Thursday, July 3, 2014

Romania parliament approves employment tax cut despite budget hole

The Romanian parliament's lower house approved on Wednesday a 5 percentage point cut in social security taxes for employers that is intended to boost economic growth but will leave a gap in the budget. The tax cut was approved last month by the leftist government of Victor Ponta, going against a recommendation from the International Monetary Fund, which leads Romania's 4 billion euro aid deal. The lower house has the final say.

The IMF has postponed a review of the aid deal pending a November 2 presidential election that has raised concerns about fiscal discipline. The cut in employers' tax to 15.8 percent from October will create a revenue shortfall of 850 million lei ($264.61 million) which the government plans to cover with higher than expected returns from a tax on special buildings introduced this year.

The head of the Fiscal Council, an independent fiscal watchdog, has said revenues from the special building tax will not be sufficient, however, as overall tax collection fell behind estimates in the first quarter. Prime Minister Victor Ponta has said the budget deficit will not rise above this year's target of 2.2 percent of gross domestic product. In 2015, the social security tax change will cost 4.8 billion lei, just under 1 percent of GDP.

Central bank Governor Mugur Isarescu said on Tuesday the cut was a step in the right direction, but that it would not be enough to take Romania out of a vicious circle without structural reforms and job creation. "It (the cut) must be surrounded by more measures to help create new jobs," Isarescu told reporters. "Consider ... how few the taxpayers are, 4 million out of an active population of 10 million, and 6 million beneficiaries."

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