Analysis: the governmental strategy - a success or economic suicide

Among the measures announced by the government there is the reduction of income tax from 16% to 10% for income from salaries, for some pensions, for rents, interest, agricultural activities, the introduction of a ‘ insuring contribution for work’  of 2.25% for employers, the increase of the gross monthly salary level which decides what personal deduction to be offered, the reduction of the total contribution of the compulsory social contributions from 39.25% to 37.25%, the reduction of the number of social contributions  from 6 to 3.

These measures increase the problem of governing programme sustainability, as there is the diminution of the budgetary income and the increase of expenditure, considers the economist Aurelian Dochia.

‘The latest measures go into the direction of the governing programme which the government follows with perseverance. Several economists, among them myself, expressed their opinion with regards to the issue of sustainability of the programme, as there are measures both regarding the increase of budgetary expenditure  and the reduction of taxation and diminution of the budgetary income. At the same time, I don’t see for 2018 signs that this issue of sustainability will be solved’ stated Dochia for News.ro.

At the same time, the gross minimum salary will grow from 1,450 lei to 1,900 lei starting with 1 January 2018, namely 31% and the income tax will drop from 16% to 10%. In exchange there is a partial nationalisation of the money of the employees from pillar ii by the reduction of the contribution from 5.1% to 3.7%.

‘ The gross minimum salary per country would increase to 1,900 lei from 1 January 2018, so that the salaries of the Romanians should not be affected by the coming back of the fiscal duty. This value corresponds to the salary included in the governing programme, 1,550 lei respectively starting with 1 January 2018’ shows the press release of the ministry of work.

At present, over one million employees in Romania (namely a fifth of the total effective of employees) are paid, at the level of the minimum salary per economy. The minimum salary increased significantly over the last years, and some decisions for growth were taken over a very short period of time, which troubled the budgets of the companies. Only this year there were for 2018 several scenarios regarding the increase of the minimum salary which initially should have reached 1,700 lei gross per month, later 2000 lei gross per month, after which the variant of 2,000 lei was given up. Later, the subject was avoided by the politicians in the public debates.

The level of the minimum salary starting next year is  necessary information for the companies which have employees paid at this level or close to this level, to know how to build their budgets, especially in the context where social contributions will transfer from the duty of the employer to the duty of the employees.

The growth of the minimum salary will make the companies rethink the salary ranking, which could represent a significant issue for the companies with many employees, considers the general secretary of the Association of Business People from Romania (AOAR) Cristian Parvan.

‘The growth of the minimum salary determines the companies to do something in connection with payment (…).The growth of  the minimum salary will put pressure on the costs in case of the companies with many employees. The companies in production have already a pressure on the costs with the price growth in energy and fuel’ Parvan said.

Moreover,a  tax   of 1%of the turnover in case of a turnover lower than a million of euro, will represent a burden in the case of companies with a low margin of profit, considers Parvan.

‘The measure will affect the small companies with business under one million euro which have a smaller margin of profit. In exchange, the liberal professions and the companies with turnover which is lower but with big profit’ said Parvan.

The social-democrat ( PSD)  government announced on Thursday that starting with January 2018 will reduce the contribution due to the employees on pillar II pension from 5.1% to 3.7% of the gross salary. The absolute value will remain but the same as the new percentage is calculated from a gross salary with 22% higher. If the employers in the private sector will not increase gross salaries, then the absolute value  paid for the pensions funds will drop.

This means a ‘nationalisation’ of the contribution due to the employee.

In 2007, the government Tariceanu approved the model for pillar II pensions which means that a percentage of the gross salary of an employee goes to a fund administered by a company specialised in money management. At the present moment, in Romania there are 7 companies which manage pillar II pensions,  the biggest is NN part of the Dutch group ING.

These contributions for pillar II were collected in an account which the employee could withdraw at pension time or leave as inheritance.

Since the beginning of the year there has been talk about pillar II pensions, PSD stating that they want the nationalisation of pillar II.

The money which was gathered in pillar II was invested by the companies for capital market management through acquisition of bonds or shares o the stock exchange.

The analysts say that the Stock Exchange of Bucharest will have to suffer by the reduction of the contribution for pillar II as there will not be money for the acquisition of shares old and new.

The latest amendments of the Fiscal Code will affect the companies with business under one million euro which have small profits,  will put pressure on the costs especially in the case of companies with many employees and will strengthen the issue of sustainability of the governing programme, according to the economists consulted by News.ro.

At the same time, the government has in mind the increase of the number of micro-entreprises which will pay taxes of 1% for the income they make through the increase of the threshold as micro-entreprise from 500,000 euro to 1 million euro. At present, the SMEs which make a turnover between 500,000 euro and 1 million euro pay tax of 16% for profit.

At the same time, the measure will simplify the way of reporting of these companies, considers Dochia.

‘ Tax for the turnover will mean for many companies not only a reduction of the taxation, but a simplification of reporting. This measure could have positive effects and in the area of reduction of fiscal evasion’ said Dochia. He drew the attention that these measures were announced too late and the government did not keep their word when they promised to  announce six months before the implementation of new fiscal measures.

The general consolidated budget which includes both the state budget and the budgets for pensions and unemployment finished the first nine months of this year with a deficit of 6.8 billion lei, representing 0.81% of GDP up by 83.8% against the same period of last year, as the growth rhythm of expenditure, increased by the salaries of the budget-paid employees surpassed the advance of collections, show the data published on Wednesday night on the site of the ministry of finances.

Romania registered a budgetary deficit of 4.1% of GDP, data adjusted seasonly, in Q2 of this year, the biggest of the EU according to the  data published recently by Eurostat.

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