May 23, 2018 / 10:01 PM / a year ago

Romania to maintain fiscal stimulus policy until 2020: ruling party chief

BUCHAREST (Reuters) - Romania’s government will maintain its policy of cutting taxes and raising the minimum wage and state pensions until 2020 in a bid to improve living standards, the leader of the ruling Social Democrats said on Wednesday.

The government could also make it optional to join a private pension scheme, said Liviu Dragnea, who holds a tight grip on his party and is also speaker of parliament’s lower house.

Membership of private pensions is mandatory for employees under 35 and any changes could hurt the capital market as pension funds are among its biggest investors.

Dragnea is seen as the eastern European country’s most powerful politician even though he is barred from becoming prime minister because of a prior conviction in a vote rigging case.

“The need for fiscal relaxation both for the private sector and for employees was acute. And ... it will continue, we will lower both the number of taxes and their amount,” he told Reuters.

The country will also push for investment to generate budget revenue and attempt to sell stakes in a slew of government companies on the Bucharest bourse over the next two years, Dragnea said.

The government went back and forth on its tax intentions last year, provoking uncertainty among investors and weighing on the leu currency, but it ultimately cut income tax and social security contributions while shifting their burden solely onto employees. It also enforced consumption-friendly wage hikes at the expense of infrastructure investment.

“We couldn’t wait years to make the changes we committed to in our program,” Dragnea said.

Steps already taken to loosen fiscal policy have raised European Commission concerns about the possibility of overshooting budget targets.

Brussels expects Romania, which joined the European Union in 2007, to run a deficit of 3.4 percent of gross domestic product this year, above its 2.9 percent target, unless it takes fresh steps to curb costs.

But Dragnea said the government would meet its 2018 deficit target without additional measures and he stuck to a growth estimate of 5.5 percent despite a lower than expected first-quarter expansion of 4 percent.


Dragnea said that by 2020, social security contributions would be cut further, to below 35 percent, from 37.25 percent currently. Value added tax would be cut by a further one percentage point to 18 percent, but it was yet undecided whether the cut would occur next year or in 2020.

He said the government planned to lower a 16 percent tax on profit to 10 percent for companies with turnover higher than 1 million euros in 2020. Property taxes were also seen falling.

The ruling party is working on measures to support the bourse from next year, including exempting employees of the capital market and brokerages from income tax. A decision on whether to eliminate a 5 percent tax on dividends was still being analyzed, he said.

He added the minimum wage was set to reach at least 300 euros ($350) by 2020, while the minimum pension would rise to roughly 200 euros.

“We are talking about wage and pension hikes to levels that could appear ridiculous to the West,” Dragnea said. “There have been too many years of austerity.”

He shrugged off concerns about the potential impact of further stimulus on the current account and inflation.

He said the government planned to focus on boosting revenue through investment, promoting aid schemes, tapping EU funds and kickstarting public-private partnerships for infrastructure works. Long-delayed bourse listings were also in line.

“Beginning with 2019-2020, an overwhelming majority of state-owned companies will be listed on the bourse.”

The blue-chip index hit a three-month low this week after preliminary government plans to cut contributions to a second-pillar private pension scheme from the second half of the year were released and then immediately denied.

“We have said we want to present a rigorous analysis in 2018 of all the data necessary to make Romanians understand whether and how much they can gain from the pension system, giving them the right to choose knowingly.”

Editing by Matthew Mpoke Bigg

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