Wednesday, September 10, 2014

Romania parliament defies president, IMF, to approve tax cut

Tue Sep 9, 2014

(Reuters) - The Romanian parliament's lower house approved a cut in employment taxes on Tuesday, going against the advice of the president and the IMF two months before a presidential election in the EU's second-poorest state.

The leftist government of Prime Minister Victor Ponta first approved the 5 percentage point cut in social security contributions for employers in June to spur growth.

The International Monetary Fund, which warned the cut will leave an unsustainable revenue gap, has postponed a review of Romania's 4 billion euro precautionary aid deal pending the election, which Ponta is widely tipped to win.

President Traian Basescu opposes the timing of the tax cut, saying it is unsustainable and could mean other taxes will have to rise after the election. He had sent the law back to parliament for re-examination, which he can only do once.

The lower house struck down his request and approved the bill. It has the final say. The lower house also decided not to claw back money from pensioners, mothers and some public sector workers who were over-compensated.

Earlier this month, Ponta said the government would lower a tax on special buildings just months after it took effect. That tax had hurt companies' earnings.

The 5 percentage point cut in employers' tax to 15.8 percent - lower than 16.26 percent in neighboring Poland or Hungary's 27 percent - rate from Oct. 1 will create a revenue shortfall of 850 million lei ($247.72 million) in the fourth quarter of this year.

Ponta has offered assurances 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.

Latest data showed the economy grew by a significantly less than expected 1.2 percent on the year in the second quarter, and recorded a second consecutive quarterly drop, pushing Romania into a technical recession.

Romania collects taxes equivalent to 33 percent of GDP, well below the average for the 28-nation European Union. Tax evasion stood at 16.2 percent of GDP last year, according to the Fiscal Council, an independent watchdog.

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