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Romania’s ruling coalition inks final draft of bill on increasing public-sector salaries

Question: Hello, what have you heard about a recent official commenting the possibility of nationalisation of the private pension system please? also, for the wage bill, if i read your article correctly then the additional increase of 1.25% of GDP would take the deficit to over 4% of GDP? last question, could you confirm how much is the under management by the private pension funds in % of GDP and how much are the annual inflows transferred to them? thank you

Answers: To start with, finance ministry Viorel Stefan denied allegations about planned nationalisation of the IInd pillar of the pension system, on April 12. The allegations were circulated (in rather general terms) by the largest pension fund manager, NN, which issued a newsletter to its customers on April 11. On April 12, MP Serban Nicolae (PSD, senior ruling party) summoned head of the financial markets supervisory body ASF, Misu Negritoiu, to explain the situation. This comes in the context of Negritoiu being proposed for dismissal last year after the crisis in the insurance system. Some MPs might attempt to resume the procedures for the replacement of Negritoiu. In any case, both Negritoiu and finance ministry Stefan firmly denied such plans, stressing that such an option was not discussed. Indeed the recent developments [or rather the public debates] related to the fiscal policies in Romania deserve attention. Summing up: the ruling coalition has passed a series of wage hikes (and other social benefits, plus cutting some non-fiscal fees), inked a problematic public wage bill (this is not sent yet to Parliament) and, more recently, announced broad reforms on the fiscal system. This latest move (the “household income tax” that would allow households to deduct certain expenditures like for education) is the most puzzling, but at least the senior ruling party did not published a draft of it. Nonetheless, PSD still claims the revised fiscal system would be enacted as of January 2018 -- which is highly unrealistic, not to mention the vagueness of the concept of “household” mentioned by the ruling coalition officials (including finance minister Stefan). Now about the nationalisation of the IInd pillar of the pension system. Indeed, the largest fund manager (NN, formerly ING Nederlanden) informed its customers about “public debates on this topic”. NN also informed its recipients that “their rights could be impacted by diminishing (or cutting to zero) the share of the social security contributions earmarked to the IInd pillar”. NN promises “to take all the necessary steps in order to defend contributors’ rights”. It was not a formal warning about the imminence of such a step taken by the government. However, such information can create panic instantly. Even if the nationalisation in itself can be carried in totally fair manner. The term is given a particular negative meaning in Eastern Europe, where the communist regime in fact took assets from wealthy persons with no fair compensation (actually no compensation at all) calling this nationalisation. It is hard to explain that the IInd pillar can be transferred back to state with all the necessary regularisation of contributors’ rights. This is exactly why such a nationalisation will most likely not take place. The fund managers (defending their interests) could easily generate panic and mass protests. But NN’s newsletter was not issued with no grounds. On April 1, MP Catalin Predoiu (opposition) accused the ruling coalition about plans to nationalise the IInd pillar. At a very private level, among members of the ruling coalition, the option might have been discussed in the context of similar moves in countries in the region. In any case, Predoiu’s comment prompted speculations from mass media. This seems to have triggered NN’s warning, unless NN officials have inside information from the government. Based on existing public information, it is very early to say whether the government will have to rely on extreme measures such as the nationalisation of the IInd pillar. Freezing or cutting the contributions to IInd pillar would be an intermediary step., indeed possible. In fact, it would not be for the first time, since the percentage contribution to IInd pillar was increased at a slower rate than initially planned. The contribution to IInd pillar was maintained at 5.1% (of gross wage) in 2017, for the second year in row (it was 5% in 2015). Government promised to rise the ratio to 6%, in 2018. Technically, the state transfers part of the contributions to the private managers with no change on the overall taxation. As regards the 1.25% part of question, it is assumed that the wage hikes will take place since 2018 (and not this year). It is premature to estimate the impact of the public wage bill, in fact it is possible that the ruling coalition gives up the idea completely within several days. But the logic of the 1.25% was that next year (versus 2017) the public payroll will increase by 1.25% 9of the current GDP and indeed roughly of next year’s GDP). But the deficit is driven by many factors. It is better to think in terms of public payroll. It is estimated to rise from under 8% currently to some 12% in 2022, according to the fiscal council. This puts 4% of GDP pressure on budget. But revenues-to-GDP can increase and other expenditures can be cut.  Furthermore, the discussions related to the bill go further than the impact on the budget and having it submitted to parliament next week seems unrealistic. By the law, any bill (not to mention this one) ought to have a section dedicated to the impact on the budget. This one does not have.

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