bne IntelliNews -

Romanian President Klaus Iohannis has vetoed the country's new Fiscal Code on the grounds that the tax cuts would heighten internal and external risks.

The provisions of the code would generate “permanent and wide deviations” from the targets pledged by Romania under national legislation and international treaties, Iohannis said in a press release on July 17, quoting the Fiscal Council's opinion on a bill drafted by the government and already endorsed by parliament.

Under Romanian legislation, the president can return a bill to lawmakers only once, and has to promulgate it within 10 days of receiving the revised version. Lawmakers can adjust the bill, or send it back in its initial form to the president.

Criticism expressed by the opposition party and by the independent Fiscal Council are related to the risks of fiscal slippage because of tax rate cuts. A more gradual approach would be preferable, the Fiscal Council recommended.

The tax rate cuts stipulated in the Fiscal Code will generate wide deficits, unless significant reductions were pushed through on the expenditure side, the president's press release said.

Domestically, the lower revenues that would come about through the proposed Fiscal Code will result in pro-cyclical fiscal policy and would put at risk the country's strategic budget targets, such as raising defence expenditure to 2% of GDP, the president said.

Romania’s parliament endorsed the Fiscal Code on June 24, including the controversial lowering of the VAT rate from 24% to 19%. Finance Minister Eugen Teodorovici said that this would widen the fiscal deficit next year to 2.9% of GDP, against a 1.25% of GDP target set under the Fiscal Compact and Fiscal Strategy.

Prime Minister Victor Ponta, speaking on Romania TV station shortly after the president's statement was released, said the government had more instruments to enact the Fiscal Code, irrespective of the president's objections, though he didn't explain what the ruling coalition would specifically do.

The government can endorse emergency ordinances to enact the key provisions of the Fiscal Code, or it can re-submit the code to parliament under emergency procedures, thus giving the opposition the opportunity to respond with a non-confidence motion, Ponta said. Under normal procedures, the Fiscal Code would be discussed by lawmakers when the new session starts on September 1.

Romania's government understands that it will temporarily miss the Fiscal Compact target, Finance Minister Teodorovici said on June 24, but it has pledged to take measures for further fiscal consolidation. Teodorovici added that the government would explain its plans to the European Commission experts visiting Romania at the time, but implied that the executive plans to go further with the tax rate cuts irrespective of the Commission’s concerns.

In late June, the European Commission failed to reach an agreement with Romania on its fiscal policy. Romania’s overall progress in implementing the jointly agreed policy measures has not been sufficient, the European Commission announced in a press release on June 26, especially in relation to fiscal policy, to allow for a staff-level agreement with the Romanian authorities, it said.