of the Fiscal Council, Ionut Dumitru, fears the budget deficit might exceed 4% of the GDP if the new Fiscal Code is implemented in the form agreed upon by the political parties, concurrently with the pay rises promised by the government to the state sector employees. And this happens in the context in which the limit accepted by the European Union, according to the criteria stipulated in the Maastricht Treaty stands at 3%. The envisaged pay rises are disquieting for the National Bank of Romania, too. A stimulation of the demand, against the backdrop of fragile economic balances “is not necessarily the wisest thing to do”, warns the spokesperson for the central bank, Dan Suciu.