The upper chamber of the Romanian parliament, the Senate, summons on Monday, Aug 18, in an extraordinary session to endorse the controversial bill on lower labour taxation, B1 TV station announced.
The head of the Senate, Calin Popescu-Tariceanu, confirmed on Aug 15 that the vast majority of the senators will most likely endorse the bill. Budget minister Liviu Voinea quoted by news agency Agerpres has reaffirmed the government support for the bill despite the economic slowdown revealed by the second-quarter and the revised first-quarter GDP figures that point to the country entering a technical recession [the seasonally-adjusted GDP contracted on q/q basis for two consecutive quarters].
The bill is scheduled to come into force on October 1, 2014. While it does not put at risk this year’s budget deficit target, it would generate significant deficits starting next year, the independent fiscal council warned. The recent deterioration of the growth outlook adds even more questions on the necessity of enforcing such steps at this moment. The mid-year budget revision was based on 2.8% GDP growth, but the official projection might be decreased under the circumstances of the disappointing 1.2% y/y GDP growth for the second quarter.
If the parliament enforces the lower labour taxation despite all the warnings issued by President Traian Basescu and the fiscal council, this would most likely prompt remarks from the IMF since the Fund’s experts reportedly expressed in June concerns regarding a fiscal gap emerging as a consequence of the reduction of social security contributions.
President Basescu warned on Aug 14 that Romania might even get its stand-by deal with the IMF off the track if the parliament endorses the bill. Basescu warned that terminating the contract with the Fund would increase by default the country’s co-financing of projects under the EU budget from 5% currently to 15%. He suggested to the government that the fiscal impact of the 5pps cut in social security contributions could be offset by the elimination of the supplementary taxes enforced by the government this year – including the supplementary car fuel excise tax and the tax on special industrial assets.
The parliament had endorsed once the government’s proposal for the 5pps cut in the social security contributions [CAS], but Basescu returned the bill to the lawmakers, claiming that i. the move would further widen the pension budget deficit and ii. the government has not identified the sources to offset the drop in general government revenues prompted by the lower labour taxation.
Romania’s fiscal council has also rejected the government proposal for the 5pps cut. The impact on the general government budget is estimated at 0.73%-0.74% of GDP for 2015-2017. There is however a major risk for fiscal slippage to occur starting 2015 under the circumstances that the government plans to meet the medium-term deficit targets seem ambitious even in the absence of the cut in the social security contributions, the council has said.
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