Romania Agrees To Increase Tax Rates If Current Austerity Measures Are Not Enough - EC

"There has indeed been a discussion with the Romanian authorities about further measures to be taken if the situation does not improve. It has been agreed that additional revenue raising actions, including increasing tax rates, will be implemented to close any unexpected budgetary gap," said the EC.

The EC also said that "in the first Supplemental Memorandum, the Romanian authorities agreed to implement additional measures, if progress towards achieving the 2010 budget deficit target was insufficient."

"The choice of measures was left to the Romanian Government, which decided to concentrate its consolidation effort on the expenditure side. The only concern expressed by the European Commission was whether the measures proposed could effectively be implemented. In response, the Romanian authorities gave the necessary assurances and committed to also implement revenue raising measures if needed to reach the deficit target," said the EC.

Following negotiation with a review mission of the International Monetary Fund and with European Commission representatives, Romanian authorities decided to implement a spending cut plan which entails a 25% reduction in public sector wages and a 15% slash in pensions and a targeted reduction in other social benefits.

There was no formal assessment at the EC level of the social impact of the measures proposed by the Romanian Government.

"However, in our view there is room for a reduction of the public sector wage bill. Between the first quarter of 2005 and the first quarter of 2009 average gross wages in the public sector more than doubled in nominal terms (well outpacing wage increases in the private sector), while public sector employment increased by 17%. As a result, the public sector wage bill increased form 7.4% of GDP in 2005 to 9.5% in 2009. Similarly, average pensions tripled between 2004 and 2009, while the number of pensioners increased by around 6%, putting the sustainability of the pension system at risk. Nevertheless, with an average monthly pension of RON711 in 2009, the social costs of pension cuts are non-negligible," said the EC.

According to the EC, in February 2010, the Romanian authorities agreed to implement a number of measures to reach the 2010 fiscal deficit target of 6.4% of GDP. The April-May EC review mission revealed that the measures were not enough to bring economy on track, and Romanian authorities proposed a number of extra measures, including additional cuts in public sector wages, pensions and social benefits.

"The Romanian authorities had agreed in the first Supplemental Memorandum signed in February 2010 to rigorously implement a number of measures to reach the 2010 fiscal deficit target of 6.4% of GDP (in ESA95 terms), including a nominal reduction in expenditures on goods and services; an 8.7% reduction in the public wage bill; and a nominal freeze in pensions. In case the envisaged measures were not on track to deliver the expected consolidation, further measures would be taken to close the gap. During the April-May review mission it became apparent that under unchanged policies the fiscal deficit target would be missed by a significant margin. In view of this, the Romanian authorities proposed a number of additional measures, including additional cuts in public sector wages and pensions and a targeted reduction in other social benefits. In return, the Commission delegation agreed to an upward revision of the fiscal deficit target to 7.3% of GDP (in ESA95 terms). This revision broadly corresponds to the shortfall in GDP growth," said the Commission.

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