Weekly Fiscal & Political Report 14-18 August, 2023

Political Updates

INTERNAL AFFAIRS

As you will see in this report’s section on fiscal updates, the future tax changes planned by the Government capture the entire political scene, with the most diverse statements. In the absence of purely political topics, we propose to focus this week on two policies that the Executive is considering. Thus, to start with, during today’s meeting, the Government is expected to discuss a public policy proposal for the improvement of the functioning of the National System for the Management of European Affairs (SNGAE). As the Minister of Foreign Affairs claims in the document, this improvement shall meet the need to improve Romania's ability to represent and promote its interests at the level of all European Union’s institutions, resulting in an increase in the relevance and degree of substantiation of Romania's European position and promotion.

At first glance, we can see that this new policy is based on three lines of action: (1) improving Romania's participation in the decision-making process at the EU level by developing a public policy in the field of European affairs; (2) improving communication and collaboration in the field of European affairs; (3) strengthening the capacity of staff involved in European affairs. Additionally, as we further analyze this document, we can see that the most important recommendation, in the context of infringement procedures, aims at improving the quality and speed of reaction of the competent central public administration institutions in the fields covered by the respective procedures, including through their preparation of thoroughly justified points of view, both by reference to national law and by reference to the incident EU law. Therefore, we can expect the Executive to further amend several normative acts in this field, in order to implement this future public policy.

A second national policy that the Government will discuss today is the update of the 2023 Annual Plan for International Cooperation for Development and Humanitarian Assistance. As the document shows, the Republic of Moldova continues to remain the priority beneficiary of Romania's policy on international cooperation for development at a bilateral level. As a result of this update, the Democratization and Sustainable Development Fund for the Republic of Moldova from the Plan will benefit from a financing of RON 4.285 million, which represents 29.68% of the Plan’s budget.

Instead, the Ministry of Foreign Affairs (MAE) proposes to withdraw, for example, the competitive call launched in the Republic of Moldova for projects in the field of digitalization addressed to the private sector in Romania, in the absence of project proposals eligible for funding. At the same time, the project with grants of RON 325,000 to support strategic partnerships in the field of international cooperation for development and humanitarian assistance in the extended Black Sea region will also be delayed. Instead, the MAE requests supplementing, with RON 100,000, the already existing RON 250,000 budget related to the assistance project in the field of cross-border cooperation and civil protection in the Western Balkans. This project envisages, for example, integrated border management, migration, combating terrorism, corruption and cross-border crime, civil protection, and emergencies.?

EXTERNAL AFFAIRS

This week, the Economy Minister ?tefan-Radu Oprea discussed with the Ambassador of the Federal Republic of Germany in Bucharest, Dr. Peer Olav Gebauer, about the dynamism of bilateral economic cooperation, aiming both at attracting German investments in Romania and at encouraging national companies that want to initiate and develop projects on the territory of Germany. The meeting focused on identifying optimal formats for the many work sessions and institutional bilateral meetings to be held in the next period between the two countries, such as the Romanian-German Business Forum in Berlin (September 28-29, 2023), the Joint Romania-Bavaria governmental Commission (September 14-15, 2023) and the Joint Romania-Baden Württemberg governmental Commission. At the same time, the Romanian minister emphasized that several efforts are currently being made to draft legislation that would support the transfer of technology to Romanian defense companies and facilitate collaboration with foreign investors.

Fiscal and Economic Updates

OVERVIEW

Even though all summer long we have been discussing the same topic – the newly awaited fiscal measures, it seems that they were postponed, as the authorities remembered they must discuss them first with the European Commission before taking any decision. On this matter, Minister of Transport Sorin Grindeanu (PSD) claimed that the new measures envisaged by the governing coalition have not yet been finalized, but there are frequent discussions between PM Marcel Ciolacu, PNL leader Nicolae Ciuc?, and the Minister of Finance Marcel Bolo?. Given the lack of transparency and communication of the executive, it is difficult to predict what will happen even in a week's time, in this particular case. ?

Shortly after this news appeared, Minister Marcel Bolo? declared that the decisions belong to the governing coalition, while also guaranteeing that the measures “will be approved as soon as possible”. Again, time is relative, and this “as soon as possible” can mean a month, from a political point of view. And it seems to be so, given that he also gave his opinion that the fiscal and budgetary measures should be adopted in September. Among the measures outlined by the minister of finance were the inclusion of multinational corporations in the fiscal measures plan, the fight against tax evasion, increased royalties for the exploitation of mineral and hydrocarbon resources, and a thorough reorganization of the National Fiscal Authority. The minister also threatened that if the fiscal and expenditure reduction measures are not adopted before the budget rectification, the budget deficit will reach 7% of GDP.

Remaining on this topic, PM Marcel Ciolacu stated this time that the elimination of tax exemptions will be done gradually in the beneficiary sectors, such as construction, IT, agriculture, food industry. Instead, he seemed to have a rather offensive attitude towards microenterprises, about which he said that "you can't have offshore taxation on microenterprises, but to solve the first five problems: living without poverty, without hunger, health, education, infrastructure", which shows his idea that the small entrepreneur must be taxed even more.

We end this section with the Fiscal Council's Annual Report for 2022, in which they revised their budget deficit projection for the current year, estimated to be above 6% of GDP in the absence of measures to correct the budgetary slippage. Among other things, the report recalls that Romania has a very low level of budget revenue and tax revenue relative to GDP, ranking second last in the EU also in 2022, similar to 2016-2021. At the same time, the report highlights the fact that Romania has an insufficiently modernized tax administration apparatus, with reforms that are slow and often only partially implemented, ranking last among the 27 EU Member States in terms of the Digital Economy and Society Index in 2021. Finally, one of the report's main ideas is that increasing tax revenue is, however, a matter of economic security and national solidarity, so that the public budget can cope with very high current and future needs, and future budget rectifications must identify adjustment measures to bring it closer to the deficit target.

ON THE RECOVERY AND RESILIENCE PLAN

PM Marcel Ciolacu announced that the new REPowerEU plan for ensuring energy security and sustainability will be sent to Brussels for approval by the end of August, a plan that amounts to EUR 1.1 billion for solar panels and energy efficiency. According to the plan, there will be more than EUR 600 million for purchases of solar panels and energy storage batteries. Around 60,000 households will be able to access the scheme and the value of each grant will be around EUR 10,000 cumulatively. However, there is no mention of the financing of the highly debated hydropower plants initially included in the chapter.